On Thursday, the Office of the Superintendent of Financial Institutions (OSFI) announced its complete B-21 guidelines for underwriting insured mortgages. But it didn’t stop there. The banking regulator also tweaked some of its B-20 guidelines, rules that shook the mortgage market when they were initially released in summer 2012.
This time around, OSFI’s actions will have far less impact on the housing market.
Here’s some of what it had to say:
On cash-back mortgages:
The regulator clarified that it has no issue with lenders providing cash-back incentives to mortgagors. However, it said “incentive and rebate payments (i.e., ‘cash back’) should not be considered part of the down payment” unless it’s related to a government-funded affordable housing program.
On borrowed down payments:
OSFI confirmed for CMT that borrowed funds can still be used for down payments (including funds borrowed off a credit card), subject to the lender/insurer’s policies and borrower qualification. We could see this being one of the next loopholes to be closed. It’s hard to justify allowing people to borrow a down payment at 18%+ interest while banning cash-back down payment programs (which often have effective interest rates that are just a half-point above normal).
OSFI adds, “Where non-traditional sources of down payment are being used, further consideration should be given to establishing greater risk mitigation and/or additional premiums to compensate for increased risk. One example of higher risk mitigation might be a larger down payment…Borrowed funds are expected to be considered in the total debt service (TDS) calculations used by mortgage insurers, which captures loan obligations beyond the mortgage loan. The use of borrowed funds would typically increase the value of an insurer’s quantitative Total Debt Service ratio. In some cases, borrowed funds may result in a borrower (e.g., marginal borrower) breaching the insurer’s TDS limit and the loan being denied mortgage insurance.”
On debt-ratio calculations:
OSFI said it “encourages the use of an industry-wide standard for the calculation of debt service coverage ratios.” Its standard of choice is CMHC’s method (e.g., 39%/44% maximum GDS/TDS using CMHC’s guidelines for calculating inputs like heating cost, rental income treatment, etc.).
On evaluating self-employed income:
For self-employed borrowers, the lender must verify the income from an “independent source” that is difficult to falsify. In reality, though, the days of true “stated income” are so far gone at federally regulated lenders that this clarification is almost a non-event.
On monitoring lenders:
Insurers must keep a close eye on lenders’ underwriting practices. Moreover, OSFI says it expects insurers to “exercise a relatively higher level of examination and scrutiny in respect of underperforming lenders (e.g., those with proportionately higher levels of delinquencies and claims, on a risk-adjusted basis) or whose practices have been found unsatisfactory…(e.g., poor loan documentation, inconsistent reporting, evidence of misrepresentation, forms of negligence, etc.).” OSFI stressed the importance of on-site lender reviews, and said insurers must consider the results of lender assessments when considering whether to approve an application from that lender. If this wasn’t painfully obvious before, now it’s even clearer: absolutely no lender in Canada wants to (or can afford to) post abnormally high arrears and insurance claims numbers.
The industry has until June 30, 2015 to implement the new B-20 and B-21 guidelines. OSFI’s full comments and policies are available here.
Rob McLister, CMT
Great extracts Rob,
Regarding monitoring lenders, I wonder if there’s a stat available about claims to insurers from lenders.
Thanks Joel, Yes, CMHC & Genworth do post aggregate claims data in their quarterlies.
So I’m curious… Does this mean we are losing access to some lender specific policies that has set them apart? Example with Scotias interest only debt repayment, this is changing to the standard 3% of the balance next week. Also we have heard that one our local lenders, the Alberta Treasury Branch will no longer be using an 80% rental offset but CMHCs 50% addback now going forward. Will OSFIs new guideline on “encouraging the use of industry wide standard debt service calculations” mean that these lenders will lose their edge in the reason why we choose them for specific deals, and that all lenders will have to follow same policies going forward?
Hi Angela, No question we’ll see more convergence of guidelines among federally regulated institutions and lenders who draw funding from federally regulated institutions.
Reader note: Late-breaking information has been added to this story regarding cash-back mortgages and borrowed down payments.
It took OSFI 3 years to publish this. It was only after feedback received from industry where significant changes were proposed.
The folks at OSFI just don’t get the basics and continue to demonstrate incompetence with each publication.
With well over 700 staff, the quality just has to improve or at least be on par with other regulators.
Keep buying homes and borrowing those down payments and “highly suggest” that banks monitor their own risk, while fully insuring them! You guys are in so deep you don’t even see how ludicrous this is. The industry will pay dearly and you’ll look back and wonder how you were ever so clueless.
@Concerned: Don’t tell me, let me guess. Another ludicrous rant from another angry renter preaching the absolute certainty future doom and gloom. Time to return to the angry echo-chamber over on Garth Turner’s blog, from whence you came.
Or. Another possibilty for the bubbleheads to consider may actually be clinical. Generalized Anxiety Disorder (GAD): characterized by excessive, uncontrollable and often irrational worry. Sufferers typically anticipate disaster, and are overly concerned about everyday matters.
Oh Concerned, such an oracle are thee! How could we ever approach your masterful knowledge of housing economics? Our clueless intellects are too unevolved to associate how 5% (?) of people with borrowed down payments equate to housing cataclysm. Thankfully we have your balanced unprejudiced wisdom to rely on, so that we may ignore superfluous data like near record low arrears and the truth that existing CMHC borrowers have 45% equity on average. Who are we to say that insured borrowers with their 745 credit scores and 25.5% gross debt ratios are qualified? No. We must defer to your housing omniscience for surely your rhetoric is not as empty as it seems.
Very good summary! keep up the good work!!