“The mortgage insurance industry in Canada continued to experience favourable financial results during 2013, with improvements in net income over 2012, mostly reflecting a reduction in claims expenses (excluding a one-time gain during 2012),” OSFI states in its recently released annual report. “Notwithstanding the currently favourable financial results, mortgage insurance remains vulnerable to consumer debt levels, housing prices, interest rates and unemployment rates.”
The first draft of OSFI’s B-21 was released in April of this year and the final version is planned for fall 2014.
Brokers awaited the draft with baited breath, fearing the guidelines would impose further restrictions and roadblocks to the mortgage industry. However, the draft was met with relative optimism from industry players.
The draft contains six principles – which include implementing an underwriting plan, assessing mortgage lenders and their underwriting practices, and risk mitigation, among others – and can be found below.
It remains to be seen how different the final version will look to the originally released draft.
Principle 1: Residential Mortgage Insurance Underwriting Plan
A (federally-regulated mortgage insurer) FRMI that is engaged in residential mortgage insurance underwriting should have a comprehensive Residential Mortgage Insurance Underwriting Plan (RMIUP). The FRMI’s insurance underwriting practices and procedures should comply with its established RMIUP.
Principle 2: Establishing Standards for the Initial Assessment and Qualification of Mortgage Lenders
A FRMI should establish sound standards for the purpose of initially assessing and qualifying mortgage lenders for mortgage insurance coverage.
Principle 3: Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders
A FRMI should establish prudent underwriting criteria, which specify the characteristics and parameters of insurable mortgage loans for lenders. In addition, a FRMI should promote sound mortgage underwriting and loan management practices by mortgage lenders by establishing prudent requirements in its insurance policies (e.g., Master Policy Agreements) for the purpose of controlling risk.
Principle 4: FRMI’s Periodic Assessments of Lenders’ Underwriting Practices
A FRMI should exercise reasonable due diligence regarding lenders’ underwriting practices, on a periodic basis, in order to assess consistency with the FRMI’s criteria for insuring mortgage loans and compliance with the requirements contained in the FRMI’s policy coverage documents. A FRMI should establish clear policies for identifying, escalating, and as needed, addressing weak or non-compliant lender practices.
Principle 5: Assessment and Validation of Underwriting Systems, Models, and Underwriters’ Processes
A FRMI that is engaged in residential mortgage insurance underwriting should periodically assess and validate its insurance underwriting systems, models, and underwriters’ processes, to ensure sound insurance underwriting outcomes and consistency with the FRMI’s RMIUP.
Principle 6: Effective Portfolio Risk Management and other Risk Mitigation
FRMIs should have effective portfolio risk management practices, including the use of stress testing and, as appropriate, the use of reinsurance. Given the objectives and risk appetite established in the RMIUP, a FRMI should consider the outcome of stress-testing and risk mitigation in appropriately setting or adjusting its mortgage insurance underwriting criteria.
The Office of the Superintendent of Financial Institutions (OSFI) has announced the planned release of the B-21 guidelines and admits there are still vulnerabilities to the mortgage insurance industry.