B-21 to erode credit union competitive advantage

B-21 to erode credit union competitive advantage

B-21 to erode credit union competitive advantage In a guest blog exclusively for MortgageBrokerNews.ca, Daniel Lewczuk of Mortgage Intelligence examines how credit unions -- who heretofore have enjoyed a competitive advantage over banks and monolines -- will be affected by OSFI's B-21 guidelines.

In 2012, the Office of the Superintendant of Financial Institutions implemented new underwriting guidelines that all federally regulated financial institutions had to adhere to. Beginning Nov. 1, 2012, B-20 negated the ability of banks and other FRFI’s to offer:

• 100% financing on mortgages
• 80% loan-to-value home equity lines of credit (this limit dropped to 65%)
• A lower qualifying interest rate for variable rate mortgages (the posted BOC 5 year rate was now used for qualifying)
• Looser rules for self-employed borrowers

This created a major advantage for financial institutions not regulated by OSFI, namely, credit unions, which are provincially regulated. Credit unions in Ontario could still offer 100% financing, 80% LTV HELOCS, lower qualifying rates for conventional variable rate mortgages, and higher loan-to-value on stated income mortgages for self-employed (up to 80%), rather than the new maximum LTV of 65% at FRFI’s, without requiring default insurance. These advantages have lasted until this year, 2014.

In April 2014 OSFI announced the B-21 guidelines which will affect mortgage insurance underwriting eg. any high ratio mortgage or other mortgage insured through CMHC, Canada guaranty, or Genworth. These adhered to earlier B-20 recommendations, and now the mortgage insurers, who are governed by OSFI, were told to follow them. The B-21 guidelines were lauded as conservative, in-line with earlier rule changes, and very sensible. The new guidelines will, however, erase some significant advantages which credit unions, up until now, have held.

This means that credit unions will not be allowed to offer 100% financing any more.

Credit unions will still be able to offer 80% maximum LTV on HELOCS, and they will still be able to qualify conventional variable rate mortgages using a much lower rate (usually the 3 year fixed rate, 5 year discounted rate, the contract rate, or a modification of the contract rate). Self-employed borrowers will still be able to obtain stated income mortgages up to 80% LTV without default insurance. Many, however, would argue that the credit union’s rules for conventional stated income mortgages are more onerous than certain insurer’s rules for insured stated income mortgages, and that there is not a significant advantage for the self-employed at credit unions, except in limited situations.

The B-21 guidelines are still in review, however, implementation is imminent and these rules could be in effect in a few short months. Where these guidelines could be most impactful is with first time buyers who do not have a full 5% down payment, nor have access to either borrowed funds or gifted money for their down payment.

The biggest advantage remaining with the credit unions will be their ability to provide HELOCS at 80% to borrowers.  Still, a significant advantage of the credit unions, the ability for borrowers to purchase a home with little or no down payment, will be disappearing.
10 Comments
  • Broker 2014-06-26 11:26:03 AM
    "This means that credit unions will not be allowed to offer 100 per cent financing any more. High ratio variable rate mortgages will also have to qualify using the BOC posted 5 year rate."

    Check your facts.

    Nothing in B-21 prevents a credit union from giving a borrower an unsecured line of credit for the 5%.

    All insured variables are already qualified at the Bank of Canada posted rate, regardless of whether it's a credit union deal or not.
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  • Bud Jorgenson 2014-06-26 11:57:03 AM
    What the credit unions can no longer do is the cash back flex down which they had been doing a lot of. As brokers we can, and have always been able to use the unsecured loc for the down payment so in this regard the rules have leveled the playing field for brokers.
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  • Max Cafissi 2014-06-26 1:45:46 PM
    Personally, I don't think anyone should be allowed to Purchase a home if they don't have at least 5% of their own funds as a Down Payment, so this change is long overdue. I have never Financed a home 100% and I have been a Broker since 1989. If you can't save 5%, or get a Gift from your Parents, you shouldn't be Purchasing a home.
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