Canada’s banking regulator sets tough rules for mortgage lending

Bloomberg

Canada’s banking regulator released final rules that will make it tougher for borrowers to take on uninsured mortgages, adding to a growing list of measures to rein in the nation’s housing markets.
The Office of the Superintendent of Financial Institutions announced measures targeting borrowers in the uninsured mortgage market. A mortgage doesn’t need to be insured if the borrower makes a down payment of at least 20 percent.
The measures, known as B-20 guidelines, include making it tougher to qualify for a mortgage by stress testing a borrower’s ability to pay if rates were the greater of the five-year benchmark rate published by the Bank of Canada or 200 basis points higher than the contractual mortgage rate. A survey by industry group Mortgage Professionals Canada showed the requirement would disqualify about one in five potential buyers.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.
Osfi may reconsider the qualifying rules if market conditions change, Rudin said, indicating the current formula is influenced by the current low-rate environment. He also said the regulator has done everything it planned to do as far as mortgage underwriting rules are concerned.
‘Actual Impact’
The measures require financial institutions to adhere to appropriate loan-to-value ratio limits that evolve with housing markets and prohibit lenders from arranging mortgages that circumvents LTVs. The new provisions go into effect on January 1. The biggest difference between the final rules and draft rules released in July is the “greater than” language around qualification, suggesting rates around stress tests will exceed 2 percentage points.
“The market has largely come to terms with this,” John Aiken, an analyst in Toronto at Barclays plc in Toronto, said in a phone interview. “Now we just have to see what the actual impact will be on the lenders’ ability and willingness to underwrite mortgages.”
Uninsured mortgages account for 46 percent of the country’s total C$1.5 trillion ($1.1 trillion) mortgage credit outstanding, according to Bank of Canada data. That’s up from 45 percent a year earlier.
The regulator has been tightening underwriting standards for home loans in the past five years in tandem with federal, provincial government efforts to cool soaring prices, particularly in Vancouver and Toronto, and to reduce consumer indebtedness. The Bank of Canada started raising interest rates in July, adding another headwind to the market.
“Our mandate is focused on the safety and soundness of the federally regulated financial institutions,” Rudin said. He added he was open to revisiting stress testing as conditions in the market changed.
Housing indicators in Toronto and Vancouver have recently shown signs of cooling off, prompting some critics to warn the move could be counterproductive.
“Further tightening of federal regulations aimed at cooling housing markets in Toronto and Vancouver risks creating collateral damage in markets elsewhere in Canada,” Gregory Klump, chief economist at the Canadian Real Estate Association, said in an October 13 statement.
“It also jeopardizes Canadian economic growth, which is already showing signs of fading.”
After years of clamping down on insured mortgages, policy makers have been turning their attention to the uninsured segment, which has been growing as a share of total mortgage lending, mostly due to higher Toronto and Vancouver home prices.