The Globe and Mail
Canada’s banking regulator is taking a softer stand on new mortgage underwriting rules than expected, a move that should lessen banks’ and mortgage brokers’ fears of a new, tougher regime.
But that relief may be short-lived: Some industry watchers speculate that the Office of the Superintendent of Financial Institutions will implement firmer rules in other areas when it releases its final guidelines around the end of the month.
The changes by OSFI are part of a larger, international effort to try to prevent another housing crisis like the subprime mortgage disaster. The new guidelines may help cool the country’s overheated housing market by tightening the rules around consumer lending.
OSFI has yet to issue its final rules, but on Wednesday it sent a letter to banks briefly updating them on some of its decisions so far.
In one of the most significant changes from the proposals it originally issued in March, it has backed off a rule that would have forced banks to insist borrowers re-qualify when their mortgages come up for renewal.
Mortgage brokers had feared such a rule would cause many people to lose their homes. Banks tend to focus on a borrower’s payment history, as opposed to rechecking income levels or property values, when mortgages come up for renewal. Lenders were worried that renewals would be denied if either of those elements had deteriorated since the consumer took out their mortgage, said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.
He said he’s pleased with OSFI’s decision.
The Canadian Bankers Association has also expressed its approval of the update.
“Less than half of 1 per cent of all mortgage holders with the country’s largest banks have gone more than three months without making a payment,” said Terry Campbell, president of the CBA, in a statement. “This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates, and a strong or weak Canadian dollar,” he noted.
Another change from the original proposal is that banks will not have to amortize home-equity lines of credit. As a result, HELOCs can continue to revolve, as opposed to forcing consumers to pay them back within a shorter time frame.
But there are still unanswered questions when it comes to these loans.
“We’re still waiting to see if people can get a mortgage portion in addition to that HELOC line of credit, which is possible now,” said Robert McLister, editor of Canadian Mortgage Trends. He is optimistic this condition will be preserved, based on discussions with OSFI.
Many people use these products for leveraged investments and interest-only borrowing. “If they had required an amortization rule with HELOCs then it would have made things much more difficult from a tax perspective,” Mr. McLister said.
A third significant change is that all the new rules, once they come into effect, will apply mainly to the banks’ Canadian operations. This will be important to those that have large foreign consumer lending businesses, such as Bank of Nova Scotia, which has retail businesses in numerous countries.
The final point in the update zeroes in on property assessments, taking the position that financial institutions should generally not rely on any single method. Banks often use automated appraisals rather than human appraisers because software is cheaper and can be turned around quickly. “It looks like the regulators are going to be keeping a closer eye on automated appraisals,” Mr. McLister said.
He also said that lenders are protecting themselves by increasingly ordering human appraisals. “It’s happening more and more. There’s a definite risk of overvaluation when you use an automated appraisal and you see that even more when the market has fallen,” he said.
But that relief may be short-lived: Some industry watchers speculate that the Office of the Superintendent of Financial Institutions will implement firmer rules in other areas when it releases its final guidelines around the end of the month.
The changes by OSFI are part of a larger, international effort to try to prevent another housing crisis like the subprime mortgage disaster. The new guidelines may help cool the country’s overheated housing market by tightening the rules around consumer lending.
OSFI has yet to issue its final rules, but on Wednesday it sent a letter to banks briefly updating them on some of its decisions so far.
In one of the most significant changes from the proposals it originally issued in March, it has backed off a rule that would have forced banks to insist borrowers re-qualify when their mortgages come up for renewal.
Mortgage brokers had feared such a rule would cause many people to lose their homes. Banks tend to focus on a borrower’s payment history, as opposed to rechecking income levels or property values, when mortgages come up for renewal. Lenders were worried that renewals would be denied if either of those elements had deteriorated since the consumer took out their mortgage, said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.
He said he’s pleased with OSFI’s decision.
The Canadian Bankers Association has also expressed its approval of the update.
“Less than half of 1 per cent of all mortgage holders with the country’s largest banks have gone more than three months without making a payment,” said Terry Campbell, president of the CBA, in a statement. “This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates, and a strong or weak Canadian dollar,” he noted.
Another change from the original proposal is that banks will not have to amortize home-equity lines of credit. As a result, HELOCs can continue to revolve, as opposed to forcing consumers to pay them back within a shorter time frame.
But there are still unanswered questions when it comes to these loans.
“We’re still waiting to see if people can get a mortgage portion in addition to that HELOC line of credit, which is possible now,” said Robert McLister, editor of Canadian Mortgage Trends. He is optimistic this condition will be preserved, based on discussions with OSFI.
Many people use these products for leveraged investments and interest-only borrowing. “If they had required an amortization rule with HELOCs then it would have made things much more difficult from a tax perspective,” Mr. McLister said.
A third significant change is that all the new rules, once they come into effect, will apply mainly to the banks’ Canadian operations. This will be important to those that have large foreign consumer lending businesses, such as Bank of Nova Scotia, which has retail businesses in numerous countries.
The final point in the update zeroes in on property assessments, taking the position that financial institutions should generally not rely on any single method. Banks often use automated appraisals rather than human appraisers because software is cheaper and can be turned around quickly. “It looks like the regulators are going to be keeping a closer eye on automated appraisals,” Mr. McLister said.
He also said that lenders are protecting themselves by increasingly ordering human appraisals. “It’s happening more and more. There’s a definite risk of overvaluation when you use an automated appraisal and you see that even more when the market has fallen,” he said.
