Speaking Notes for Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Northwind Professional Institute Inaugural Housing Finance Forum
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It is my great honour to kick-off this inaugural Northwind Professional Institute Housing Finance Forum.
Given your agenda, you will be expecting me to offer a perfunctory review of the status of housing markets in Canada, a discussion of persistent vulnerabilities, a review of recent sandbox changes, the prospects for lender risk sharing and maybe even muse about potential future changes.
If I do that, I will be repeating what I and others have already said, and I will bore us all. You will kindly thank me and enjoy a couple of days here amidst the southern Ontario countryside.
I’m not going to do that.
Instead, I am going to pull back the drapes for you. I will give you the insights you’re seeking but I will do it via a more enduring subject: what we are doing at CMHC to become a world leader in housing risk management and why that matters to Canadians
Before I do so, I want to acknowledge three colleagues here with us who are central to CMHC’s journey.
Steve Mennill is Senior Vice-President of Insurance; I challenge anyone to match his knowledge and understanding of housing.
Our Chief Financial Officer and Senior Vice-President, Capital Markets, Wojo Zielonka, also has a sophisticated grasp of risk and the unrelenting courage to challenge us to do better.
And finally, our progress in the evolution of risk management at CMHC would not have occurred without the leadership of our Chief Risk Officer, Romy Bowers, who joined us in 2015 from one of the large banks. Crucially, Romy’s leadership and deep understanding of operational risk have helped us extend a risk mentality across the enterprise. As you know, Romy has also contributed her intellect and energy as part of this event’s organizing committee.
CMHC as an instrument of public policy
CMHC is one of the most important financial institutions in Canada. Think of that classic holiday movie, It’s A Wonderful Life: we sit at the intersection of banking and people borrowing to buy their homes.
But we do so on a national scale, much more than Bedford Falls. Managing about $1 trillion of financial activity, we are a domestically systemically important financial institution.
Our firm stance at this intersection can be powerful: in standing ready to buy $125 billion of mortgages to support lending during the global financial crisis, CMHC helped insulate Canadians from the worst.
The U.S. sub-prime crisis illuminated the importance of housing to the financial system. It didn’t take people long to notice CMHC’s role as a cornerstone of our economy.
A few commentators and some politicians worried that we were too large and mused about our privatization. This view overlooks what we have in CMHC, a unique and enviable institution by global measure.
Not only do we provide the stabilizing value of being a shock absorber, we combine our presence in mortgage lending with an assisted housing function that supports 555,000 households in need in 2016.
The breadth of our perspective on the full spectrum of housing informs our research activities and supports the policy advice we give to ministers. You see us as a Crown corporation and government sees us very much like a federal department, and the President as de facto deputy minister of housing. The Deputy Ministers of Finance and Employment and Social Development Canada are key partners in this work, and are on our Board of Directors.
Despite our importance, we risked losing our relevance. In a sense it was our own fault. We were guarded and defensive, so concerned about not rocking the boat that we had little to say. In hindsight, we had been typically Canadian: modest, and to a fault.
Understandably guarded and insular in the face of criticism, we were turned inward and risked losing our place in the world.
Any enterprise needs clarity about why it exists, and public entities must be held to an even higher standard: governments can crowd out others by their very presence.
And holding us to account isn’t simple: taxpayers can’t sell our shares nor vote out our Board. It is therefore our duty to confront the existential question of what value we provide – of why government needs to be involved. A diagnosis of CMHC’s raison d’être was needed.
Our strategic drift had been a particular problem. The company had been criticized for being driven too much by growth for its own sake, whether maximizing market share in insurance or growing our securitization volumes. Pursuit of growth caused us to add riskier insurance features such as extended mortgage amortizations. And we were unable or unwilling to prevent an erosion in our historic assisted housing activities.
So we got back to basics.
Our mission and strategy
We started by answering a few key questions. We reaffirmed a noble mission, an aspirational vision and a path to achieving them, questions any company must answer clearly.
Why do we exist; what is our mission? We help Canadian meet their housing needs. This statement expresses both a noble purpose and one that is conscientiously restrained.
Where are we going; what is our vision? We will be at the heart of a world leading housing system. Our vision properly extends beyond what’s good for CMHC to the welfare of our housing system as a whole.
And how will we serve our mission and achieve our vision; what is our strategy? We will (1) achieve better outcomes by managing risk, (2) lead through innovation and insight, and (3) be a high-performing organization – one that is admired by Canadians and is reliable and interesting.
Risk management is job one. It’s linked to everything we do. And there was work to be done.
Risk management at CMHC
A review of CMHC by the Government and the Office of the Superintendent of Financial Institutions (OSFI) had previously concluded that some wholesale changes were needed to our governance, oversight and risk management capabilities.
Our initial response to OSFI’s observations was to cross items off their list of action items. We were driving by looking in the rear view mirror. We weren’t keeping up; we weren’t anticipating change. We were not truly managing our risk; in a sense, OSFI was.
That had to change. Over the past few years, we have ourselves focused on six key risk-management deficiencies, all informed by OSFI’s guidelines1, which are based on sound risk-management practices: (1) stress testing and capital management, (2) lender quality assurance, (3) model governance, (4) our internal audit function, (5) cyber risk and, (6) crucially, our risk management policies and practices.
In our estimation, our internal audit and lender quality assurance functions are now robust. Our work in stress testing, capital management and model governance will achieve maturity in 2017. Cyber risk will be an ongoing effort, with our capabilities substantially advanced via our IT partnership with Accenture. Finally, we made important progress on an enterprise-wide approach to risk governance last year.
We had struggled to navigate between our dual mandate to support access to housing and to promote financial stability. In pure housing supply terms, more is more of the former and more is less of the latter.
While we had a governing Risk Appetite Framework (RAF), it avoided the question, using circular and euphemistic language relying on our “access” mandate as an escape clause.
We have since revised our RAF to reconcile this tension using a conditional model that navigates between different states. To summarize: we will prioritize financial stability unless and until economic dislocation occurs2; in those events, we stand ready to take a more active role in supporting Canadians’ access to housing.
The conditionality of our risk posture has clarified our decision making, including in response to OSFI’s new risk-sensitive mortgage insurance capital guidelines. As a result of our new approach, we have recently announced price increases for our transactional insurance to fully compensate us for increased capital holding levels, which have introduced credit scoring as a factor.
However, instead of increasing our pricing even more for lower credit scores, we have opted to accept lower ROEs for that business, which is less served by the private sector. Our examination of the potential socio-economic impact on rural, remote and lower valued homes caused us to price this risk differently than for higher credit scores. That said, we have signalled an intention to explore future price differentiation more based on credit scores.
For low ratio portfolio insurance, we have adopted a fully risk-based approach. This is insurance purchased by the lender months or even years after the loan is originated, for the purpose of using the loan as collateral in CMHC-sponsored securitization.
The new capital framework applies to these insured loans as well, and will result in premiums that are on average more than double the current premiums. However, there will be considerable variation depending on the risk characteristics of the loans in the portfolio. We have provided our clients with substantial detail about the range of premiums to expect given various loan-to-value ratio and credit score combinations.
I am proud of our progress as a risk manager. Beyond our achievements in our six focus areas, instilling a risk mentality in all that we do will make us a world leader.
Risk management is a way of thinking; it reflects an attitude about risk. An effective risk manager imagines what could change in order to prepare for it. She also imagines what should change – and bends the world to make it happen.
In 2014, the Financial Stability Board (FSB) published a guiding paper on risk culture for regulators3. The FSB outlined the foundational elements needed and identified four indicators of a sound risk culture: tone from the top, accountability, effective communication and challenge, and incentives. These four indicators have been central to the changes we are undergoing at CMHC.
My colleague Jeremy Rudin, Superintendent of OSFI, also addressed the importance of culture in risk management in a speech to the CD Howe Institute in 2015.4 Beyond rules and checklists, the Superintendent underscored the need to attend to “…norms, attitudes and behaviours related to risk awareness, risk taking and risk management and how these reinforce, or undermine, responsible risk management.”
Senior management can change strategy, structure, systems, even people – and we’ve done all of this at CMHC; however, absent addressing the prevailing influence of culture, the project is lost.
CMHC is a very different organization today, in part reflecting the energy of nearly 700 new employees over the last two years. This progress has been necessary but is not yet sufficient.
More change is needed. Our goal of being a world leader in housing risk required us to attend to our culture as well: getting at the shared history, cultural artifacts, biases and hidden “rules” that still trip us up.
We determined that being a world leader would have to come at the cost of some near-term progress. Changes would slow our advancement in order to accelerate and sustain it.