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OSFI Facing Growing Pressure to Tweak Stress Test

Canada’s financial regulator is facing growing pressure to tweak its mortgage stress test, and no longer just from the mortgage industry.

On Monday, Calgary city councillor George Chahal filed a motion asking for the mayor to call on the federal government to amend the stress test implemented by OSFI (the Office of the Superintendent of Financial Institutions) on January 1, 2018.

Chahal argues the stress test is designed for the Greater Vancouver and Toronto markets, where prices have soared in recent years, and that slower-growth cities, such as Calgary right now, are suffering the wide-ranging consequences. One of those, which he addressed in his motion, is that many borrowers who don’t pass the stress test are being forced to turn to private, unregulated lenders that typically charge higher rates.

“I think we need to have a made-in-Alberta solution based on local economic indicators and which reflects the needs of Calgary and our local economy,” he told The Calgary Star.

Alberta Conservative Party Leader Jason Kenney also spoke out against the stress test last week, vowing to fight it should he be elected premier.

“If you elect a United Conservative government, we are going to go to bat for [those]…who are being pushed away from home ownership because of the prejudicial, regional, unfair stress test imposed by the Canada Mortgage and Housing Corp.,” he said in a speech to Calgary real estate agents.

In January, Mortgage Professionals Canada released its annual report, which addressed the negative effects of the stress test and reiterated calls for changes. Key among them being that any stress test be based on a “relevant” interest rate and factor in income growth and principal repayment; stop subjecting renewals to the stress test; and making it easier for borrowers at alternative lenders to transfer to more liquid and lower-cost lenders.

Canada’s big banks too, which at one time welcomed the stress test, are now voicing their own concerns in the face of a 17-year low in mortgage growth.

“The damage caused by the central bank’s premature bullishness was reversed quickly [with a pause in interest hikes]. What hasn’t been reversed yet is the damage to the housing market due to OSFI’s B-20 rules,” CIBC Deputy Chief Economist Benjamin Tal wrote in a research note, adding that he does not view the introduction of the 200-bps stress test as an error. “Some Canadians needed to be saved from themselves. But given where we are in the cycle, and with policy rates up by 75 basis points since the introduction of the new measures, is 200 basis points still the right number? Not taking a position here… just asking.”

In an interview with the Huffington Post, he added: “It’s not something that has to be set in stone. It should be more dynamic,” he said of any stress test. “You have to assess the damage to the housing market, whether that damage is too severe, and what other forces in the market are leading to slower growth.”

OSFI Not Expected to Cave to Pressure…Yet

Despite the increasing pressure to tweak the stress test, OSFI has no plans to make any modifications just yet, according to sources cited by Reuters.

That was more or less confirmed by Carolyn Rogers, Assistant Superintendent of OSFI, during a speech Tuesday.

“OSFI monitors the environment on a continual basis and when we determine that adjustments to our standards and guidelines are warranted, we make them,” she said.

She noted that the stress tests were introduced due to a “shift in risks” in the financial system and that the situation can continue to change.

“Should that margin of safety be monitored, and should changes be considered if conditions in the environment change? Of course they should,” she said.

Ron Butler of Butler Mortgage told CMT that as the real estate “apocalypse” continues in Vancouver, those in government and the mortgage industry are justifiably worried.

“Banks are here to make money for shareholders, and if they see something adversely affecting that goal, such as a slowdown in lending, they will definitely have an opinion,” he said.

Butler notes that he sees both sides of the stress test argument, saying he sees the human toll it takes on those caught in the middle, but also the need for it given that “soaring real estate prices pose a certain degree of danger to our economy and society.”

He argues that any modification should do away with requiring mortgage renewals at a new lender to be subject to the stress test. “Applying the stress test to consumers seeking to get a better deal at the point of renewal of their mortgage is ridiculous,” he said. “If a family is prevented from shopping for the best interest rate at the point of renewal when their incumbent lender is not required to use the test, then it is an anti-consumer policy that enriches the incumbent lender and harms the consumer.”