CANADA’S BANKING WATCHDOG SETS TOUGHER RULES FOR MORTGAGE LENDING

CANADA’S BANKING WATCHDOG SETS TOUGHER RULES FOR MORTGAGE LENDING

STARTING IN JANUARY, NEW REGULATIONS WILL MAKE IT TOUGHER FOR CANADIANS TO QUALIFY FOR UNINSURED LOANS, AFFECTING CONSUMERS WITH DOWN PAYMENTS OF 20% OR MORE.

Ottawa plans to move forward with regulations that would make it tougher for Canadians to qualify for uninsured loans, affecting consumers with down payments of 20 per cent or more.

In final guidelines published Tuesday, the Office of Superintendent of Financial Institutions even tweaked its original proposal forcing borrowers to also qualify for mortgages based on a potentially higher Bank of Canada five-year posted rate, a restriction Ottawa forced on all government-backed loans back in 2016.

The new stress test is the latest in a series of policy changes and rules aimed at ensuring Canadians can afford their homes even if interest rates rise.

“OSFI hasn’t just tapped the brakes, it’s jumped on the brakes with both feet,” said Rob McLister, founder of RateSpy.com.

“Uninsured borrowers can qualify for a mortgage today at rates as low as 2.97% on a 5-year fixed. In a few months that hurdle will jump to almost 5%.”

McLister said at least one in six mortgagors with 20 per cent equity could be affected by the new guidelines.

All other things being equal, “those folks will need almost 20% more income to qualify for the same size mortgage they can get today,” he said.

“Given where our housing market and debt levels are at, this is the most ground-shaking mortgage rule change of all time. That’s not hyperbole,” McLister added.

He said a big question now is whether credit unions, which are provincially regulated, will continue allowing people to qualify at the lower, and therefore easier, contract rate.

“These revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin, in a release, referring to B-20 guidelines which impact the loan industry. The changes come into effect on Jan. 1, 2018.

Rudin acknowledged that the stress test could push prospective homebuyers away from the banks to lenders that are not federally regulated. But he said OSFI’s primary consideration is ensuring the safety and soundness of the banks it regulates at a time when household debt is at record levels, home prices have ballooned in some markets, and interest rates remain near record lows.

“We are very aware of the potential migration risk,” Rudin said on a morning conference call. “That does not change our mind that this is a valuable (tool)… It’s still a net positive.”

Analysts expect the mortgage business at Canada’s banks to slow in light of the changes OSFI changes coming into force Jan. 1, along with earlier measures taken by government and regulators to tamp down skyrocketing house prices in some pockets of Canada’s real estate market, particularly in Vancouver and Toronto.

Scott Chan, an analyst at Canaccord Genuity, has forecast that mortgage growth will slow to low single digits in the near term.

Rob Sedran, an analyst at CIBC Capital Markets, said the banks are generally supportive of an “engineered slowdown” of the housing market, as opposed to a downturn triggered by an unforeseen event.

“Our only remaining concern is the risk that all these changes will act in concert to create a more pronounced slowdown than any one regulatory body intended,” Sedran wrote in a note to clients Tuesday.

Officials within Canada’s banking sector have suggested the new rules, particularly the more stringent stress test, could have unintended consequences.

“We have some concerns that the stress test will push some borrowers to non-federally regulated lenders, which will shift risk outside of the regulated space,” said Neil Parmenter, chief executive of the Canadian Bankers Association.

However, he said the industry group is reviewing the final guidelines in consultation with member banks, and “generally supports the government’s overall objective of maintaining a robust, affordable and sustainable housing market across the country.”

 The real estate industry had been lobbying furiously for changes to the final guidelines, worried tougher borrowing conditions would squeeze more people out of the market. OSFI said it received more than 200 submissions from federally regulated financial institutions, financial industry associations, other organizations active in the mortgage market, as well as the general public.

Instead, OSFI tightened a loophole that some have said would have sent buyers into cheaper but more volatile short-term loans to qualify, a key consideration as the Bank of Canada considers further increasing the overnight rates which most prime lending is tied to.

An original proposal from OSFI called for consumers with low-ratio loans to qualify based on the rate on their contract plus 200 basis points or two percentage points. The guidelines now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus 200 points.

OSFI said it is also requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk. “Under the final guideline, federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve,” the organization said in its release.

The regulator also said it is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.

“A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law,” according to the guidelines published Thursday.

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