More mort­gage red tape could hurt home­buy­ers

Pro­posed ‘stress test’ not needed, says Neil Mo­hin­dra.

Vancouver Sun - - OPINION - Neil Mo­hin­dra is a pub­lic pol­icy con­sul­tant and au­thor of Unin­sured Mort­gages Reg­u­la­tion: From Cor­po­rate Gov­er­nance to Pre­scrip­tion, pub­lished by the Fraser In­sti­tute.

Amid wide­spread con­cern about hous­ing af­ford­abil­ity in Van­cou­ver and across Canada, the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions wants to raise the mort­gage bar for many po­ten­tial home­buy­ers by re­vis­ing its guide­line on res­i­den­tial mort­gage un­der­writ­ing.

The pro­posed re­vi­sions, which are in­tended to ad­dress risks as­so­ci­ated with rel­a­tively high lev­els of house­hold debt, in­clude a “stress test” for unin­sured mort­gages (those with a min­i­mum of 20 per cent down of a prop­erty’s value) to de­ter­mine whether the bor­rower can meet pay­ments if in­ter­est rates rise by two per cent. But is this ad­di­tional test needed for OSFI to achieve its reg­u­la­tory ob­jec­tives?

As noted in a re­cent study pub­lished by the Fraser In­sti­tute, the ori­gins of the guide­line are Amer­i­can. Weak un­der­writ­ing prac­tices in the U.S. helped fuel the global fi­nan­cial cri­sis, as mort­gage loans were bun­dled and sold to in­vestors, in­clud­ing fi­nan­cial in­sti­tu­tions around the world.

In re­sponse to the U.S. hous­ing col­lapse, the Fi­nan­cial Sta­bil­ity Board, an in­ter­na­tional body ded­i­cated to fi­nan­cial sta­bil­ity, in­tro­duced an in­ter­na­tional stan­dard in 2012 meant to en­sure weak mort­gage un­der­writ­ing stan­dards would never again play such a sig­nif­i­cant role in a fi­nan­cial cri­sis. In Canada, OSFI re­sponded to the FSB stan­dard by in­tro­duc­ing the guide­line on res­i­den­tial mort­gage un­der­writ­ing. This was de­spite clear ev­i­dence, based on ar­rears data (pay­ments at least 90 days over­due), that Cana­dian stan­dards had not weak­ened to lev­els any­where close to the U.S.

Now the OSFI wants to fur­ther stiffen the guide­lines with a pre­scrip­tive “stress test” for those who put sig­nif­i­cant eq­uity (again, 20 per cent or more) down when they pur­chase a home.

Be­sides a lack of ev­i­dence of a prob­lem, a cush­ion against loss in the event of de­fault al­ready ex­ists.

The con­se­quences of this test in­clude re­duced buy­ing power for some bor­row­ers. It could also drive some bor­row­ers to more ex­pen­sive un­reg­u­lated sources of credit and a less com­pet­i­tive reg­u­lated mar­ket. Some bor­row­ers may be pushed into choos­ing mort­gages with shorter or vari­able terms when avail­able at lower in­ter­est rates to in­crease buy­ing power de­spite higher vul­ner­a­bil­ity to in­ter­est fluc­tu­a­tions.

The case for the test is ques­tion­able. OSFI says its pri­mary reg­u­la­tory ob­jec­tive is to safe­guard de­pos­i­tors and pol­i­cy­hold­ers from loss on the funds they have en­trusted to fi­nan­cial in­sti­tu­tions. Be­sides a lack of ev­i­dence of a prob­lem, a cush­ion against loss in the event of de­fault al­ready ex­ists — unin­sured mort­gages re­quire a min­i­mum of 20 per cent down of a prop­erty’s value.

But iron­i­cally, the strong­est rea­son why the pro­posed test is un­nec­es­sary is the ro­bust­ness of OSFI’s ex­ist­ing reg­u­la­tory frame­work. OSFI ex­pects fi­nan­cial in­sti­tu­tions to hold cap­i­tal against un­ex­pected losses that ex­ceed in­ter­na­tional stan­dards. OSFI guide­lines re­quire a lender’s board to de­fine the risk ap­petite and set in­ter­nal con­trols to en­sure the risks taken by the in­sti­tu­tion are con­sis­tent with the board’s risk ap­petite. And OSFI does not wait for a se­ri­ous prob­lem to emerge, but in­ter­venes early.

But re­quir­ing a spe­cific test to ad­dress what is a tem­po­rary prob­lem would mark an omi­nous turn to­ward a more pre­scrip­tive style in OSFI’s su­per­vi­sion of fi­nan­cial in­sti­tu­tions. Con­cerns over high house­hold debt are bet­ter ad­dressed within OSFI’s reg­u­la­tory regime by en­sur­ing in­sti­tu­tions have ad­e­quate poli­cies and pro­ce­dures to man­age risk. Fi­nan­cial in­sti­tu­tions would re­tain the flex­i­bil­ity to choose a mix of un­der­writ­ing cri­te­ria in ar­eas such as debt ser­vice cov­er­age and loan-to-value ra­tios to en­sure mort­gage loans are con­sis­tent with the board’s ap­petite for risk.

In ad­di­tion to bet­ter meet­ing the needs of the mar­ket, and in­creas­ing home-buy­ing op­por­tu­ni­ties for Cana­di­ans, this would also al­low in­sti­tu­tions to re­spond more ef­fi­ciently to chang­ing con­di­tions in the mar­ket through ad­just­ments to un­der­writ­ing cri­te­ria.


Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.