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Reaction to OSFI rule changes

Brokers question timing of OSFI’s proposed rule changes

Some in the industry are openly questioning the timing behind OSFI’s proposed underwriting changes.

Several mortgage brokers contacted by CMT suggest the banking regulator is late to the party with last week’s announcement of potential new underwriting restrictions.

The proposed new rules⁠—subject to public consultation⁠—include loan-to-income and debt-to-income restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.

Critics wonder if the announcement has more to do with optics in response to rising affordability challenges for borrowers struggling with high interest rates. OSFI, however, says the changes are needed to counter “record levels of household indebtedness.”

Just days earlier, CEOs from the country’s Big 5 banks convened at a conference where several publicly commented on potential vulnerabilities among their borrowers. Scotiabank’s CEO said the bank has about 20,000 borrowers that it considers “vulnerable.”

Mortgage broker Ron Butler of Butler Mortgage said there were “crickets from OSFI” over the past three years despite concerns about the use of HELOCs as down payments on investment properties and throughout the record run-up in home prices.

“When house prices were rising 3% a month in 2021 and mortgage growth was hitting the highest levels in Canadian history: crickets from OSFI,” Butler told CMT.

“When house prices started to drop because mortgage rates jumped in 2022 and Canadians with variable rates or 1-year rates renewing saw payments going up 60%, or HELOC rates and payments going up 125%: crickets from OSFI,” he added. “Now in 2023 OSFI thinks it’s time to discuss tightening mortgage lending rules.”

In an industry forum, broker Ryan Sims with TMG The Mortgage Group communicated a similar sentiment.

“Generally, regulators shut the barn doors after the horses are long gone,” he wrote.

“Now that rates have gone up, house prices have dropped, and—for lack of a better term—the stuff is hitting the fan, only now does OSFI seem to see an issue,” he added. “The problem was that the issue should have been identified long ago, but no one was talking about it. Now, everyone is talking about ‘risk,’ so the regulator has to address the elephant in the room.”

How borrowers could be impacted

Whether for optics or not, the proposed measures stand to affect between 5% and 10% of borrowers, according to a report from National Bank of Canada, and could cause “further pressure on mortgage growth, if and when implemented.”

One of the proposed measures, for example, could restrict the volume of loans regulated lenders would be able to carry on their books that exceed a certain “high” debt threshold, such as those with a loan-to-income level of 450%.

OSFI could also place debt service limits on uninsured mortgages, similar to those in force for insured mortgages (those with a down payment of less than 20%). The current Gross Debt Service (GDS) and Total Debt Service (TDS) limits for those mortgages are 39% and 44%, respectively.

But enacting such measures doesn’t necessarily mean the affected borrowers will “disappear completely,” National Bank noted. “Some may increase down payments while others will simply qualify for smaller mortgage amounts.”

However, some fear it could drive more borrowers to non-federally regulated markets, such as private mortgages and Mortgage Investment Corporations (MICs).

“I don’t think the measures are going to be good for Canadians,” Clinton Wilkins of CENTUM Home Lenders Ltd. in Nova Scotia told CMT. He noted that the measures target conventional mortgages (those with down payments above 20%), which are more commonly available from the big banks.

“If you can’t qualify at the bank, it’s going to push more consumers into alternative lending or into private lending, which are higher-risk and higher-cost credit facilities anyway,” he said. Wilkins said his biggest concern right now is the losses that could potentially start with private mortgages that are coming up for renewal.

“So, are these measures meant to protect Canadians or are they meant to protect the banks from themselves?” he asked.

An opportunity for brokers to add value

Sims said most of the rule changes will affect CMHC-approved lenders the most, but that mortgage brokers continue to have access to lenders not impacted by the OSFI changes.

He says it will be an opportunity for brokers to bring value to those who may get turned down by the banks.

“Brokers will now have more options than are available at the corner bank branch,” he noted, adding mortgage professionals will be in a position to help those “cast aside by traditional lenders.”

“That is what the mortgage broker business was built on, and how it will be moving forward,” he said. “We will continue to add immense amount of value as we help our clients navigate the changes.”