OSFI Official Defends its Mortgage Guidelines

OSFIOSFI, the nation’s banking regulator, appears dead set on tightening mortgage lending, and on a fairly wide scale.

In an internal communication acquired by Bloomberg News, OSFI’s manager of policy development, Vlasios Melessanakis, answers CMT’s March 20 review of its draft mortgage guidelines.

Bloomberg was kind enough to share the source document with us, which it had to obtain under  freedom-of-information law.


Here is that document. In it, Melessanakis makes the following points…

(Note: CMT comments are in italics. Where quotes are not present, we have paraphrased.)

  • Financial Stability Board international standards” are a driving force behind OSFI’s recent mortgage recommendations (Melessanakis says all G20 countries will be expected to adopt similar underwriting principles.)
  • “Enhancements” in lending practices “are needed.”
  • OSFI wants to be proactive, in keeping with its “early intervention mandate.”

Canada faces debt risk and housing risk, and neither should be downplayed. OSFI is, to a large extent, doing what it feels it must and it is right to be ahead of the curve.

That said, here are some comments with which objective observers might take issue. Melessanakis writes:

  • “The (housing) market may break because the fundamentals are not sound (i.e., overvaluation of homes), not because of OSFI guidance.” (OSFI’s blanket wide-ranging underwriting restrictions will have an adverse influence on housing demand. This is absolutely undeniable. If this tips the market balance in favour of supply, then OSFI guidelines could indeed contribute to and/or spark a housing tumble.)
  • HELOC growth has “contributed significantly to growing overall household debt…If (or when) housing prices drop, households would be vulnerable.” (Two fair questions would be: how many households and how vulnerable? We have anecdotal evidence, but not enough good data to answer this. Hopefully OSFI’s data is sound, though it hasn’t shared any so we wouldn’t know. One thing is certain: HELOC borrowers are better qualified and face tougher approval standards than regular mortgagors. People with only HELOCs on their property have 81% equity on average, according to CAAMP data, so HELOC abuse is by no means epidemic. Moreover, if the HELOC taps are tightened, chronic borrowers will still borrow, but at higher and riskier interest rates.)
  • OSFI has not proposed carve-outs to its mortgage guidelines for strong borrowers who present immaterial default risk. To this, Melessanakis says: “Being ‘responsible’ is one thing, having the capacity to pay back the loan is another.”
    (Capacity is not an issue with today’s sound borrowers. They have solid credit, equity, net worth and employment. Even with a 300 basis point rate hike, only 8% of the overall market would have a high total debt service ratio [i.e., one that’s above 40%], says CIBC. Naturally, only a fraction of these would actually default on their mortgages. Add to that a small number who would default for other reasons.)
  • The government is enacting mortgage tightening in a “staged manner.”
  • Arrears have only been stable and below U.S. and UK levels for the “past 5-7 years. See (banking) failures in the 1980s and 1990s.”
    (In the modern era of housing, arrears peaked at 1.02% in 1983, according to CMHC. That followed a dire economic environment. For 20+ years, arrears have been very reasonably contained.)
  • “Are the banks equipped to handle a 40% (home price) drop—(like) what occurred in (the) Toronto market in (the) early 1990s?”
    (This statement draws questions about Melessanakis’s market understanding. Toronto home prices peaked in April 1989 at $261,000 and fell 28% to $189,000 in August 1993. His 40% figure is baffling. Toronto sales comprise one-fifth of the nation’s housing market. But most banks’ risk exposure is spread across the entire country. Many would argue that stress-testing with a national home price drop of 40% isn’t realistic. Anything is possible but modern history doesn’t support it and 40% is well beyond projections from reputable economists, housing analysts, independent think tanks, etc. A national drop of this magnitude would take an epic economic catalyst. Overvaluation alone isn’t enough.)
  • Regarding CMT’s observation that it’s better to take “medicine” from a spoon than a ladle, meaning that too many rapidly adopted housing regulations could derail the market, Melessanakis replied, “What does that mean? Do nothing?”
    (Perhaps Melessanakis might have been a bit frustrated at this stage of his comments, since “do nothing” clearly wasn’t our suggestion.)

*********

Proactive lending safeguards are in our best interests to the extent they control irresponsible borrowing.

The risk is that the policy side effects are worse than the disease. A sudden and overly restrained housing market could potentially trigger the severe correction the government wants to avoid.

OSFI received a lot of pragmatic feedback during its comment period. Hopefully it genuinely considers all feedback, even that which differs from its own views. We’ll certainly do the same.


Rob McLister, CMT

  1. Hello, great site – thanks
    I have been watching the Toronto market for 10 years now and it seems more obvious this year than ever before that there is something wrong with the pricing of the homes in the GTA region. Everybody knows these prices are not sustainable. We were fortunate enough to have a crystal ball that could see 4 years in advance however we learned nothing and will repeat the US style tumble.

  2. How about this for a wacky idea?
    Make borrowers qualify for all the consumer debt! problem solved! Lets treat the real problem.
    OFSI scares the hell out of me.
    INSANITY!
    Vlasios has misunderstood his mission,it sounds like he is trying to start a crash not prevent.

  3. Apparently a bureaucrat who doesn’t understand the real estate market and follows the yellow line without questioning it.

  4. Better late than never to implement the tightening policy. The earlier the housing market can be brought back to normal (and everyone KNOWS it’s not, whether they admit it), the less pain is inflicted.

  5. “A sudden and overly restrained housing market could potentially trigger the severe correction the government wants to avoid.”
    If you are using the the term “correction” appropriately, then a correction is exactly what to government wants to bring back prices in line with fundamentals.
    By calling it “severe” you are implictly stating that the market is severely incorrect or severely out of line with fundamentals.
    A “correction” is a good thing to keep a market healthy or perhaps you just misuing the term?

  6. OSFI is the Canadian financial regulator. You can’t boast about the strength of this country’s financial sector, and then complain about OSFI. (aka, having your cake and eating it too)
    The CMHC and the mortgage market should have been regulated by OSFI a long time ago, as per the rest of the financial sector. I’m relieved its finally under the umbrella.

  7. Reasonfirst,
    Good topic. Thanks for the post.
    Some thoughts on corrections:
    Corrections are usually healthy as you note. Certain Canadian housing markets (not all) need a correction.
    Corrections are often relatively brief, but they can also last a awfully long time (years). The “severity” of a correction is not limited to its price decline. It’s also measured by rate of decline and duration.
    Corrections routinely overshoot when markets believe the fundamentals are worse than they are. The economic ramifications can be destructive. That is not (or at least should not be) the government’s intention. But it is certainly a growing risk, and it’s a risk being shrugged off by a few too many policymakers.
    Cheers,
    Rob

  8. OSFI’s changes would come at a time that the market slowing and coming to a head. The ‘counter-cyclical’ policies designed to slow the market will quickly become ‘pro-cyclical’ on the downward side, exacerbating the decline.
    Too much, too late in my opinion.
    And make debt that wasn’t properly qualified at the time of issuance unenforceable in delinquency. That will bring the credit cards etc to heel very quickly.

  9. I wish Ottawa was as concerned about its own debt & spending habits. If this all happens watch the tax revs drop, that will wake them up. Provincial & Local Governments will also be in scrambling. Pay off debt, take some chips off the table and have some cash reserves.

  10. You need to strike a balance between regulation and economics. OSFI has demonstrated an inferior understanding of the mortgage market and its role in the economy. It has blinders on when it comes to anything other than risk control. That is not balance.

  11. Melessanakis’ understanding of markets is also subject to question based on his assertion that a decrease in housing prices is ‘breaking’ the market. In reality price decreases are a normal part of a functioning market. Maybe this is a result of spending too little time in the private sector where markets matter, which his resume would seem to indicate.
    Some of these rule changes are similar to the effects on rental markets that are created by rent controls. They usually come too late, happen when the market is already in the early stages of correcting itself, and cause the pendulum to swing too far, utimately hurting the people that the program is intending to help.

  12. Vlasios Melessanakis is a public servant who’s entire career revolves around the Ottawa government community and who has no legitimate business experience (despite what his bio states).
    Sorry for such a blunt remark, but OSFI seems to oscilate between incompetence (pensions in general and Air Canada in particular) and overstepping the boundaries of their mandate.

  13. Sustainable…really? Government finances haven’t been sustainable ever and now you want them to try and create a sustainable housing market? This is hypocritical. All free markets that start to run away from fundamentals eventually correct themselves. Do you really think the Government is capable of controlling this with their only known tool (regulation), when their past performance in this area is consistently otherwise?

  14. That said, here are some comments with which objective observers might take issue.
    No offense, but given that you run this blog as well as a mortgage brokerage, you are by definition not an objective observer.
    Moreover, if the HELOC taps are tightened, chronic borrowers will still borrow, but at higher and riskier interest rates.
    Where’s the evidence for this? I would suspect that some HELOC borrowers would not be borrowing if they suddenly had to pay a few percent more interest on an unsecured loan.
    OSFI has not proposed carve-outs to its mortgage guidelines for strong borrowers who present immaterial default risk.
    If those borrowers are insured by CMHC, then they have no right to expect any particular favourable credit conditions. If they aren’t, then I agree that the government should stay out of it and let the banks decide whether to lend or not.
    In the modern era of housing, arrears peaked at 1.02% in 1983, according to CMHC. That followed a dire economic environment.
    Fannie Mae’s delinquency rate was 0.65% before the US crash. It doesn’t have any predictive value. Household debt in 1983 was a fraction of what it is now. Comparing the arrears rate from then and coming to the conclusion that it will be the same this time is not valid.

  15. LS,
    No offense taken. How dull life would be without your thoughtful reminders of how biased we are. :)
    As the late Helene Deutsch once said, the ultimate goal of all research is not objectivity, but truth. CMT’s readership and our livelihoods depend on dealing in facts, and the facts need no spin.
    Re: “Where’s the evidence for this? I would suspect that some HELOC borrowers would not be borrowing if they suddenly had to pay a few percent more interest on an unsecured loan.”
    “Some” perhaps. But HELOCs are often used as low-cost substitutes for other types of borrowing (e.g., car loans, investment loans, etc.). OSFI, the Bank of Canada, and economists have discussed this very point many times. The former seems to discount that this substitution effect is rational behaviour.
    Re: “If those borrowers are insured by CMHC, then they have no right to expect any particular favourable credit conditions. If they aren’t, then I agree that the government should stay out of it and let the banks decide whether to lend or not.”
    I see. So, one abdicates rights simply by virtue of his or her decision to get an insured mortgage? Their qualifications and risk level have no bearing? That is certainly one of the more “interesting” viewpoints I’ve heard lately LS.
    Re: “Fannie Mae’s delinquency rate was 0.65% before the US crash. It doesn’t have any predictive value. Household debt in 1983 was a fraction of what it is now. Comparing the arrears rate from then and coming to the conclusion that it will be the same this time is not valid.”
    Historical arrears have value in two ways. First, they confirm in a general sense if policies and borrower conditions have been sound as of the recent past. Second, they illustrate what periods of stress can mean to people’s willingness and ability to pay their mortgage. So they are not a throw-away statistic.
    Household debt, by itself, is a useless measure of default risk. Arrears are more closely linked to employment and affordability. By multiple measures, mortgage affordability is exceptionally favourable today, compared to 1983. Here is the Bank of Canada’s measure: http://credit.bank-banque-canada.ca/financialconditions#hai You’ll find others if you Google.

  16. $189,000 in 1993 dollars is $163,000 in 1989 dollars. (source http://www.bankofcanada.ca/rates/related/inflation-calculator/ )
    $163,000 is 38% less than $261,000. See where his 40% drop comment comes from? Not baffling at all. People in residential real estate love to trot out long term, non-inflation-adjusted charts, which show, erroneously, that real estate almost always goes up, and that slumps are short.

  17. Where does Melessanakis talk about inflation adjusted numbers? Even if he was, he still got the numbers wrong. You don’t run an entire financial system with approximations. If you’re going to exaggerate and round up, you might as well round up to 45% for more effect.
    Either way, suggesting that banks should capitalize for a 40% nationwide sell-off makes Melessanakis a fanatic. He needs replacement. End of story.

  18. Testing for a 40% nationwide decline coupled with 13% unemployment wouldn’t be out of line with US and UK regulators’ scenarios.

  19. Actually Rob, I’ve always been very impressed as to how you do stick to the facts and in my humble opinion, do your best to present an unbiased commentary. There are many times I’ve thought “wow brokers won’t like that” about an opinion you’ve provided.

  20. OSFI wants to be proactive, in keeping with its “early intervention mandate.”
    What…really? Proactive and early intervention…I suggest you arrived a little late to the party, it’s over. Where were you before the boom? Hell, where were you during the boom? Come on OSFI, just admit that you dropped the ball. You allowed the banks to operate outside of the policy guidelines set many years ago. We don’t need new policies! The banks just need to follow policies already in place.

  21. I see. So, one abdicates rights simply by virtue of his or her decision to get an insured mortgage?
    Rights? Since when is an 85% HELOC a right? Was that an addition to the charter that I’m not aware of?
    If the CMHC decides (or OSFI decides for the CMHC) that they want to tighten up their restrictions, then that is up to them. Would you object if a bank decides to change a mortgage in a way that reduces flexibility? Of course not, that is their right as the organization offering the product.
    As I said, it’s a different situation for non-insured mortgages, since I believe that risk should be managed by the banks directly.
    First, they confirm in a general sense if policies and borrower conditions have been sound as of the recent past.
    Right, so my example with Fannie Mae’s arrears rate (0.65% in the first year of their crash, it was much lower during their boom), means their lending conditions were sound, right?
    Second, they illustrate what periods of stress can mean to people’s willingness and ability to pay their mortgage.
    I think this is a dangerous line of thinking because it presumes some sort of increased integrity of Canadian borrowers versus borrowers in the US. The assumption that american borrowers are somehow less determined to keep their house is not logical, and smacks of misplaced patriotic pride.
    Even if it were true, your example from 1983 is 30 years ago. Assuming that things are still exactly the same in terms of consumer integrity is a huge stretch.
    Household debt, by itself, is a useless measure of default risk.
    I didn’t say it’s a measure of default risk. It’s an example of one of the very large changes in household finances between 1983 and now. When a household is maxed out in other debt, any smaller change in employment (lower pay, baby on the way, etc), or affordability will have a more adverse affect than if they had less other debt and more financial reserves.
    By multiple measures, mortgage affordability is exceptionally favourable today, compared to 1983.
    Nationally we’re below the record from 1983 (Vancouver is above, all of BC is above, and affordability in most other cities is significantly worse now than for the past 20 years).
    So we’re getting close to the awful levels of affordability, and we’re doing it at record low interest rates.
    So yes, we are overall not quite at the extremes reached in 1983 (when rates were ~18%). Do you see why I mentioned the whole “objective observer” thing? That is clearly not the whole picture of affordability.
    source: http://www.rbc.com/newsroom/pdf/HA-1125-2011.pdf

  22. I trust the Government more than the Coporations right now. Greedy banks and capitalist insiders creating an unsustainable housing market to which the middle class will be on the hook for bailing out.

  23. In fairness, does anyone on this forum want to compare resumes with DR. Melessanakis? I’m sure that would be a pretty humbling experience.

  24. Re: “Rights? Since when is an 85% HELOC a right?”
    By “right,” I was using your word LS. i.e., “they have no right to expect any particular favourable credit conditions.”
    Clearly you and I are not talking about an inalienable right here. What I’m saying is that hard-working Canadians who have proven to be financially responsible are being lumped in with riskier borrowers. These prudent homeowners who support the housing system and pay the salaries of policymakers, have a right to expect that reasonable and beneficial lending policies not be taken away for no good reason.
    (By the way, there are no 85% LTV HELOCs.)
    Re: Your Fannie Mae example & soundness…
    My reference was to Canadian arrears, so we’re talking about “sound” from a Canadian standpoint. Stats can’t be taken in isolation. Without context, these numbers are misleading. For example, one cannot ignore every key difference between the Canadian and U.S. housing markets and focus only on a number. It’s like comparing GDP of two separate countries and suggesting the factors driving GDP in country A must be the same as those driving country B.
    Re: Arrears and economic cycles
    Arrears are impacted primarily by employment data. The point was, we can use past arrears data for a basic view of how economic stresses impact potential defaults.
    Re: “I didn’t say (household debt is) a measure of default risk.”
    You linked household debt to the discussion on arrears (which are a precursor to defaults), which is why I commented on it.
    Household debt means nothing in a discussion of arrears unless you factor in assets, affordability, and other variables. You could have $100,000 in consumer debt to my $1,000 in debt and be a better credit risk than I. It’s not the level of debt that causes arrears problems. It’s people’s ability to service it.
    Re: Affordability
    I don’t think we’re on the same page LS. The statement referenced national affordability. Naturally, one can find cities above the mean, just like you can find cities where affordability is much better than the average.
    Rates are pivotal in a discussion on affordability. They are heavily factored into the formula. Just because rates were far higher in 1983 doesn’t mean affordability metrics are flawed. Affordability is an objective measure with a simple purpose, to gauge people’s ability to debt service at a given time.
    The fact remains, mortgage payment affordability (by measures like the Bank of Canada’s) is better than 1983. Affordability by other measures (RBC’s BMO’s, etc.) are close to historical norms, despite exploding home prices. The fact that affordability could change is a whole separate discussion (and incidentally, one we’re doing a Globe piece on next week).

  25. I have no issue with some of the proposed guidelines especially the helocs. The one issue I believe will have a huge impact on house prices and the market will be the proposal to require re-qualification on renewals. Peoples lives change, circumstances change. If they qualified when they originally took out the mortgage, by making them re-qualify on income and appraisal values on renewal is a almost sure fire way for the OSFI to ” bring on a correction”.
    The problem is that once you are down that slope, where does it stop? I have many clients that originally took out mortgages as Newlyweds with 2 incomes…..they have since had kids and the wife has reduced her hours if not quit all together to be able to stay at home. The clients are still making all payments as they have decided to tighten up on extra curricular monetary activities. So they are making all payments but could be forced out as they technically do not qualify on paper anymore !!
    And what about the client who has no problem qualifying income wise but if the values had gone down 15% in that time and they originally had only a 20% down mortgage….with having to re do the appraisals would the client need to come up with a huge lump sum just to re qualify and keep it conventional??
    To those that think this will not affect them….think again…this will affect everyone who is a homeowner !!

  26. These prudent homeowners who support the housing system and pay the salaries of policymakers, have a right to expect that reasonable and beneficial lending policies not be taken away for no good reason.
    I agree, assuming these prudent homeowners are not relying on CMHC insurance. Then their lending should be strictly between them and their bank.
    However, if they are taking out CMHC insurance, then CMHC has the full right to change the terms and restrictions on their service. If the responsible homeowner doesn’t like that, they can save up 20% and bypass the insurance.
    For example, one cannot ignore every key difference between the Canadian and U.S. housing markets and focus only on a number.
    Completely agree. However when you claim that low arrears rate is a sign of low risk, then it is reasonable to demonstrate that this does not hold in other markets. Of course there is differences, but the fact remains that arrears rate is not a predictor of future risk.
    Arrears are impacted primarily by employment data.
    Yes, and the second biggest factor is negative equity.
    It’s not the level of debt that causes arrears problems.
    I agree. The point I was trying to make was that household finances are in a very different place than they were in 1983. It’s partly household debt, it’s partly interest rates, it’s partly the number of dual income households, etc. Therefore comparing the situation to 1983 (where arrears were manageable) is not taking into account the whole picture.
    The statement referenced national affordability. Naturally, one can find cities above the mean, just like you can find cities where affordability is much better than the average.
    I realize that. But in the end people are buying in individual cities, and not buying a national average house. The fact that there are many cities that do not have an affordability problem is completely irrelevant to the cities that do.
    The RBC measure indicates that even nationally the affordability is quite poor relative to the last 20 years, even at record low rates.
    They are heavily factored into the formula. Just because rates were far higher in 1983 doesn’t mean affordability metrics are flawed.
    Of course, that much is obvious. My point was that rates of 18%, the risk of a rate increase is incredibly small (how much higher could they possibly go?), so even though affordability was very poor, it is entirely reasonable to expect it to improve when you renew your mortgage.
    When rates are 3%, the situation is reversed and interest rates have little room to decrease, but lots of room to increase. It is very likely that affordability will deteriorate on mortgage renewal, so the situation is very different from 1983.

  27. Totally agree. That rule seems insane. What would be the point of forcing people to sell that aren’t in arrears? Sounds like a terrible idea, but maybe there’s more to it.
    If they want to avoid people getting themselves into trouble when they go from 2 incomes to 1, then tighten up the qualification regs to leave more buffer. Constantly forcing re-qualification is nuts.

  28. 40% is total overkill.
    US home prices only fell by 1/3, despite one of the worst financial crises in history, criminal underwriting, a crooked securitization system, non-recourse in many states, option ARMs, NINJA loans, unregulated lending and a lots of other stupidity that Canada doesn’t have.
    Likening American and Canadian mortgage markets proves only one thing, ignorance.
    The main similarities between the two countries are price increases and debt levels. Those predict nothing.

  29. My understanding is that in the UK, borrowers (or at least some) have to re-qualify with every mortgage renewal. Would welcome some clarification on this.

  30. I can’t believe “mortgage professionals” at CMT can be so dumb. Firstly, I love who you defend the OSFI “doing what it feels it must and is right to be ahead of the curve,” but yet when the Finance Minister speaks to banks about being irresponsible you call him a communist (or an anti-capitalist, tomato/tomawto)
    Now, you oh so eloquently write your own remarks back to Melessanakis without even telling your readers that he was responding to YOUR comments. The same ones you made when you called Flaherty and our Conservative government communists, and hypocrites.
    Policy side effects are NOT worse than the disease. Stop being so greedy. Stop wanting to only take the commission paid by the lender, and start being responsible.

  31. All I said was that these risk scenarios are being used elsewhere. Obviously, your scenario should be a bit WORSE than the low point observed in a similar market just a few years ago. We’re talking about testing for three sigma events here, not two sigma.
    US home prices only fell by 1/3, despite one of the worst financial crises in history […]
    You might want to spend a bit more time with the data there, son. The housing crash preceded the financial crisis. Many people even think it may have been a factor. See you in the funny papers.

  32. I understand your thinking, but your last sentence contradicts it a bit. Ultimately, it is the government who is choosing to bail out the greedy corporations and give them a sense of security to continue their risky behaviors. Have these bailouts had the desired effect in Canada? How about the USA? As a shareholder in a coorporation, I expect the officers to find creative ways to make money and can’t fault them for doing so. If I think the way they do so is questionable or risky, then I don’t have to invest. As a taxpayer, I don’t have the option to opt-out and not invest even though past history demonstrates varying degrees of incompetance no matter what political party is in power. IMO, incompetance is even worse when the so-called “civil servants” are the decision makers (as in the OFSI), as there is essentially no accountability.

  33. “Policy side effects are NOT worse than the disease.”
    This cannot be said with certainty as only history can be the judge. Many of the decisions made today will have domino effects for years.

  34. Kate,
    Life’s too short. Let’s try to keep it civil. Question our line of reasoning all you wish, but getting personal will give you a short pass here.
    With respect to disclosure, the second paragraph of this story states “Vlasios Melessanakis, answers CMT’s March 20 review of its draft mortgage guidelines.” (We are CMT.) There is also a link to the Bloomberg story that states the same. It’s difficult to understand how you conclude that this was not fully disclosed.
    OSFI, Minister Flaherty, and all involved in this process have good intentions. A number of their mortgage tightening proposals are sound policy. The issue is that some of their measures go too far, are too much at one time, and risk unnecessary collateral damage. Hence, it is reasonable that an observer might challenge some of their measures while commending them on others.
    Rob

  35. Hi LS,
    We’ve both made our points on issues 1-4 above so I’ll give you the last word on those.
    On affordability, OSFI’s policies will affect homeowners nationwide, not just in “individual cities” like Vancouver and Toronto. That’s why the national affordability is relevant to a discussion on national policy.
    Rules made to correct a minority of cities hurt people in the majority of regions where those rules aren’t necessary. One could argue that it better serves the nation to tighten guidelines in specific regions only, given regulators’ clear concern for these areas. Unfortunately, the resulting political backlash of that idea might make it unpalatable for Ottawa.
    Re: ”The RBC measure indicates that even nationally the affordability is quite poor relative to the last 20 years…”
    Are we looking at different data? In its latest report RBC writes: “For the majority of markets across Canada, the level of affordability is now close to where it was a year ago (within 1 or 2 percentage points) and to the long-run average.”
    RBC cites Toronto, Vancouver, Montreal, and to some extent, Ottawa, as exceptions. It calls for marginally improving trends in affordability overall in 2012.
    That said, RBC’s numbers are not perfect. Some comments on that: RBC Affordability Survey
    As for future rates affecting affordability, rate predictions are futile. Exhibit 1: Japan.
    On the other hand, people have to be tested to ensure they can pay their bills if/when rates rise X%. It doesn’t take 100 pages of new rulemaking to implement that kind of common sense. Incidentally, more and more, we’re seeing the LTVs of AAA clients (with outstanding credit, assets and TDS ratios within guidelines) be cut back because insurers are qualifying them at much higher rates than regulations require.
    Rob

  36. Toronto and Vancouver account for only 1/4 of national homes sales. How can you justify them dicating mortgage rules in hundreds of other cities and towns across the country?

  37. rabid economist,
    Can you remind us again; how many PhDs did Long Term Capital Management have before it lost all $4.6 billion of its investors’ money in 4 months? Never fear questioning a man of pedigree.
    The problem with smart people is that they sometimes miss a lot of trees by looking at the forest.

  38. I would ignore Kate’s crass and uncalled for comment. She clearly has a reading impediment.
    People who have to insult others and take their words out of context shouldn’t be allowed to post. Rob, you are a bigger man than I to let this comment stand.
    Kate, You are the last spokesperson we need representing “our Conservative government.”

  39. You dodge the facts. Your 40% number is groundless if it’s based on the US. Canada is not a “similar market” to the US.
    Why is it not similar? Re-read my post.
    The US crash was triggered and exacerbated by criminal underwriting, a crooked securitization system, non-recourse in many states, option ARMs, NINJA loans, unregulated lending and many other idiotic practises that don’t occur here.
    You might as well compare Canada’s housing system to China’s or India’s.

  40. Rob, Melanie et al,
    I’ve been a long time reader and regret not writing in before. We refer to your publication quite frequently for our research.
    Contrary to LS, I don’t believe that journalistic standards rest on being an industry outsider. Your writing proves that by being constant source of factual mortgage market analysis. Few outside the industry could replicate the invaluable resource you’ve created.

  41. The 40% value has precedent in Canada — average Toronto condo prices dropped by about that amount between 1989 and 1994.

  42. This discussion of Toronto prices is so pointless. Banks don’t lend in Toronto only. Their risk is diversified across the country.
    OSFI is a national regulator. It’s job is to stress test based on national price volatility. Jim Flaherty will grow wings and fly before house prices drop 40% nationwide.

  43. Very true. Regulators have a poor track record when it comes to understanding the free market and how it should be managed.

  44. On affordability, OSFI’s policies will affect homeowners nationwide, not just in “individual cities”
    Right, but where will the effect be felt most? In the cities with the highest valuations. I doubt many people in Halifax will be affected, where the median price/income is only 3.5.
    Like you said, the government can’t impose regulations only on certain cities.
    As for future rates affecting affordability, rate predictions are futile.
    It’s not a rate prediction, it’s a simple balance of probabilities. I assume we can agree that with affordability at the same amount, risk is far higher when rates are low than when rates are high.
    Incidentally, more and more, we’re seeing the LTVs of AAA clients (with outstanding credit, assets and TDS ratios within guidelines) be cut back because insurers are qualifying them at much higher rates than regulations require.
    Great. I assume the insurers know what they’re doing and are appropriately cutting back their risk.

  45. Contrary to your implication, I didn’t say journalistic standards are better if you are an outsider.
    What I said was, that given the occupation of it’s authors, this site obviously has a bias. This isn’t a bad thing, but it’s a reality. Everyone has a bias including me of course.
    The correct response to bias is to state your biases and then let the reader make an informed decision on how to interpret your writing. This site has lots of fantastic info, I only object to the statement that readers should somehow believe it to be an objective observer of the market. That is fundamentally impossible.

  46. Vancouver and Toronto comprise 27% of sales. OSFI can’t discount the other 73% of the country when assessing and managing risk. That’s a simple truism.
    Regarding region-specific regulations, I didn’t say the gov’t can’t do it or that it’s a bad idea. The point was simply that it presents challenges to regulators.
    As for affordability, mortgagors should always be tested to ensure they can handle higher rates, regardless of where rates are at any given time.

  47. Hi LS,
    Thanks for that feedback.
    A brief point on objectivity and then we’ll get back on topic.
    Objective writing is free from fact distortion. That’s our definition and it’s what we strive for. No one can be perfect but we do our honest best to get things right.
    If one wanted to take the definition a step further, objectivity could be defined as expression devoid of personal feeling or interpretation. That’s something we’ll never aim for because most issues aren’t black and white. We have to use the experience and evidence we’ve collected to form an honest judgement.
    So yes, to the extent that we believe in the data available to us, we have a “bias” toward that information. At the same time, it’s vital to be open minded as new data becomes available. I can’t tell you how much we’ve learned over the years from (and how indebted I am for) the incredible wealth of knowledge that CMT readers share in these forums.
    Cheers…
    Rob

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