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While OSFI’s proposed underwriting changes announced in January were presented as an effort to control market risk, critics say the regulator risks driving more borrowers into unregulated parts of the market

That was one of the concerns Mortgage Professionals Canada, the country’s 15,000-member mortgage industry association, put forth in its submission document to OSFI, which CMT obtained exclusively.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), came out in January with three potential underwriting changes to its Guideline B-20, which governs mortgage underwriting practices and procedures.

They included new loan-to-income (LTI) and debt-to-income (DTI) restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.

OSFI recently wrapped up its consultation on the proposals with industry stakeholders, and hasn’t confirmed when an announcement will be made on its final decision.

But should it choose to proceed with any of the measures, it could end up introducing additional risk into the real estate market, put housing even further out of reach for the average Canadian, and drive more borrowers to private lending.

Those are some of the arguments put forth by Mortgage Professionals Canada (MPC) in its submission to OSFI.

“Introducing further restrictions in the context of a heightened rate environment creates the risk conditions of pushing average Canadians out of the federally regulated system and into riskier and more costly mortgage solutions,” MPC said in the document. “As a result, more consumers are turning to alternative and private mortgage financing options.”

MPC argued that mortgages remain the “safest of all credit products” for federally regulated institutions, with mortgage consumers not only unlikely to miss their mortgage payments, but also less likely to miss a non-mortgage payment compared to those without mortgages, according to Equifax data.

It also pointed out that mortgage delinquency rates—the percentage of mortgages in arrears by at least three months—remain just off historic lows at 0.15% as of February.

“If qualification requirements become too stringent for the average Canadian borrower, there is a risk of creating a federally regulated financial system that privileges the select few who are able to qualify for a loan at a federally regulated institution, while more Canadians are pushed to costly, riskier mortgage solutions,” MPC added.

It said this goes against the mandate laid out in the Blueprint for OSFI’s Transformation 2022-2025 to “place greater emphasis on contributing to public confidence in the Canadian financial system.”

OSFI Superintendent Peter Routledge commented on the risks the regulator is trying to manage during the release of its Annual Risk Outlook for 2023, in which OSFI listed the housing market as one of the country’s most significant economic risks.

“The level of household indebtedness in Canada is a vulnerability we take very seriously, and it is an area we have been and will continue to monitor carefully,” Routledge said. “That longstanding vulnerability is made riskier today by elevated mortgage interest rates, and a potential economic downturn.”

Concerns about market over-tightening

MPC isn’t the only voice to express concerns about OSFI’s proposed rule tightening.

Ontario’s mortgage broker regulator, the Financial Services Authority of Ontario (FSRA), noted recently that “recent economic and market uncertainty, significant home price appreciation and more stringent underwriting criteria introduced by OSFI for federally regulated lenders have made it more difficult for consumers to obtain or maintain mortgages with traditional lenders.

FSRA’s data show a growing number of borrowers are obtaining private non-bank mortgage loans, which often come with higher interest rates and lender fees.

In 2021, before the Bank of Canada’s rate increases had even started, the market had already started to see a large shift with private non-bank mortgage volumes rising 72% over two years to $22.4 billion. They comprised 10.6% of Ontario’s mortgage market in 2021, and FSRA expects that growth continued in 2022 and 2023 due to current market conditions.

Ben Rabidoux, founder of Edge Realty Analytics, commented recently on OSFI’s latest proposed underwriting changes and said, “to me, it begs the question, why?”

He said that while he was in favour of OSFI’s initial stress test introduced in 2018, which qualifies uninsured mortgages on the greater of the mortgage contract rate plus 2% or 5.25%, he suggested the latest proposals could slow a mortgage market that is already dramatically slowing.

“Mortgage growth is falling, we’re down about 40% year-over-year [and] mortgage debt nationally is now growing slower than incomes,” he said while speaking at MPC’s Toronto Symposium in April.

“So, what is OSFI trying to accomplish here? I don’t fully get it.”

CIBC Chief economist Ben Tal also weighed in on the proposed changes in the context of the federal government considering measures that would benefit housing demand, such as its promise to increase the insured mortgage cutoff to a purchase price of $1.25 million from $1 million.

“I think that if you ask [Prime Minister] Trudeau—and at the end of the day he decides—he would go ahead with some demand-side initiatives,” Tal said during a recent TMG Town Hall discussion. “If you go to OSFI, they will go in the opposite direction. They think [the current market slowdown] is not enough.”

Tal said he’s “concerned that OSFI will make it worse,” with regards to the current housing correction. “I deal a lot with OSFI, and they really believe they have to do a lot to save this mortgage market from itself.”

For OSFI’s part, Superintendent Peter Routledge said in a speech recently that they haven’t exhibited a bias towards tightening the mortgage market further.

“There’s been this perception that OSFI is tightening underwriting standards, but we certainly never intended to communicate that,” he said. “We haven’t had any bias in terms of tightening or loosening mortgage underwriting; we just simply want to see what the experience tells our constituents about the mortgage system, and how we can make it safer.”

If OSFI were to move ahead with any of its proposed changes, Ron Butler of Butler Mortgage said it would likely lead to another surge in activity as prospective buyers rush to enter the market before any new restrictions come into effect.

If any of the changes go ahead, “history shows us there will be a flurry of home sales and mortgage activity to beat the rule change deadline,” he tweeted.

“[That] is just what we DON’T need: artificial stimulus to a housing market that is already experiencing a price resurgence…”

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