Regulator finalizing mortgage rule overhaul

A package of proposed reforms aimed at cooling Canada’s housing market that includes controversial new stress tests for uninsured mortgages will be finalized by the end of the month, the head of Canada’s top bank regulator said Tuesday.

A document outlining the changes to mortgage underwriting rules, governed by industry guidelines known as B-20, will be published by the Office of the Superintendent of Financial Institutions sometime in October, with the changes coming into effect two to three months later, Jeremy Rudin said during a speech in Toronto on Tuesday.

The “broad thrust of the changes will be similar to what we had in the (recent) consultation process,” and an earlier letter outlining OSFI’s proposals, he said.

These include measures aimed at ensuring banks are lending money to home buyers who can manage their loans even if interest rates rise, and reducing the banks’ reliance on loan-to-value calculations in markets where home prices are rising rapidly.

“We clearly see the potential risks caused by high household indebtedness across Canada, and by high real estate prices in some markets,” Rudin said in his speech.

“We are not waiting to see those risks crystallize in rising arrears and defaults. Rather, we are adapting our standards to new developments.”

Speaking to media after the speech, Rudin said the bank regulator is still finalizing some controversial details of the overhaul, including a proposed stress test that would force uninsured home buyers to qualify for mortgages at rates two percentage points above those stipulated by their contracts.

Rudin said the OSFI has received feedback about the stress test and potential consequences during industry consultations in recent months.

Critics have publicly suggested the stress test could cause a shift to shorter-term loans in order to qualify more borrowers, and could potentially send more home buyers to riskier lenders that aren’t federally regulated — and therefore aren’t bound by OSFI’s rules.

Rudin said that while some consequences may not be intended, or positive, OSFI’s role requires it to ensure banks can manage their loan books.