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Today is B-20 Day

B-20No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.

The effects of these guidelines are visible already. A host of lenders have announced stricter rules on things like conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages. Albeit, some implemented these changes well ahead of today.

In essence, it is now tougher for many borrowers to get mortgage financing.

The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.

One prime example is First National, Canada’s biggest non-bank lender. It has adopted OSFI’s low-ratio qualification policy on variable and 1- to 4-year fixed mortgages with 20% or more equity. That requires it to analyze a borrower’s debt ratios using the Bank of Canada’s 5-year posted rate (which is usually a much higher rate than the actual contract rate).

(This is generally a sound guideline. It helps protect unsuspecting borrowers from the risk of higher rates. In the past, many lenders used rates like their 3-year discounted rate to qualify conventional mortgages with variable, 1-, 2-, 3- or 4-year terms.)

Like most non-bank lenders, First National relies in part on OSFI-regulated institutions to fund its mortgages. Those institutions now require compliance with B-20, and First National has little practical choice but to go with the flow.

And it’s not alone. Most monoline lenders are in the same boat.

We spoke with a treasury executive at one lender earlier today. He told us:

My view is that all non-bank lenders other than credit unions will be subject to B-20, it’s just a matter of time.

All other lenders are selling loans to federally regulated financial institutions (FFRIs), either on the FI’s balance sheet or through the Canada Mortgage Bond (CMB) program. Those lenders would all be subject to B-20.

(He added that “every one of them” will eventually use the 5-year Bank of Canada benchmark rate to qualify variable and 1- to 4-year conventional mortgages.)

In short, OSFI guidelines will rule the day for any bank, trust or lender that gets funding from a bank or trust.

Credit-UnionsAs you read above, however, credit unions (CU) are not federally regulated (see OSFI Rules Spell Opportunity for Some Credit Unions). That means CUs have more flexibility when approving a mortgage. That flexibility will continue as long as:

(a)  provincial regulators don’t impose new OSFI-style guidelines

(b)  a CU doesn’t accept funding from an OSFI-regulated source, and

(C)  a CU doesn’t apply for a federal charter.

Due to B-20, CUs have now become the last bastion of common sense lending in the prime mortgage market. Take Meridian Credit Union, for example, one of Canada’s biggest credit unions. Meridian still uses the actual mortgage rate to qualify 1-4 year conventional mortgages. And there are various other CUs that do the same.

In most cases, we would never advise a borrower to not assume higher rates in the future. But in limited circumstances, that extra borrowing power is appropriate for a well-qualified borrower with good equity, good employment, good credit and either a short holding period or higher near-term income expectations.

Instead of conforming to a rigid box, Meridian and many other credit unions use old-fashioned good judgment. This allows for flexibility where needed, without taking unnecessary risks. Meridian says there are no plans to change its qualification rate on conventional mortgages.

OSFIBy contrast, most lenders under OSFI rules will be more black or white: You’re either in their credit box, or you’re not. Exceptions to these rules will be more limited than ever before.

Sidebar: Here’s a partial list of other OSFI-inspired changes occurring across the mortgage market:

  • Tighter debt ratios on uninsured non-prime mortgages (some “B” Lenders have never even published debt ratio guidelines before today)
  • Stricter proof of income for self-employed borrowers with more than 20% down (i.e., more evidence that an applicant’s business can afford to pay the salary being stated by that borrower—business and personal bank statements, for example.)
  • Stricter guidelines for calculating a borrower’s minimum monthly payment on unsecured debt (This payment affects a borrower’s debt ratios. Three per cent of the outstanding balance has long been a standard, but several lenders used more flexible guidelines.)
  • Stricter policies for estimating heating cost, which is also used in debt ratio calculations
  • The end of cash-back down payment mortgages (at all lenders except credit unions)
  • The end of borrowed down payments (at some lenders).

Many of these changes are sound, but all of them (combined) will curtail housing demand and/or affordability for some period of time. That means medium-term housing pain for the hope of long-term economic gain.

Rob McLister, CMT