Amid widespread concern about housing affordability in Vancouver and across Canada, the Office of the Superintendent of Financial Institutions wants to raise the mortgage bar for many potential homebuyers by revising its guideline on residential mortgage underwriting.
The proposed revisions, which are intended to address risks associated with relatively high levels of household debt, include a “stress test” for uninsured mortgages (those with a minimum of 20 per cent down of a property’s value) to determine whether the borrower can meet payments if interest rates rise by two per cent. But is this additional test needed for OSFI to achieve its regulatory objectives?
As noted in a recent study published by the Fraser Institute, the origins of the current guideline are American. Weak underwriting practices in the U.S. helped fuel the global financial crisis, as mortgage loans were bundled and sold to investors, including financial institutions around the world.
In response to the U.S. housing collapse, the Financial Stability Board, an international body dedicated to financial stability, introduced an international standard in 2012 meant to ensure that weak mortgage underwriting standards would never again play such a significant role in a financial crisis. In Canada, OSFI responded to the FSB standard by introducing the current guideline on residential mortgage underwriting. This was despite clear evidence, based on arrears data (payments at least 90 days overdue), that Canadian standards had not weakened to levels anywhere close to the U.S.
Now the OSFI wants to further stiffen the guidelines with a prescriptive “stress text” for those who put significant equity (again, 20 per cent or more) down when they purchase a home.
The consequences of this test include reduced buying power for some borrowers. It could also drive some borrowers to more expensive unregulated sources of credit and a less-competitive regulated market. Some borrowers may be …read more
Source:: Vancouver Sun