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OSFI pulls back on some mortgage proposals, all in on others
Canada’s top banking regulator is shelving some key proposals aimed at keeping homebuyers from loading up on too much debt and protecting bank bottom lines.
Based on feedback from lenders since January, the Office of the Superintendent of Financial Institutions said Oct. 16 that it will not pursue putting tighter regulatory limits on debt-service coverage, part of a proposal to cap lenders’ loans with high debt service ratios. Most of the January proposals were directed at uninsured mortgages.
“After careful consideration of stakeholder feedback, we agree that regulatory limits on debt service coverage should not be pursued,” OSFI said. “While such limits could result in greater consistency, they would remove too much risk-based decision-making and risk ownership from lenders.”
The regulator said there are certain limits that apply to insured mortgages, under the law, but noted that those generally serve public policy objectives beyond the scope of OSFI prudential soundness and financial stability mandate.
“A strengthened principles-based expectation could therefore be more suitable” than the initial regulatory limits proposed, OSFI said.
The regulator is overhauling its B-20 guideline that includes the mortgage stress test, first introduced in 2012 with additional thresholds added in 2018.
OSFI proposed a bevy of possible changes in January 2023 including new “affordability” stress tests to adapt to heightened payment and renewal risks of higher interest rates, while making it easier to qualify for longer fixed terms that post less risks.
“Depending on what OSFI finally decrees, the implications could be significant for home prices, lender volumes and the options available to individual borrowers,” said Rob McLister, veteran mortgage analyst and adviser on his blog MortgageLogic.news.
McLister said OSFI appears to have abandoned a plan to use debt-to-income measures it had proposed to restrict mortgage debt and total indebtedness as a percentage of borrower income, which the regulator said is “too complex to implement at this time.”
This was the industry’s biggest worry from all of OSFI’s proposals
However, he noted that although lenders also tried to get rid of loan-to-income measures — arguing that they ignore a borrower’s assets, hurt smaller lenders, and are unnecessary because higher interest rates are already bringing these metrics down from high levels — OSFI appears to be sticking with those.
“This was the industry’s biggest worry from all of OSFI’s proposals,” McLister said.
Meanwhile, the regulator rejected industry proposals to regulate the housing market differently in urban markets such as Vancouver and Toronto. OSFI does, however, appear to be onside with lender proposals to enlist the Canada Revenue Agency to aid with home buyer income verification.
Overall, McLister said the “silver lining” for the real estate industry is that many changes proposed nine months ago don’t appear to be happening after all.
“Our regulator threw a lot of proposals against the wall last January. It now seems that only a few of them will stick,” he wrote.
“What’s more, OSFI doesn’t want to rock the boat too quickly heading into a potential recession, noting that ‘the cumulative impact of multiple measures could create unintended, negative impacts.’”