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Latest in Mortgage News: OSFI Changes Rules for Mortgage Deferrals

OSFI regulatory changes to mortgage deferrals

OSFI, Canada’s banking regulator, announced today it will start phasing out special regulatory capital treatment of deferrals given improving economic conditions.

The changes are effective immediately for mortgage payment deferrals granted by the Big 6 banks through to the end of September. Those deferrals will now only receive special capital treatment for up to three months as opposed to six. After September 30, any deferrals will be treated according to OSFI’s normal rules.

At the height of the pandemic and market volatility, the Office of the Superintendent of Financial Institutions announced special treatment for loan and insurance premium payment deferrals to be considered as “performing” as opposed to “non-performing.” A loan is considered non-performing when the borrower is late on making payments, typically by 90 days or more. Non-performing loans require the bank to set aside additional capital, or “provisions,” in the event of losses.

“The gradual phase out of this special capital treatment supports the ongoing stability of Canada’s financial system by ensuring a smooth transition back to pre-existing requirements,” OSFI said in a release.

Mortgage deferral relief“Our change today really reflects changes in economic conditions, unwinding of certain government programs and other indicators,” an OSFI official added during a conference call. “We’ll continue to monitor those going forward and, if conditions begin to deteriorate, we’re ready to act as necessary.”

Asked whether banks will be more likely to limit future deferrals to three months vs. six, OSFI officials noted that, “banks are well-capitalized to continue to offer deferrals and other supports to their borrowers even as the capital treatment winds down.”

As of July 30, there was approximately $170 billion worth of outstanding mortgage deferrals in place among the Big 6 banks, with the majority expected to mature between September and October, OSFI noted. The regulator added that the number of new deferrals in recent weeks has been “limited” and “stable at a low level.”

In recent weeks the big banks have reported a sharp decline in the number of mortgage payments still being deferred. For example, BMO and Scotiabank report that 90% of mortgage borrowers who had deferred payments are back to making regular payments. At RBC, normal payments have resumed for about 80% of its mortgage deferrals, with extensions granted to 19%. The remaining 1% are considered delinquent.

U.S. Federal Reserve Adopts New Approach to Inflation

The Federal Reserve announced a significant policy change on last week to “average inflation targeting.”

As a result, the central bank will allow inflation to run above its inflation target of 2% for some time before hiking interest rates.

Fed Chairman Jerome Powell called the change a “robust updating” of central bank policy. What it means is that the Fed will be less inclined to raise interest rates when unemployment falls, as long as inflation doesn’t rise too drastically.

“Many find it counter-intuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Could the Bank of Canada Follow Fed Policy Changes?

It seems likely, considering the BoC launched a public consultation this week inviting the public to share its ideas on inflation targeting.

housing market outlookCanada’s central bank is gathering feedback through this online survey, which will be available until Oct. 1, 2020.

The review of how the BoC sets its inflation target has been spurred by the COVID-19 pandemic. Societal changes mean people are now spending less on items that have a larger impact on the inflation reading, such as gasoline. They’re now spending more on items that have a smaller impact on the index.

“While we have benefited from having well-anchored inflation expectations in the past, this mooring will be tested by the very rough economic waters caused by the pandemic,” Deputy Governor Lawrence Schembri said in a speech to the Canadian Association for Business Economics.

The Bank of Canada has been targeting inflation at 2% for nearly 30 years after it got out of control in the late 1970s and early eighties.

Home Building Springs Back to Highest Level Since 2017

Home building activity is back into high gear following a drastic slowdown during the height of the pandemic.

Housing starts were up 16% nationally in July compared to June, to a seasonally adjusted 245,604 unitsthe highest level since November 2017. In Toronto, building activity sprung back even more quickly, jumping 22% on an annualized basis.

“Despite the housing market’s durability thus far, we continue to see a soft spot ahead given the ongoing lack of immigration and upcoming resumption of many deferred mortgages,” wrote Royce Mendes of CIBC Economics.

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Last modified: September 1, 2020

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.