Recently the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, issued a draft of recommendations geared to clamp down on underwriting practices. After reviewing the 18 pages of changes suggested by OSFI the following three items jump out as changes that would have an immediate limiting effect on home buyers:
• “Cash Back” should not be considered part of the down payment.
• The use of more conservative debt ratio calculations including using the 5 year posted benchmark rate for qualifying uninsured mortgages with 1-4 year terms.
• A requirement for increased documentation and scrutiny for self-employed stated income borrowers and equity mortgages.
Fortunately, there is some time before these new rules come into effect and not all non-bank lenders will be affected by these rules and thus may not adjust their underwriting practices. However if you are working with First-Time buyers who require the “cash back” program for their down payment or BFS clients that require a stated income mortgage, it would not hurt to have them pre-approved soon.
OSFI said it is issuing the draft guideline to allow industry and other vested parties to provide input on best practices for mortgage lending. The guidelines do not affect the rules for insured mortgages, which are set by the government. “Although financial institution mortgage portfolios in Canada continue to perform well, a number of vulnerabilities in the financial system exist, including high household indebtedness,” said Mark Zelmer, Assistant Superintendent, Regulation Sector. “OSFI is acting in an effort to prevent these vulnerabilities from evolving into problems for the financial system.”
OSFI, the Bank of Canada and the Department of Finance, along with other Financial Institutions Supervisory Committee (FISC) partners, regularly consult with one another on issues pertaining to the financial system.
OSFI has invited the vested parties to make comments on the guidelines by May 1, 2012 prior to these guidelines being implemented. The talk on the street is that the big banks will not oppose these new guidelines which are aimed at making it harder for home buyers to qualify for a mortgage. One major bank has already voice its support by stating that the draft rules “will take the air out of the balloon a little bit,” said Tim Hockey, TD’s group head of Canadian banking. He was speaking at National Bank Financial’s financial-services conference in Montreal. “Hockey said he feels less anxious today than two weeks ago about the high consumer debt levels because of OSFI’s recent actions. He reiterated that even in the worst-case scenario, the bank would continue to make money.”
Based on OSFI asking for comments from the vested parties by May 1st we should have at least a couple of months until these guidelines become the rules and we find it harder to have first time home buyers and BFS stated income clients qualify for a mortgage to make their home purchase. If you are working with clients who will need the stated income or cash back products, they should make an offer and have their mortgage approved sooner than later.