Mortgage Qualifying Regulations are Tightened by the Canadian Banking Regulator

Earlier this month, the banking regulator in Canada released the new regulations that will make it more difficult for potential borrowers to apply for uninsured mortgages. This only adds to the ever-growing list of changes meant to regulate the Canadian housing market.

OSFI, The Office of the Superintendent of Financial Institutions, outlined the guidelines to target borrowers in the uninsured area of the mortgage market who have been solely responsible for the recent burst of growth in prices. If the borrower makes a down payment of at least 20 percent, a mortgage does not currently have to be insured.

However, the new guidelines for mortgages that are not insured will require lenders to stress test borrowers to see if they are able to pay higher rates than they have initially been offered. This stress testing is in fact testing their creditworthiness in the event that borrowing costs should increase. The new regulations will most likely have a negative effect on the market that is already suffering due to higher borrowing costs and other such factors over recent years.

In a note to investors, Toronto-based economists at the Bank of Montreal, Doug Porter and Robert Kavcic, stated, “Unlike past rule changes, this one comes in an environment of Bank of Canada tightening, and as Toronto’s housing market is already correcting in the wake of separate provincial policy measures, these changes could prolong that adjustment.

Bank of Canada

The BMO economists theorized that “This significant move by the regulator acts as a de-facto tightening,” In other words original organizations could decrease by as much as 15% which would adversely affect the amount of rate increases that the Bank of Canada will make in the coming year.

These stress tests will be calculated at least 2% higher than the contracted mortgage rates, which already exist for, insured mortgage. According to a survey by Mortgage Professional Canada, this would potentially disqualify one out of every five prospective buyers.

If the market conditions change drastically, Superintendent Jeremy Rudin, might reconsider these terms, according to reports on a conference call shortly after the public announcement was made. Rudin stated that the current financial market is in fact influenced by the low rate in effect at the current time. He also stated that the regulator has done everything according to plan inasmuch that is concerned with mortgage underwriting rules.

John Aiken, an analyst at Barclays Plc in Toronto, stated via telephone. “The market has largely come to terms with this, now we just have to see what the actual impact will be on the lender’s’ ability and willingness to underwrite mortgages.”

Over the past five years, the regulator has been tightening underwriting standards for home loans. This is in tandem with provincial and federal government efforts to lower skyrocketing market prices, especially in Toronto and Vancouver, as well as to reduce consumer debt. In July, the Bank of Canada began to raise interest rates, another blow to the already suffering buyer’s market.

In a Bloomberg TV interview at the bank’s Toronto headquarters, Bharat Masrani, 61, Toronto-Dominion Bank Chief Executive Officer, said, “We’ve had many steps here, and this is one more step. I think it is a useful tool to have. We’ve had some kind of steadiness in the housing market in Toronto over the past few months because of some of the other changes that were introduced a few months ago.”

Uninsured Segment

Borrowers have been leaning toward the uninsured segment after many years of regulations that were designed to clamp down on insured mortgages. Those homeowners who do not meet the requirements for insured loans are putting up larger down payments in order to get uninsured mortgages. This then brings down the creditworthiness of the housing market. According to the regulator, a great many of these borrowers have been funding higher down payments via other means of borrowing.

According to Bank of Canada data, uninsured mortgages account for 46% t of the country’s total C$1.5 trillion ($1.1 trillion) outstanding mortgage credit. This is a 45% increase from just a year ago. According to OSFI data, insured mortgage credit has decreased by 4.5%, while uninsured mortgage credit is up 17.3% in August from the previous year.

Rudin stated, “Our mandate is focused on the safety and soundness of the federally regulated financial institutions.” However, some critics are warning that the move could be counter-productive given that housing indicators in Toronto and Vancouver have recently shown signs of cooling-off.

In an Oct. 13 statement, chief economist at the Canadian Real Estate Association, Gregory Klump, made the following statement “Further tightening of federal regulations aimed at cooling housing markets in Toronto and Vancouver risks creating collateral damage in markets elsewhere in Canada. It also jeopardizes Canadian economic growth, which is already showing signs of fading.”

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