It could have been worse.
Here’s what we now know…
- Contrary to some fears, mortgage holders in good standing will not have to be re-approved at renewal if they stick with their existing lender.
- This was the No. 1 industry concern in OSFI’s draft guidelines.
- OSFI says lenders can rely largely on people’s “good payment” records at renewal, which “is one of the best indicators of credit worthiness.”
- The maximum loan-to-value on HELOCs will be cut from 80% to 65%.
- OSFI says, “HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance.”
- 65% LTV will be a hard limit that applies to all HELOC borrowers at all federally regulated lenders (i.e., it won’t be applied as a weighted-average on lenders’ portfolios).
- There’s no word yet on when HELOC changes will happen. “Later this year” is the most frequent guess we’ve heard from industry watchers.
- There’s hope that this guideline will be limited only to the line of credit portion of readvanceable mortgages. In other words, there’s nothing to suggest that people won’t be able to get a 65% LTV credit line, plus a 15% LTV mortgage, for a total LTV of 80%. (We won’t know this for sure until the final guidelines are released.)
- OSFI will not require that HELOCs be amortizing.
- In other words, interest-only HELOCs will likely survive, with no set repayment period.
- OSFI very wisely realizes that “the revolving aspect of a HELOC is a fundamental feature of the product.” Responsible borrowers rely on flexible interest-only payments for uses like investment financing, among others things.
- These guidelines will not apply to insurers, only to lenders and institutions that acquire mortgages.
- OSFI says, “A separate guideline applicable to…mortgage insurers will be published for consultation at a later date.”
- No substantive changes will be made to OSFI’s draft guidelines on automated appraisals.
- OSFI’s March 19 guidance states that “Proper collateral management for residential mortgages (at origination, renewal or refinancing) should include a comprehensive, on-site appraisal, unless there are appropriate circumstances that justify the use of alternative approaches.”
- Mortgage applicants with a “relatively high LTV ratio,” unique properties, or less liquid properties (e.g., rural homes), will now more likely need an appraisal by a human appraiser versus an automated valuation system.
- We’re hearing more criticism lately about automated appraisals inflating values. This criticism may intensify if prices start falling.
- CIBC’s Ben Tal tells us that banks are increasingly opting for human appraisals to “protect themselves against mistakes” by automated valuation systems. “Real people appraising properties tends to lower the value of those properties,” he says.
The speed at which OSFI has reviewed people’s comments and made decisions on these industry-moving policies is truly impressive.
Moreover, it’s relatively rare for OSFI to release interim updates like this after a comment period. It underlines the economic importance of these changes. (Stakeholders greatly appreciate these updates, so hats off to OSFI for keeping everyone in the loop.)
The final version of these guidelines will come “in the near future,” according to today’s release. That likely means later this month or July.
Sidebar: OSFI’s new mortgage policies are drafted for federally regulated lenders only, but regulators in certain provinces might also adopt them.
Rob McLister, CMT