Mortgage alarm raised by New Westminster chartered accountant
New Westminster chartered accountant Elbert Paul is no stranger to waging lonely crusades on behalf of the public. In the mid-1990s, Paul was one of the first to blow the whistle on the B.C. Ferry Corporation’s ill-fated fast-ferry construction program. It blew almost a half-billion dollars on three problem-plagued vessels. Most media outlets didn’t pay much attention at first. Eventually, the auditor general launched an investigation, but by then it was too late to avert one of the biggest boondoggles in B.C. history.
Late last year, Paul took up another cause that he feels is just as serious. And again, media outlets aren’t very interested, even though this involves far greater amounts of money.
His concerns relate to a draft advisory from the federal Office of the Superintendent of Financial Institutions Canada that was issued last October. The document highlights the need for federally regulated entities—including banks and insurance companies—to convert to international financial reporting standards.
In a phone interview with the Georgia Straight, Paul said that this new policy will increase banks’ concentration of power and undermine financing of affordable housing across Canada. In his opinion, those hit hardest are first-time home buyers, ordinary homeowners who renew mortgages, and organizations that want to borrow money at low interest rates to build affordable housing.
“We have a major change in public policy on housing, and there is no venue as a result of the consequence of the proroguement of Parliament where this matter can be raised in the public domain,” Paul said. “To me, that is fundamentally inappropriate.”
The draft advisory notes that the London-based International Accounting Standards Board’s directives “likely require that many Canadian securitizations and off-balance sheet structures be reported on the balance sheets” of federally regulated entities. This will increase the asset-to-capital multiple of deposit-taking institutions like banks and trust companies. In Paul’s view, financial institutions will respond by reducing the size of existing loan portfolios. The OSFI did not return a call from the Straight by deadline.
Paul is particularly concerned about the impact on mortgages that are insured by the Canada Mortgage and Housing Corporation. CMHC mortgages are securitized (converted into securities that are packaged and sold to investors) through the Mortgage Backed Securities and Canada Mortgage Bond programs. The draft advisory states that as of January 1, 2010, the OSFI is no longer permitting mortgages sold through the MBS and CBM programs until December 31, 2009, to be excluded from the asset-to-capital multiple ratios.
“Many financial institutions will have no choice but to exit CMHC securitization entirely as revenues from this low risk insured product will be significantly less favourable than from other products,” Paul wrote in a December 10 letter to Finance Minister Jim Flaherty. “This is because CMHC securitization product will be weighted the same way as any other asset—in other words, the advantage that CMHC securitization has provided in the past (in that they were never included in the calculation) will now be taken away.”
According to Paul’s letter, CMHC’s securitization program insured mortgages in 2008 for more than 900,000 housing units worth $148 billion. “CMHC insurance helps keep borrowing costs down for people with small down payments who would otherwise face higher interest rates and not be able to afford purchasing housing at all,” Paul wrote in his letter to Flaherty. He added that CMHC’s securitization program also allows landlords to finance apartment units at reasonable rates, which can be rented at affordable prices.
In December, Paul asked competition commissioner Melanie Aitken to investigate whether Flaherty, as the minister overseeing OSFI, violated Section 49 of the Competition Act by allowing the regulator to “significantly reduce competition” through the policy. He claimed that it would force some institutions to withdraw from CMHC’s securitization initiatives.
On January 21, Paul received his reply. Aitken claimed that his letter “does not establish a factual basis” to suggest that any offence had been committed. “Further,” Aitken added, “existing jurisprudence has confirmed that section 49 does not apply to the actions of the Minister of Finance or the Superintendent of Financial Institutions.”