OSFI Puts Canadian Lenders on Notice; Tightens Oversight

Canadian Regulator Sends A Message to Lenders – Keep Proper Lending Practices

The Office of the Superintendent of Financial Institutions (OSFI), responsible for the oversight of Canada’s banks and largest lending institutions, has announced that it will be keeping a closer eye on the mortgage lending market as housing prices continue to soar.

The regulating institution cites the rapid rise of housing prices in certain markets, continually low mortgage rates and high debt-loads burdening Canadians.

OSFI sent a lender to each federally regulated lender reminding them of their duty to “prudent underwriting of residential mortgage loans.”

As home prices continue to rise, many Canadians look to buy as much house as they can, some Canadians are eager to catch a market which continues to be hot; while others simply want to ‘get in’ for fears of being ‘priced out.’

The regulator also pointed at a few mortgage qualification factors that will increasingly warrant further scrutinization. These include the following:

– Institutional risk: What does the profile of an institution’s mortgages look like? Are loans exceeding risk guidelines laid out by the institution? How would the institution fare in different scenarios where some loans were compromised?

– Debt Service Ratios: Lenders use two key metrics, Total Debt Ratio and Gross Debt Ratio. We’ve covered in the past how these ratios are calculated to determine what you can afford. OSFI wants to make sure lenders are not exceeding these guidelines.

– Income Verification: Speaking to your HR department or employer to confirm your salary or compensation. Are you an hourly employee? If so, are you guaranteed a certain number of hours each week? Are you under contract? These are all questions that lenders will want to know before approving your mortgage.

In a letter to all federally regulated financial institutions, the regulator says it’s “aware of incidents where financial institutions have encountered misrepresentation of income and/or employment.”

OSFI has also stated that the typical test of a home-owners ability to handle rising interest rates may not be sufficient. Conventionally, mortgage lenders use the Bank of Canada’s posted five-year fixed rate to qualify borrowers, a rate much higher than today’s market rates in the 2.50% range.

The regulatory body also noted that the market’s reliance upon property appraisals may also create uncertainty in today’s hot housing market. OSFI noted that lenders should use appraisal values that “…provide for a conservative LTV calculation…”

What Does This Mean to the Average Canadian?

Not too much – at least today. The point addressed by OSFI reenforce what they believe to be sound lending practices, which many lenders in Canada already practice. However; the gesture puts these institutions on notice that there may be closer oversight and more stringent lending rules in the future.

There continues to be a prevalence to tighten lending rules in the Canadian mortgage market. As the housing market continues to grow and become an even larger portion of the economy, mainstream media, investors and home-owners will continue to keep a watchful eye.