OSFI Sticks With Loan-To-Income, Drops Debt-To-Income On Mortgage Underwriting Rules Overhaul
Canada’s primary banking regulator has decided to shelve certain critical proposals designed to strike a balance between safeguarding homebuyers from excessive debt burdens and safeguarding the financial stability of banks. The Office of the Superintendent of Financial Institutions (OSFI) made this announcement on October 16, following feedback from lenders received since January.
They have chosen not to proceed with implementing more stringent regulatory limits on debt-service coverage, a crucial part of their proposal to cap loans from lenders with high debt service ratios. It’s worth noting that most of the proposals introduced in January were primarily focused on uninsured mortgages.
In its statement, OSFI emphasized, “After careful consideration of stakeholder feedback, we agree that regulatory limits on debt service coverage should not be pursued. While such limits could potentially bring about greater consistency, they would also eliminate too much risk-based decision-making and risk management from the lenders.”
The regulator acknowledged that there are already specific limits in place for insured mortgages, as mandated by law, but these generally serve broader public policy objectives that extend beyond OSFI’s core responsibility of ensuring prudential soundness and financial stability.
OSFI suggested that a principles-based expectation might be more appropriate than the original regulatory limits they had proposed.
This move comes as part of a broader overhaul of OSFI’s B-20 guideline, which includes the mortgage stress test introduced in 2012, with additional thresholds added in 2018. In January 2023, OSFI had put forth a range of potential changes, including the introduction of new “affordability” stress tests to account for increased payment and renewal risks associated with higher interest rates. They also considered making it easier for borrowers to qualify for longer fixed terms, which pose fewer risks.
Rob McLister, a seasoned mortgage analyst and adviser, commented on the potential implications, saying, “Depending on what OSFI finally decrees, the implications could be significant for home prices, lender volumes and the options available to individual borrowers.”
McLister further noted that OSFI seems to have abandoned a plan to employ debt-to-income measures to restrict mortgage debt and total indebtedness as a percentage of a borrower’s income, citing it as “too complex to implement at this time.” However, OSFI appears to be sticking with loan-to-income measures, a decision that McLister considered the industry’s primary concern among OSFI’s proposals.
“This was the industry’s biggest worry from all of OSFI’s proposals,” he emphasized.
In contrast, the regulator rejected industry proposals to implement distinct housing market regulations in urban centers such as Vancouver and Toronto. Nevertheless, OSFI does seem to support lender proposals to involve the Canada Revenue Agency in verifying homebuyer income.
Overall, McLister highlighted what he saw as a “silver lining” for the real estate industry, noting that many of the changes proposed nine months ago do not appear to be materializing. He concluded, “Our regulator threw a lot of proposals against the wall last January. It now seems that only a few of them will stick. What’s more, OSFI doesn’t want to rock the boat too quickly heading into a potential recession, noting that ‘the cumulative impact of multiple measures could create unintended, negative impacts’.”
Earlier in June, OSFI sounded the alarm on the mounting risks associated with mortgage extensions, urging lenders to take immediate action. The agency emphasized the pressing need to address the risk accumulation in Canadian lenders’ portfolios.
Information for this story was found via Financial Post and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
