by Neil Sharma – Oct 2017
A new Fraser Institute report, Uninsured Mortgage Regulation: From Corporate Governance to Prescription, fired a warning shot the government’s way by positing that its new mortgage regulations are both unnecessary and harmful.
Neil Mohindra, a public policy consultant independent of the Fraser Institute and the report’s author, says the Office of the Superintendent of Financial Institutions (OSFI) is intervening because of high debt levels in the country, and because it wanted to meet the Financial Stability Board’s international standard, but the new stress test will adversely impact the residential mortgage market.
Mohindra added that OSFI didn’t need to write a prescriptive requirement into the guideline because financial institutions already choose from an assortment of underwriting criteria that mitigate risk.
“The main point of the paper is that the stress test is not necessary,” Mohindra told mortgagebrokernews.ca. “Cities like Vancouver and Toronto are very different from other parts of the country and there is potential for housing prices to be depressed because buyers simply don’t have enough buying power. But that also depends on a number of factors, including policies being taken recently from the provincial, municipal and federal governments.”
Mohindra says the mortgage industry risks less competition and becoming more concentrated. “There are some lenders that are federally regulated financial institutions and they specialize, to a large extent, in mortgages, and they have specific niches which they target,” he said. “Some are at different risk levels. They can qualify a lot of borrowers through their models and through their focus on niches. If there’s a stress test that puts all borrowers into the same category that it makes it more difficult for these institutions to define niches and pursue them, then this will hurt small lenders that are more specialized than big banks.”
Consumers will also be short-shrifted, he warned. Not only will their buying diminish, many might not be able to buy the homes they want – which they would have been able to prior to the government’s intervention.
“You can have an individual who puts a minimum of 15% down instead of 20%, and in that case the loss on default would be even lower, but the borrower would still be subjected to the same stress test against a 200 basis point increase in interest rates. That’s what it is going forward.
“Right now, lending institutions are expected to follow the existing OSFI guidelines on mortgage underwriting practises, which indicate how they should assess or which borrower should be approved, but it does not have the same degree of prescription.”
But Mohindra is perplexed by the need to fix a functional system. While OSFI is concerned about household indebtedness in Canada at their highest ever levels, he believes the previous system provided the necessary checks and balances.
“They’re just a bit spooked, which is why they’re going in this direction,” he said, “but it’s a departure from how they regulated in the past – a departure from a successful model of good governance and good policies and procedures.”
