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Theresa Tedesco | 13/05/08 | Last Updated: 13/05/09 8:37 AM ET

Most summers, federal Finance Minister Jim Flaherty gathers with a group of CEOs, academics and policy wonks in the quiet Quebec village of Wakefield. Two years ago, Robert P. Kelly, the newly minted chairman of the Canada Mortgage and Housing Corp., was among the 25 invitees who attended the August, 2011 retreat. At the time, the 59-year-old Haligonian inhabited a corner office on Wall Street as chief executive officer of The Bank of New York Mellon, the fifth largest in the U.S. Apparently, Kelly made an impression with his blunt talk and depth of knowledge of the financial services industry in both Canada, where he spent 19 years at Toronto Dominion Bank, and the U.S. “He wasn’t the most subtle person in the room,” recalled Ian Lee, a professor at the Sprott School of Business at Carlton University. “He was very direct; he didn’t speak in code and nor was he politically correct.”

During the discussions, Prof. Lee sounded alarm bells about CMHC, the country’s national housing agency, as he had done previously during pre-budget consultations. The former Bank of Montreal mortgage manager was deeply worried that CMHC – what he called the “Godzilla” of Canadian residential housing financing – had moved well beyond its original mandate to provide inexpensive, low-rate mortgages with low down payments to returning veterans of the Second World War. Today, courtesy of what he termed a “mission gallop,” CMHC has cornered about 75% of the country’s mortgage insurance market and its guarantees to banks and other mortgage lenders are worth about $588-billion – or almost one-third of Canada’s annual gross domestic product.

By any measure, the national housing agency created in 1946 by the Liberal government led by former Prime Minister Mackenzie King has morphed into a major financial institution. Despite this “unconstrained power,” CMHC was not regulated like other large financial players. It had no meaningful oversight beyond its political masters and no real supervision. Those concerns were echoed in November, 2011 by the International Monetary Fund which asked whether CMHC “has a modern and effective governance structure and supervision and assessing the scope for further strengthening its risk management.”

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