OSFI Issues “Early Warning” on Mortgage & HELOC Lending

Julie-Dickson-OSFICanada’s lending industry is witnessing rock-bottom interest rates and unrelenting competition.

The former has fuelled borrowing volumes. The latter has been known, on occasion, to encourage looser lending criteria.

Together, the two can be destructive to a banking system and economy.

That’s why OSFI (Canada’s banking regulator) is being proactive. In a speech today, OSFI head Julie Dickson laid it out like this for financial institutions:

  • Low rates have likely “increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.”
  • As a result: “…We, at the OSFI, have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.”
  • “The message from OSFI to financial institutions is that…institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.”
  • FIs must protect against imprudent lending “more so than they have historically.”

After her speech, Dickson told reporters:

  • “I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen [lending] standards.”
  • As a result, OSFI is “stepping in to increase the monitoring” of lender portfolios.
  • “I think it’s prudent to increase [FI] capital levels as soon as we can.” (This was in response to a separate question on the new Basel III capital/liquidity standards.)

OSFIDickson also noted that OSFI is presently cooperating with the international Financial Stability Board to develop global guidelines “for what constitutes safe mortgage lending.” That includes down payment, loan-to-value and income verification parameters.

Despite the warning, Dickson acknowledged that Canadian banks have “managed risk” well to date, adding that Canadian FIs are in “a position of strength”.



Sources: OSFI, Globe & Mail, Reuters, Wall Street Journal

Rob McLister, CMT

  1. Lending only to people can afford will slow the business and house sales, but on the other side will assure banks that people won’t default or bankrupt.
    Future will show what was right.
    As long as the rates stay low and go even lower, I’m good :)

  2. You would think OSFI might take this opportunity to visit various other forms of unsecured lending. In particular, the amount of credit card debt that clients are carrying on a monthly basis. As a Mtg Broker, I am meeting a great many more clients with large balances on multiple cards that when combined are creating high pmts. Yet many of these same individuals have been provided with offerings to further increase their credit limits. I find it ironic that they are approved for higher credit limits to increase their debt load further however, I cannot increase their mortgage past 85% LVR to consolidate and clean up the debt they are currently carrying…

  3. Financial institutions won’t be in a position of strength if the jobs market softens or economic growth stagnates. When interest rates are at today’s lows, it’s a great opportunity to consolidate and actually shed debt. But it appears that more and more consumers are doing exactly the opposite; as rates remain low, they continue to take on even more debt. It’s a worrying trend.

  4. Hey Bob – great points. The banks for the most part aren’t worried about people defaulting on their mortgages. They are worried about credit card defaults – that market is much more profitable for them and given the relative size of their exposure and that they can’t control it (for the most part), they seek to control that which they can – the mortgage market because people are afraid of losing their homes.
    What if, sometime over the next five or ten years, Canadians stopped paying their credit cards en masse? What would the banks do then – if it were a concerted effort across the country? I can the day coming in Europe, particularly Greece, where that could happen and if does, it might catch on elsewhere.

  5. I completely agree with you Bob and I just had that conversation this morning with someone. I spoke of an example, I assisted a client earlier this year who had a relentless $80,000 in credit card debt, with interest rates 18% and up. How can our society allow this to happen? Nobody needs that much unsecured debt! Why and how are they able to get that much access. And, why are we not able to control that market? This is where I am lost. It’s the credit card debt that’s the devil!!

  6. Let’s put those average numbers into practice…
    The average mtg in my region is about $240,000 so that would equate to a total household consumer debt of $352,940. At 5% of the total debt, card debt should end up at $17,647. The carrying cost for the $240k mtg would be $919/mth (@ 2.99% / 35yr) and the mthly carrying cost for the $17k credit card debt would be $529 @3% or ($353/mth if you are lucky enough to repay @ 2%/mth)
    Let’s assume with those pmts some clients may have found themselves tight in terms of cash flow. Wouldn’t it be nice to fix it and then drop their monthly pmt from $1,448/mth to $988/mth?
    In reality, I wish I saw clients like this, but I don’t… I deal with clients who through their own accord are now carrying way more outside debt than $17k! and cash flow has become the bigger issue; not the amount of debt… The Govt. is doing a good job of alerting people that previous behavior has to change, but I do believe it is the outside unsecured debt that is creating havoc and consuming most peoples disposable income. Historically speaking, credit cards were only meant to be used as a convenience and never as a source of longer term financing.

  7. Ms. Dickson, “I think it’s prudent to increase [FI] capital levels as soon as we can.” What planet does she live on?
    Ms. Dickson is just another regulatory lifer with a respectable education but little real world banking experience who is still convinced they can operate FI’s better than the FI’s do. Which is about as ridiculous as NHL hockey umpires telling Sidney Crosby how to score goals!

  8. I would say use your credit card as an unlimited transactions debit one, but spend max up to 150% of what you can pay on the next statement. I personally carry no balance on credit cards (except with 0% rate). But people are raised and educated to live 500% on credit and banks and government like that as they are the ultimate winner :)

  9. they may merge NHL with NBL (National Boxing League) … that way will attract more fans and respectively profits.
    Sid the Kid is a victim of it’s fans as they like watching hits more than goals. Sad, but true.

  10. I’m quite encouraged by Benjamin Tal. He bites back sharply and quickly at OSFI with his public observation that “..curtailing lending in a sluggish economic environment could cause problems…” and goes on to explain it to the Regulator like she is two years old.
    I’d like to think Tal’s comments are indicative of the industry response OSFI can expect across the board if they keep this up.

  11. I wonder how much of the criticism levelled at Dickson is related to the fact that she’s a “lady” (thank you for pointing that out, th3uglytruth) and a “Ms.” (also very pertinent, banker in an ivory tower.)
    I’d say that anyone who is critical of a regulator’s attempt to regulate financial institutions needs to make a credible argument that financial institutions have proven to be good at managing risk themselves. A large number of banks in the United States and Europe have proven precisely that they are not (and capital requirements often played a signal role.)
    I would hesitate to give the Big 5 Canadian banks a lot of credit in having managed their risk well over the last decade, and likewise in having been profitable. They operate, after all, in an oligopoly that is often an informal cartel. (And that’s not me throwing wild accusations about – the banking market in Canada is a textbook uncompetitive oligopoly. The way mortgage rates move in tandem across the Big 5 is a great example of informal cartel behaviour.) When you work in an uncompetitive market there is less pressure to take risks, because it is so much easier to make money. Likewise, there are less reasons to experiment with innovative products, because profit margins are fat enough without them. So the fact that they took less risk than their American counterparts is at least partly attributable to their very favourable uncompetitive market conditions rather than to their foresight.
    It’s worth remembering that innovative products that involve high risk (like CDOs that packaged sub-prime ratings and were rated as investment-grade) are not a great thing, but that doesn’t mean all innovative products are bad. And in Canada we pay the price of an oligopoly through lack of innovation. (Mortgages are a great example – without credit unions, what would a Big 5 mortgage prepayment right look like today?) And lack of innovation usually acts as a drag on economic growth.
    At present I don’t see any reason for giving credit to banks that they are able to regulate themselves. When they operate in a fully competitive market, are profitable and managing risk well over long periods, all without a regulator having raised a finger, then I’ll be persuaded.

  12. Love your Friday night, 2am drunk blog entry! You pulling the sex card speaks volumes about you since its what some women use to manipulate situations to an unfair advantage because in truth they are equal but refuse to believe it.
    Truly successful people get to where they are by working hard and nothing else. Just ask Alberta’s newly voted in Female Premier.

  13. Putting the male/female issue aside, you make several excellent points…..
    “The banking market in Canada is a textbook uncompetitive oligopoly.”
    “The way mortgage rates move in tandem across the Big 5 is a great example of informal cartel behaviour.”
    “The fact that (Canadian Banks) took less risk than their American counterparts is at least partly attributable to their very favourable uncompetitive market conditions rather than to their foresight.”
    “(The American’s experiment with mortgage innovation) doesn’t mean all innovative products are bad.”
    I don’t think it ever hurts to remind bankers of their regulatory responsibilities.

  14. To banker in ivory tower:
    Your statement….. “Ms. Dickson is just another regulatory lifer with a respectable education but little real world banking experience who is still convinced they can operate FI’s better than the FI’s do.” ……..this is absolutely RIDICULOUS!!!
    Regulatory bodies in Canada are the MAIN reason we haven’t suffered the plight of our southern neighbours. If FI’s were left to their own devices, Bay St would replicate Wall St. Our real estate markets have been extremely successful precisely BECAUSE of our more conservative banking legislation. If we allowed our ‘bankers in ivory towers’ to run amuck, like the U.S did, we would have hundreds of thousands of foreclosures and homeless Canadians.
    I dare you to ask Canadians if they prefer U.S/Euro banking legislation over our Canadian model. I think only bankers in ivory towers would prefer it……so they could earn hundreds of millions of dollars, while simultaneously destroying our economy and millions of lives. NO THANKS!!!

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