“We started to see [HELOCs] being used as a substitute for a mortgage. Instead of having a mortgage on a house, you had a HELOC only, and that is not what these HELOCs were designed for originally. That’s why we suggested in the guideline strongly that there be a loan-to-value ratio of a maximum of 65%.”
“We want the (underwriting) practices at the banks buttoned down,” Dickson added, saying that some financial institutions were not following underwriting policies “to a T.”
If OSFI were to impose this 65% LTV limit on all borrowers (regardless of qualifications), some would view it as one of the most over-reaching consumer lending rules OSFI has enacted; painting all borrowers—strong and weak, responsible and overleveraged—with the same brush. Hopefully exceptions will be made for strong borrowers.
It’s vital to note that HELOCs support a host of valid uses. Many people rely on them for investing purposes, educational borrowing, contingency funds, value-added renovations, etc. Moreover, unlike high-ratio mortgages, HELOCs present no taxpayer risk because they’re not backed by the government. They also impose minimal insolvency risk to banks, to the extent that borrowers are well-qualified and maintain 20%+ equity.
On a related note, OSFI’s draft guidelines suggest it might also require federally regulated institutions to limit interest-only periods on HELOCs to five years. This would be a senseless restriction for people who use HELOCs for retirement planning. In such strategies (e.g., the Smith Manoeuvre), interest-only payments and 80% LTVs are sometimes essential. In these cases, HELOC borrowing is generally offset by the income-generating assets purchased with those funds.
Regarding the recent 2.99% mortgage “sales,” Dickson said it is “very important” to make sure consumers “can not only pay a 2.99% (rate) but can actually pay the 5-year Bank of Canada posted rate.” It’s not a coincidence then that OSFI’s proposed guidelines talk about using the 5-year posted rate to qualify a much broader range of borrowers.
BNN interviewer Howard Green also tried to get her to comment on whether bankers might be afraid to speak out against over-regulation because of retribution from regulators and examiners. Dickson dismissed that as being a material issue in Canada. Some in the industry, however, would certainly differ with her on that point.
Rob McLister, CMT
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