Posted in the National Post on March 20, 2013
By Finn Poschmann and Philippe Bergevin
The irony of Finance Minister Jim Flaherty’s hounding of bank mortgage lenders, for advertising competitive market terms, should be lost on none. Perhaps he believes lenders will extend daft, risky loans, or that low market interest rates will tease borrowers into taking on debt they can ill afford. In Ottawa, however, risky lending begins at home: Federal Crown financial corporations, for which Mr. Flaherty’s government is responsible, beat the market competition every time.
Today’s budget, and the next one, are opportunities to do something about it. By expanding on Budget 2012, which took steps toward reining in the market‘s true risk behemoth, the Canada Mortgage and Housing Corporation (CMHC), Minister Flaherty could build a lasting legacy, and leave the Canadian financial marketplace more of a market and less risky, which would be good things indeed.
The big federal lenders, other than CMHC, are Export Development Canada, the Business Development Bank of Canada, and, riskiest of all, Farm Credit Canada (FCC). The story so far, which has been all about CMHC, is instructive.
CMHC does many things in the social policy field, but its primary line of business is mortgage insurance — the agency, and by extension the federal taxpayer, is on the hook when insured mortgages go bust. By early 2012, CMHC was backing almost $600-billion in mortgages at face value, many of them taken on under loose terms; the residual risk, in the event of a major market downturn, would blow through the agency’s capital and severely dent the federal books.
In response, Budget 2012 did several important things. It revamped CMHC’s board structure, and authorized the government to charge the agency market-based premiums representing the federal risk exposure. It directed CMHC to function as a registrar for the covered bonds that banks issue to finance their mortgage lending portfolios, and introduced a legislated covered bond framework that clarified creditor priority in the event of a Bank’s bankruptcy. Good steps.
There were two other big changes. Banks can no longer place insured mortgages in covered bond portfolios or otherwise insure the contents of those portfolios, encouraging the housing finance system to mature and develop, if not innovate, outside the federal insurance umbrella. And, most important, Budget 2012 directed the Office of the Superintendent of Financial Institutions (OSFI) to produce annual reports on the risks embodied in CMHC’s books, putting the agency on a regulatory footing closer that of other large financial institutions.
Now, if Budget 2013, or 2014, takes the obvious next step, and farms CMHC’s social policy functions to a more suitable federal department, we will be left with a Crown agency that walks and talks more like a private sector financial institution. It will compete with the current, smaller private mortgage insurers, and eventually we will wonder why we need a Crown agency to do so.
And that gives us a model for how to think about Farm Credit Canada. FCC gets cheap capital by way of its federal backing, and pays no income tax, allowing FCC to be an extremely aggressive competitor in farm and agribusiness lending, its pricing and terms. It offers low downpayment loans, interest payment holidays, interest-only loans, permits rolling-over loan interest (that makes a bad loan, like old socks, seem good again after a while), sells loan life insurance and more.
Most discouragingly, FCC readily will lend against dairy quota and against dodgy “green” energy contracts with the Ontario government. The plain awfulness of this is difficult to overstate: The practice politically and financially invests not just FCC, but the federal government and taxpayers in the permanent maintenance of the costly and counterproductive supply management system and economically damaging, subsidized green energy fantasies.
Meanwhile FCC boldly advertises its easy terms. Want to lease some farm equipment? FCC is there: “no security deposit or additional security required; use your trade-in as credit to eliminate first payment; one-stop financing with fast turnaround times.” Need to skip a payment? FCC is there. Need to re-advance loan funds without reapplying or requalifying? You don’t need a budget story advancer (that’s what this article is), you need an Advancer Loan, which “pulls out all the stops,” and FCC is there!
And, as farmland prices begin to bubble and farm debt and FCC’s loan book continues to soar, the risks are obvious.
The Ottawa rumour mill says that OSFI is gearing up for a visit to FCC; Budget 2013 should direct the regulatory hounds to make the trip to Regina headquarters a regular event, and formally to report on it. As things stand, FCC’s impaired loan percentage, on its own reporting standard, is well above the industry norm; public adherence to common reporting standards will clarify the risks, enabling better management of them.
And a better understanding of the risks, on the part of taxpayers and the government, will lead to questions about why we are taking them on. Farm mortgage lending and equipment leasing are lines of business that national and regional private institutions are more than ready to serve. And they would do more of it, and without putting the public purse in danger, were FCC’s risky, hypercompetitive practices suitably
reined in.
Bottom line: If Flaherty is looking for dangerous risks in loan lending, and worrisome advertising come-ons in the financial sector, he doesn’t have to go far to find a big source of trouble. And the legislative and regulatory tools to do something about it, and the mandate to do so, rather than hounding market-based lenders, are correctly in the minister ‘s hands.
Finn Poschmann is vice-president, research, and Philippe Bergevin is senior policy analyst at the C.D. Howe Institute.
