OSFI escalates fight against mortgage lending risk

Amid deteriorating economic and financial conditions, the Office of the Superintendent of Financial Institutions (OSFI) is contemplating the introduction of a series of measures designed to curb growing mortgage lending risks.

The federal financial regulator launched a consultation on potential changes to its mortgage underwriting rules that would complement the stress test requirements it has already adopted to curtail risks to lenders, and the financial system overall.

In its consultation, OSFI said that while those existing stress testing requirements have helped to limit risks, additional measures may be needed.

Specifically, it’s considering the introduction of measures to mitigate the added risks that accompany the recent sharp rise in debt servicing costs, as interest rates have increased in an effort to combat high inflation.

“The [stress test requirement] has proven a crucial risk mitigant against [the] increase in rates, elevated inflation and the potential loss or reduction of borrower income,” it said, but warned lenders still face increased risks, including mortgage rates at their highest in over a decade and borrowers facing record levels of indebtedness.

“Additionally, as noted in the Bank of Canada’s latest Monetary Policy Report, the pace of economic growth in Canada is slowing and is expected to moderate further, with the potential for downside global risk due to the combined tightening of central banks,” it said.

Given these accumulating risks, OSFI said that it intends to consider additional tools to preserve credit quality and sound underwriting practices at lenders, starting with measures that target debt serviceability.

“In this initial consultation, OSFI is interested in stakeholder feedback on a set of proposed complementary debt serviceability measures designed to better control prudential risks arising from high consumer indebtedness,” it said in a release.

The measures proposed in the consultation include possible “loan-to-income and debt-to-income restrictions, debt service coverage restrictions, and interest rate affordability stress tests.”

These new restrictions could be implemented at the individual loan level, or at the level of the overall mortgage underwriting portfolio, it noted.

“OSFI welcomes stakeholder views on these debt serviceability measures, how they might be implemented, and other measures that could address prudential risks arising from high household indebtedness,” it said, adding that it may decide to adopt one, or more, of the proposed tools.

The deadline for providing feedback on the consultation is April 14.

“Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry. We look forward to stakeholder views on how different debt serviceability measures can support this important policy objective,” said Tolga Yalkin, assistant superintendent policy, innovation and stakeholder affairs, at OSFI.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.