Inside the taming of CMHC

Evan Siddall, the chief executive officer of Canada Mortgage and Housing Corp., likes to give books to people he is getting to know. A favourite is This Is Water, an essay about self-centredness by David Foster Wallace, which begins with an allegory:

“There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says, ‘Morning, boys. How’s the water?’

And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, ‘What the hell is water?’ ”

CMHC was a lot like that insular fish when Siddall arrived at the end of 2013.The agency, created in 1946 to build houses for veterans of the Second World War, liked to describe itself as the “heart of housing”—an enormous Crown corporation that dominated the mortgage insurance market, guaranteed complex, bond-like assets called mortgage-backed securities, and subsidized the building and upkeep of First Nations and social housing.

Yet CMHC seemed oblivious to the outside world. In 2012, it held assets worth nearly $300 billion, making it one of the largest financial institutions in Canada. Even so, CMHC had none of the supervision accorded to the country’s large banks, which appeared to suit the agency’s leaders just fine. It flat out rejected any suggestion its insurance schemes were inflating house prices. It had a weak commitment to transparency and hoarded data the Finance Department and Bank of Canada would have found helpful. And it had earned a reputation for bullying critics on Bay Street into silence, which it could do because the big banks were hooked on CMHC insurance. In 2011, Maclean’s profiled the institution, declaring it a menace to Canada’s economy.

READ MORE: Maclean’s original 2011 investigation into CMHC

That CMHC no longer exists. In 2012, the agency was given the added responsibility of helping Finance and the central bank secure financial stability. Siddall discovered an institution poorly suited for that job, so he cleaned house to make room for about 100 new workers with backgrounds in risk management. CMHC now publishes more data, including stress tests of its ability to withstand economic shocks and regular assessments of “problematic conditions” in the housing market. But the biggest change might be the new attitude at the top. Siddall thinks speaking frankly and publicly about CMHC’s role in the housing market is part of his job, and he did just that in a wide-ranging interview with Maclean’s just after the release of the federal budget in March.

From the outside, those interested in policy and governance can be forgiven if it all seems too good to be true. If experts had been asked to perform a theoretical overhaul of CMHC a few years ago, many would have designed the agency that exists today. And in fact, Siddall’s efforts are now taught at Harvard Business School. In a span of a couple of years, he and his lieutenants fired more than 200 people, reassigned 500, hired 435 and added several hundred more through temporary contracts. “That’s a lot of churn,” says Harvard’s Boris Groysberg, who published a case study of Siddall’s overhaul in November. “He has a lot of courage.”

The only worry now, with house prices reaching stratospheric levels, is that it has all come too late.

 

ANOTHER FAVOURITE BOOK of Siddall’s is House of Debt, a highly regarded study of the correlation between excessive mortgage debt and financial crises. Atif Mian, an economics professor at Princeton, and Amir Sufi, a professor of finance at the University of Chicago, conclude that economic disasters are “almost always” preceded by a large increase in household debt. They say the correlation is so strong that the relationship is as close as you can get to an empirical law in economics.

Canadians’ debt is rising significantly faster than their paycheques. The ratio of household debt to disposable income is at a record 169.4 per cent, a jump of 23 percentage points from 2006. In 1996, the figure was 99 per cent.

“I don’t want to be the CEO of CMHC when there is a financial crisis that was triggered by something related to housing,” Siddall says. “I worry about our responsibility for that. I think about that a lot.”

CMHC can’t control the housing market, he continues. “That’s a misunderstood factor about CMHC. We and our colleagues at the Department of Finance are constantly accused of not solving the problem. We’re standing in front of a lot of core economic reasons for why housing prices are higher.”

They sure are. The most familiar reasons are low interest rates, booming big-city economies, immigration, foreign and domestic speculation, and not-in-my-backyard rules that restrict supply. Less discussed is the role of CMHC and the many federal and provincial tax incentives that tempt Canadians to buy homes instead of renting them.

READ MORE: The Bank of Canada’s muddled message on house prices

CMHC sits at the centre of this system. The agency’s job, in effect, is to unburden banks of their exposure to housing so they can lend more. It’s a sweet deal for lenders, who enjoy virtually risk-free profit on their mortgage businesses. Canada’s homeownership rate surged to about 70 per cent in recent years, among the highest in the world.

But prices also surged, an inconvenient truth for an agency committed to affordable housing, forcing Canadians to take on bigger mortgages to keep pace. Governments have implemented numerous measures to restrict demand, but debt and prices kept rising. Talk of a homegrown financial crisis is no longer a fringe concern. Michael Chong, a contender to lead the Conservative party, says CMHC has made such a mess of the housing market that he will sell it if he ever gets the chance. (Incidentally, Siddall has some experience with that sort of thing. In the 1990s, when he worked for BMO Nesbitt Burns, he was a key member of the consortium of bankers that organized the sale of the Canadian National Railway on behalf of Jean Chrétien’s government.)

Siddall has the ear of the finance minister, but an auction isn’t one of his policy recommendations. CMHC is “an invaluable instrument of public policy,” he says. He would rather protect the agency from politicians such as Chong by restoring its credibility. One way he is doing that is by ceding market share. The value of CMHC’s assets dropped to $252 billion in 2015, down 14 per cent from 2012.

“The Maclean’s story [from 2011] correctly identified the strategic drift of the organization,” Siddall says. “It had gone beyond that core of what it needed to do. It had become part of the problem.” He adds, “We should be willing to weaken CMHC if it strengthens the system. We are here to service Canadians, not ourselves.”

Historically, politicians drew from the real estate establishment to fill leadership positions at CMHC, raising the risk it could be captured by a certain point of view. Siddall’s predecessor, Karen Kinsley, worked at a Toronto developer before she joined the agency, and spent 25 years at CMHC, 10 as the boss. Kinsley is widely remembered for her brief embrace of 40-year mortgages, a reckless decision that drew a rebuke from former Bank of Canada governor David Dodge.

Siddall’s previous employers include Goldman Sachs and Lazard Frères & Co., two of the world’s top investment banks. When he got the call to join CMHC, Siddall was working at the Bank of Canada, helping to devise highly technical schemes to end “too big to fail,” post-crisis shorthand for the perception that governments would rescue the biggest financial institutions whenever they got into trouble. “Evan is consistently analytic, thoughtful and highly effective,” says former Bank of Canada governor Mark Carney, who hired his fellow Goldman Sachs alumnus in 2012.

Siddall, 51, spent his first three months at CMHC doing little but observing and asking questions. “That was the hardest thing ever,” he says. “I made a pact with myself, and my colleagues and the board, that within those first 90 days I would listen and learn. I didn’t know the organization. I was an outsider.”

READ MORE: How Canada completely lost its mind over real estate

Then, with his facts assembled, he implemented one of the largest organizational overhauls Ottawa ever has seen. Carmen Foglietta, the facilities manager, orchestrated 2,000 “moves” in 2015, more than double the number of people who shift desks in a typical year. “It was very, very intense,” she says. “I was taken aback at first.”

Siddall says he discovered that most of CMHC’s employees were driven by a “sense of mission” but were held back by a bureaucratic hierarchy that slowed decisions and removed personal accountability. So he eliminated sπeveral layers of middle management. The technology was a mess too, so Siddall hired a veteran of Ottawa’s tech scene as chief information officer, outsourced routine tech chores and shifted CMHC to the cloud.

Importantly, Siddall and his management team also wrote a new mission statement that emphasized the agency was about satisfying housing “needs,” not wants—a key distinction for an organization that long saw boosting homeownership as part of its mandate.

Groysberg says he has rarely seen such a dramatic overhaul implemented so quickly. Many executives are good at coming up with a plan, but they often tire of the day-to-day stress of implementing it. “I have known a number of CEOs who knew they needed to make big changes, but would never do it,” he says. “Those CEOs ended up in Chapter 11 bankruptcy protection.”

 

IF BEING WRITTEN up by Harvard hasn’t captured Ottawa’s attention, Siddall’s penchant for truth-telling will. The heads of Crown corporations say virtually nothing in public, and when they do, they avoid comments that might offend politicians or lobbyists. The notion is so entrenched that even Stephen Poloz, the governor of the Bank of Canada, avoided talking publicly about the potential benefits of deficit spending until he worked under a prime minister who agreed.

Siddall is unbridled. In a speech in Vancouver last fall, he called out politicians who favoured taxing international buyers as a way to deflate the city’s bubble. He agreed foreign speculation was a factor, but said CMHC research showed domestic speculation was a bigger issue. “When a white person buys a house, we don’t notice,” he said at the event, hosted by the Vancouver Board of Trade. “If somebody of a different colour does, we do. And that’s not good economics.”

Siddall has questioned the level of government support for first-time homebuyers, and has challenged banks to accept a greater share of the risk associated with the mortgages they sell. Other Crown chiefs may offer such advice, but none does it so openly.

It’s put him in the political firing line at times. In February, Ron Liepert, a Conservative member of Parliament from Alberta, called Siddall “arrogant.” The CMHC boss had just given testimony at the House of Commons Finance Committee that effectively called out critics of tighter mortgage-lending rules as self-interested.

Incidentally, Liepert was wrong. Siddall is confident, not arrogant. He constantly shares credit, saying, for example, that the thing he dislikes about the Harvard study is that it is too much about him. What Liepert was reacting to was a rare brush with a public servant who was willing to engage with politicians in an actual debate. “Public servants often worry too much about the negative perception of what they would say,” Siddall says.

It makes you wonder whether a housing bust would be the existential threat it is now if Siddall had arrived sooner. In an interview, he’s asked if he thinks he’s in a race against a financial crisis. He struggles with the answer. “Boy, that’s . . . I don’t know,” he says.

Siddall mentions another book, The Black Swan by Nassim Nicholas Taleb. Taleb’s contemporary classic is enjoying something of a renaissance after Brexit and Donald Trump’s victory in the U.S. presidential election, with its argument that humanity rarely sees the truly life-altering shifts coming. “I was quite affected by it,” Siddall says of the book, first published in 2007. “I don’t think it’s interesting whether I think we’re in a race against a financial crisis. It’s interesting whether I worry we’re in a race against a financial crisis.”

Just to be clear, Siddall’s worried. That means the rest of us can worry a little bit less.