OSFI Toughens Mortgage Underwriting

OSFIOSFI’s final mortgage underwriting guidelines are out, sooner than expected.

There are significant changes on the way for a variety of borrowers. TD’s Chief Economist, Craig Alexander, told BNN that the impact of these guidelines is equivalent to “well over a percentage point (increase) in mortgage rates.”

However, these guidelines are less concerning than OSFI’s original draft (which proposed things like requalification on renewal). Moreover, in many ways this news isn’t as market-shaking as today’s Department of Finance announcement.

That said, here is what’s changing (Note: this applies to federally regulated lenders only):

  • HELOCs:  The maximum loan-to-value on a HELOC will drop from 80% to 65%. That will sting borrowers who leverage HELOCs for productive purposes (e.g., as substitutes for open mortgages, or as a low-cost borrowing source for income-generating investments or small business). However, lenders can still provide a 15% amortizing mortgage on top of a HELOC, for 80% loan-to-value total. OSFI tells us: “Existing HELOCs are not affected, but future offerings are subject to the limits.”
  • Qualifying Rates:  The qualifying rate is being toughened for conventional mortgages. For variable rates and fixed terms less than five years, it will be “the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.” This will push a small number of borrowers into 5-year fixed mortgages because they won’t qualify for shorter terms.
  • Stated Income: Going forward, all self-employed borrowers must provide “reasonable” income verification (e.g., a Notice of Assessment). Most lenders already have such policies. It appears that true “no-income documentation” stated income mortgages are officially a thing of the past at mainstream lenders.
  • Down Payments:  “Cash back should not be considered part of the down payment,” says OSFI. This effectively eliminates 100% financing, and is one of the most common sense guidelines of them all.

There are also other changes that may affect non-prime mortgages. We’re awaiting clarification on those before commenting further.

Federally regulated lenders have until “no later than fiscal year-end 2012” to comply with these guidelines. That ranges from October 31, 2012 for major banks to March 31, 2013 for other institutions). However, OSFI expects them to comply sooner if possible, so we may see some of these changes within a few months, if not weeks.

There’s no telling yet if provincial regulators will impose the same guidelines on the lenders they regulate (like credit unions).

OSFI received over 70 comments on these restrictions. Here is its summary of those.

Here’s the full Guideline B-20 (PDF)

Rob McLister, CMT

  1. OSFI tells us: “Existing HELOCs are not affected but future offerings are subject to the limits.”
    No grandfathering of existing HELOCs… this is a smart move, would have opened a huge can of worms and affected many, many borrowers.

  2. I read that as grandfathering existing HELOCs. How do you read that otherwise?
    Will individuals be able to get into traditional 80% HELOCs prior to the end of the bank’s FY? I have a HELOC but it’s not readvanceable and I was thinking of changing over. Not sure if I am able to do that now or not.

  3. Just posted the same question on the “Round 4” article – will the banks be allowed to reduce the 5-yr fixed rates since the 5-yr bonds are so low, and probably will go even lower? I think that it is very nice of the Government making sure that our banking executives will look like geniuses by profiting on a 2% spread, it’ll be interesting if these policies will not have the opposite effect by dropping the real-estate market too fast.

  4. Pure securitizing lenders do NOT have the manpower, space and resources to verify identity, verify borrower income and history, physically review properties, keep documentation, or comply with disclosure.
    How many of these lenders even meet borrowers in person? Hahaha!!
    Staff up or good-bye.
    Tick, tock.

  5. What do you mean? Pure securitizing lenders rely on brokers to meet clients in person and they do verify income and history, have appraisers review properties as necessary, keep documentation and comply with disclosure.
    Not sure what your point was exactly.

  6. Flathead just f’d up my whole families future. Was expecting to sell our house next spring for 1.3 million. Now this f#$#%rs law upon me and my buyers will make me probably loose 300 f’n thousand dollars that we need to take care of my mother with the rest of her life as she is disabled.
    mf flatheadery bs
    I always get stuck in the middle of $#\+ whenever it comes down, ALWAYS ME, no one else, such pure mf bs. After 20+ mf years in a place, about to sell and this bs drops on me. Flatheadery you….

  7. Please read the new regs and industry commentary.
    Pure securitizing lenders will be required to do 2x what they are now to be in compliance.
    A 1200 sq ft mortgage factory cannot do what OSFI is mandating.

  8. That’s too bad that some family with their own parents to take care of won’t be allowed to sign onto a life of ramen and debt slavery and hand the proceeds over to you. What a terrible system this will be.

  9. rareas and concerned..
    You really should be a little less cold hearted.
    Most people use their home equity for savings and emergencies and this seems like a particularly difficult situation. Obviously you’ve never been faced with a situation where you need to take care of a disabled individual individual and don’t understand the financial strain it puts on some one.
    Your comments are unnecessary.

  10. At least we can still finance a car for 100% over seven years and get a trip to Bahamas as a bonus. I still have my $50,000 MBNA card, doubt I could get in much trouble with that. Glad to see OFSI has figured out the real issues in credit are the lowest rate products for the consumers. Wander if that means the banks will make more money?

  11. The Honourable Mr. Flaherty gave you until July 9th to find a buyer whose mortgage may be generously guaranteed by me, the taxpayer. Quit whining and find yourself an agent. If you really think you stand to lose $300k, price it $150k below market and hope for multiples.

  12. Here Here Wiseguy well said. No talk about credit card companies increasing your limit without any new requalification or request. Good credit score? Well then you should be able to obtain 100k in credit without proving any income. BS!! When the ministry figures this stuff out who do they consult the Banks!! Do you think the banks would recommend anything does not line their pockets or is a risk to their bottem line. only 65% on HELOCS and you need more just apply for a credit card no problem. I am really pissed they did not look at unsecured debts at all. RBC allows interest only repayments on their lines of credit. Do you think that is a risk? JBA

  13. Please google total credit card debt vs total mortgage debt (save you one search mortgage = $1.2 trillion).
    One is a fraction of the other.
    Gov’t prefers to tackle the bigger number. Make sense?

  14. Also the borrower mentality is very different between these two products. The public as a whole does realize that credit card debt is bad and should be avoided. Some can’t do it, but that’s another issue.
    Mortgage debt is portrayed as good debt and people are encouraged left right and center to buy and as soon as possible.

  15. There’s the “danger to the consumer” aspect and then the “price increase” aspect. Both expanding credit card debt and expanding mortgage debt can pose danger to consumers, but the former isn’t tied to price increases in the same way that the latter is.

  16. ok, so what happens to my existing HELOC, with Firstline? I just read on here yesterday that Firstline are ceasing operations, so if i move to another lender when i renew in december, do i get to take my firstline HELOC with me or do i have to negotiate a new one?

  17. Who, pray tell, would give you a second mortgage behind Firstline’s HELOC as first charge?

  18. Hi Robert,
    At renewal if you transfer your mortgage as is with no new funds and do not select one with a collateral charge you should be able to keep your HELOC with CIBC/First line. You will have to request a “Priority agreement from your lawyer to be drawn up” Cost about $100 – $300 depending on what city you are in… If the balance of your mortgage has not changed than the HELOC remaining in second position should be approved by CIBC/Firstline.
    CIBC has also launcehed a new collateral product like the RBC Homeline Plan, BMO Readiline, and Scotia STEP, to be announced in a couple months… This will have both a mortgage and HELOC component.

  19. D is ranting about missing out on 300k of someone’s hard earned future money and I’m cold hearted. Most middle-aged people have someone or someones that they take care of, we are the squeezed generation. D could have sold his/her house before listings exploded, but chose not to. That’s not anyone’s fault but his/her own. If you are going to play the casino whether to fund a travel habit or take care of family, you have to pull the chips off the table at the right time. Period.

  20. Not to be cold or anything, but did it not occur to you that the family who buys your home might also some day have an ailing mother? And that they might appreciate having $300,000 less in mortgage debt? It works both ways you know. It isn’t always YOU.

  21. The CMHC isn’t backing car loans or your MBNA Mastercard, so your argument is pure strawman.

  22. One is backed with an asset (mortgage) the other isn’t (credit card). The credit card number is the bigger debt.

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