The Office for the Superintendent of Financial Institutions (OSFI) released a letter this week updating their supervisory expectations for residential mortgage underwriting.
“Given the current economic environment in Canada, with record levels of household indebtedness and growing risks and vulnerabilities in some housing markets, OSFI’s supervisory scrutiny in the area of mortgage underwriting will continue. Moving forward, OSFI will place an even greater emphasis on confirming that financial institutions conduct prudent mortgage underwriting, and that their internal controls and risk management practices are sound and take into account market developments.”
The letter continues, warning that “persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto), could generate significant loan losses if economic conditions deteriorate. Financial institutions can sustain losses both through the potential inability of borrowers to meet their debt obligations, as well as through declining values of the real estate properties pledged as collateral in mortgage loans.”
As a consequence of the “unsettled” economic environment, OSFI has identified several areas where it will be enhancing its supervisory scrutiny of residential mortgage loan approvals, including income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value ratios, and risk profiles, which are generally on the rise for newer mortgage loans. For any buyer looking to get a mortgage, you can expect lenders to be even more strict when it comes to your income being verified by reliable, well-documented sources, “conservative calculations” when it comes to your income, and a potentially more rigorous stress test than using the current five-year interest rate standard to test your ability to service your mortgage.
“With rapid price increases in some areas and current exceptionally low interest rates, the risks are getting larger,” said Superintendent Jeremy Rudin. “OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area”.