New mortgage rule tweaks could cool hot markets
TORONTO • Canada’s top banking regulator is planning to change the amount of capital banks must hold against residential mortgages to keep up with the rapid rise in house prices and highly leveraged buyers in some markets.
Observers said the move, together with an announcement Friday by the federal government to tweak house d own payments, could help cool Canada’s hot housing market. If the O- ffice of the Superintendent of Financial Institutions requires banks to hold additional capital against m- ortgage loans, it will dampen en thusiasm for offering those loans or potentially force banks to charge more for them, said one longtime industry observer.
“These ( combined) actions are d- esigned to slow new mortgage vol umes, and we believe they will be successful with respect to that objective,” Paul Holden, an analyst at CIBC World Markets Inc., said in a note to clients.
However, Holden does not expect t- he impact of the changes by the fin- ance department and OSFI, com b- ined with fee tweaks to securitization programs at mortgage insurer Canada Mortgage and Housing Co-r poration (CMHC), to be large.
“We are likely talking about a slowing at the margin,” the analyst said.
T- he capital framework estab l-ished by OSFI for residential real es tate is intended to ensure banks “can absorb severe but plausible losses.”
But as household debt continues t o grow faster than income, and house prices in some markets are still rising rapidly, the risks in the Can- adian mortgage market “con tinue to evolve,” OSFI’s deputy superintendent Mark Zelmer said Friday in a letter to banks and other industry players.
“- The planned changes to the regulatory capital framework will ensure that capital requirements keep pace with those developments and reflect underlying risks,” he wrote.
The regulator plans to consult with the industry and the public and have new rules in place “no later than 2017.”
Zelmer’s letter detailing OSFI’s planned overhaul of residential mortgage capital requirements was released i- n tandem with new Finance Minister Bill Mo- rneau’s an n- ouncement Friday setting a min imum down payment of 10 per cent on the portion of home prices over $500,000.
Ben-jamin Tal, deputy chief econo mist at Canadian Imperial Bank of Commerce, said the Department of Finance policy is intended to cool the country’s two hottest and most expensive markets, Toronto and Vancouver.
O- SFI’s planned changes also rec o- gnize that the housing market var ies in different pockets across the country. As the regulator explained in the letter to banks, rapid and prolonged house prices increases in some markets mean the “potential severity of losses may vary across Canada.”
Among the proposals put forward by OSFI is that banks include in their models a “risk- sensitive floor” for losses in the event of default that is tied to increases in local property p rices and to house prices that are high relative to the income of the borrower.
“- This will ensure a level of con sistency and conservatism in the protection provided to depositors and unsecured creditors” of the b-anks, OSFI said, noting the new re q- uirements won’t be applied retro actively to existing mortgage loans.
For private mortgage insurers that are federally regulated, OSFI plans to introduce a new standardized approach that will require more capital when house prices are high relative to borrower incomes.
Federally regulated deposittaking institutions such as banks c- urrently have very low capital re quirements on mortgages that are insured against default because the g overnment backstops the insura nce. However, OSFI is considering adding criteria to recognize these capital benefits in light of concerns that recently became public about t he documentation backing some mortgage loans.
These “risk mitigation benefits ... should, in principle, be reduced in circumstances where there may be m- aterial concerns around compli ance with the terms of the insurance policy,” OSFI’s letter said. It did not refer to specifics, but cited “recent observations related to mortgage loan documentation.”