Bloomberg News

Bankers Join Plumbers as Canada Housing Agency Revamps Board (1)

June 11, 2013

CMHC Chairman Robert Kelly

Canada Mortgage & Housing Corp. Chairman Robert Kelly was former chief executive officer of Bank of New York Mellon Corp. Photographer: Jin Lee/Bloomberg

Canada’s housing agency, which insures C$563 billion of mortgages, named former Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly chairman last month amid government pressure to upgrade management. He joins a board that includes a partner in a plumbing company and the former solicitor of a town in rural Nova Scotia.

Canada Mortgage & Housing Corp. has been told by the government to behave more like a commercial financial institution. In response, CMHC is ensuring its directors know as much about balance sheets as home improvement.

CMHC is screening its board of directors for an enhanced set of skill requirements, including experience in the financial industry and risk management, according to a Nov. 5 memo obtained by Bloomberg News under freedom-of-information law. They include a requirement for “financial acumen and literacy,” says the memo, which was labeled “confidential” and addressed to Human Resources Minister Diane Finley, to whom the agency reports.

The Canadian government has been strengthening oversight of CMHC, which insures most mortgages in the country and which would be the nation’s sixth-largest bank by assets.

The changes suggest those overseeing CMHC “don’t like what they see,” said George Athanassakos, a finance professor at Western University’s Ivey Business School in London, Ontario. The economic risks of a housing-market decline justify taking “aggressive measures” at CMHC, he said.

“Consumers are leveraged,” Athanassakos said in a telephone interview. “Combined with an overpriced housing market, it doesn’t bode well for the economy and the financial sector.”

Encouraging Lenders

The agency, established in 1946 to address a housing shortage at the end of the Second World War, began insuring mortgages in 1954, partly to encourage private lenders to play a bigger role in mortgage underwriting. By law, mortgages in Canada with down payments of less than 20 percent must be insured. CMHC’s insurance is fully backed by the federal government, and the government has capped the amount of insurance it can offer at C$600 billion ($586 billion).

CMHC also issues Canada Mortgage Bonds and uses the funds to buy mortgage-backed securities from financial institutions. The Bank of America Merrill Lynch 1-5 Year Canada Housing Trust Index, comprising 11 mortgage bonds with a par value of C$88 billion, has returned 0.52 percent this year through yesterday, compared with losses of 1.1 percent for Canadian government debt and gains of 0.92 percent for an index of the nation’s corporate bonds.

Finance Experience

Kelly’s experience in housing finance and capital markets “will be of great benefit to CMHC,” Finley said in the statement that announced the appointment. The former Wachovia Corp. chief financial officer and Toronto-Dominion Bank executive “will ensure the continued strong governance of Canada’s national housing agency.”

Finance Minister Jim Flaherty has taken steps to rein in CMHC in an attempt to shield taxpayers from a potential downturn in the nation’s housing market. In last year’s fiscal plan, he directed the country’s financial regulator, Superintendent of Financial Institutions Julie Dickson, to review CMHC’s books at least once a year. The government also placed the most senior bureaucrats in the finance and human-resources departments on CMHC’s board.

Karen Kinsley said last month she will step down as CMHC’s chief executive officer when her term ends June 17. Kinsley, a fellow of the Institute of Chartered Accounts of Ontario, had been with the agency for more than 25 years. CMHC said June 3 it is seeking a “dynamic and visionary” CEO with risk-management experience and knowledge of financial markets.

Risk Management

The majority of directors, other than the finance and human-resources officials, should have “senior” experience in the financial industry or risk management under the changes laid out in the memo.

Directors are also being screened for experience or expertise judging corporate and executive performance. Board members were already required to demonstrate knowledge of CMHC’s commercial operations and have experience in real estate and social housing.

“While the previous board skills profile always called for experience and knowledge in the areas set out in the current board skills profile, there is now an increased emphasis, in particular, on experience in the financial industry,” spokesman Charles Sauriol said in an e-mail.

Updated Governance

“CMHC continually updates its governance and risk management practices,” Sauriol said. “As the organization evolves, so too will the skills required of the board.”

Alyson Queen, a spokeswoman for Finley, said the memo represented “a continuation of the enhanced governance” promised in Flaherty’s budget. A spokeswoman for Flaherty, Kathleen Perchaluk, deferred to CMHC when asked to comment on the memo.

Brock Kruger, a spokesman for OSFI, said by phone last week that the regulator’s review of CMHC covers the agency’s commercial operations, not its board governance.

There are 12 positions on CMHC’s board. Current members include E. Anne MacDonald, the solicitor who helped manage real estate for Pictou, Nova Scotia, a town of 3,437 about 10 hours by car northeast of Boston. MacDonald’s biography on CMHC’s website says she has “extensive knowledge of provincial and municipal law” and primarily practices “real estate, wills, probate, municipal law and family law.”

Homebuilders Association

The board also includes Rennie Pieterman, a partner in Practical Plumbing Co. Ltd. of London, Ontario. Her CMHC biography says she served eight years on the Board of Directors of the London Home Builders’ Association, including as President in 2003, and has been a member of the Association’s Renovators’ Council since 1994.

MacDonald didn’t immediately respond to two voicemail messages seeking comment on this story. Pieterman declined to comment when contacted by telephone, referring questions to Kelly, who wasn’t available for an interview according to Sauriol.

Board members should have a wide range of skills and bring “qualifications and experience related to CMHC’s overall operations and mandate,” Sauriol said in an e-mailed statement. All of the current directors “possess a range of experience in housing-related areas, such as housing finance, aboriginal and seniors’ housing, residential and commercial construction, real estate and public policy.

Rising Debt

Household debt has risen to a record 165 percent of disposable income as Canada relied on a housing boom and consumer spending to lead the world’s 11th-largest economy out of the 2008 global financial crisis. Flaherty tightened rules on insured mortgages for the fourth time in four years in July on concern some regional housing markets were overheating.

Canadian house prices have increased 16 percent in the past five years, according to the Teranet-National Bank Composite House Price Index. (TNBHICP) By comparison, U.S. prices measured by the S&P/Case-Shiller index of property values fell 11 percent over the same period.

Flaherty said in his March budget that he would limit use of CMHC’s portfolio insurance, which covers home loans with down payments greater than 20 percent.

The government said the change was intended to restore ‘‘taxpayer-backed portfolio insurance to its original purpose of allowing access to funding for mortgage assets.” Since the 2008 financial crisis, Canadian lenders have used government-backed insured mortgages to shore up capital in line with international standards.

Flaherty said May 22 that CMHC has grown into a “major financial institution” and needs to operate like one. Canada’s banking regulator OSFI “has been over there doing some stress testing, and we’re going to continue monitoring CMHC very closely,” he said.

To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net


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