OSFI response to mortgage proposals will please industry: expert

The real estate industry is likely breathing a sigh of relief after Canada’s banking regulator signalled it might not move ahead with some proposed tightening of its mortgage lending rules, says one mortgage expert.

The Office of the Superintendent of Financial Institutions floated the proposals in January as part of its wide-ranging review of the B-20 mortgage underwriting rules. It then invited feedback from stakeholders, including those from the banking, mortgage brokering and real estate sectors.

The review came as OSFI said risk around loans and borrowing had increased considerably in recent years. Its proposals included potentially adding new conditions for the stress test, where would-be borrowers must prove they could continue to make mortgage payments at a higher interest rate.

But OSFI said in a letter to all federally regulated financial institutions on Monday that stakeholders were generally not supportive of additional debt service measures.

“A key concern raised was the disproportionate impact that new, industry-wide measures could have on smaller institutions with unique business models,” the regulator said in the letter, which was posted to its website.

Potential additions to the existing stress test included limits around the proportion of mortgages where the loan is more than 4.5 times the borrower’s income, along with measures that would limit how much debt payments could take up of someone’s monthly household income.

It also gauged opinion on a potentially more nuanced approach to the existing stress test that could make affordability tests more stringent for higher-risk products like variable-rate mortgages.

But “some of the big initiatives that they had put forward don’t look like they’re going to actually transpire,” said mortgage strategist Robert McLister, who agreed with concerns that tougher loan-to-income restrictions could scale back lending.

“OSFI said (Monday) that they don’t want to make any broad-based restrictions like that and so that, I think, was a key positive.”

He said flexibility for lenders can be better maintained if the regulator does not implement defined debt ratio limits for uninsured federally regulated mortgages.

“The lenders want flexibility there and that could have materially reduced the number of mortgages that banks could offer more indebted borrowers,” said McLister.

Instead, OSFI said it will “pursue targeted supervisory actions that will aim to limit (federally regulated financial institutions’) individual exposures to high household indebtedness over time.”

Those measures will take into account the size, nature, complexity, and risk profile of each institution.

Mortgage Professionals Canada president and CEO Lauren van den Berg said there needs to be a balance “between prudent policy and the ability of Canadian borrowers to secure a mortgage” once the regulator ultimately decides the details of those reforms.

While she said her organization, which participated in the consultation, is encouraged by OSFI’s approach thus far, she cautioned that “too much regulation could constrain banks from providing credit when it is at its most scarce.”

“Our concern is that if the requirements to qualify for that mortgage become too restrictive for the average Canadian borrower, then there’s a real risk of creating a system that’s going to privilege the select few who can qualify for a loan at a regulated bank or lender, while more Canadians are being pushed to more costly and riskier mortgages,” van den Berg said.