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.