OSFI doubles down on keeping stress test for uninsured mortgage switches

  6/13/2024 |   SHARE
Posted in Government and Regulation by Vanguard Realty | Back to Main Blog Page

The head of Canada’s banking regulator stood firm in rejecting renewed calls to remove the mortgage stress test on uninsured mortgage switches.

During testimony before a Parliamentary finance committee this week, Peter Routledge, head of The Office of the Superintendent of Financial Institutions (OSFI), once again said the regulator is not considering changes to the mortgage stress test for uninsured mortgage switches.

Currently, borrowers with default-insured mortgages (down payments under 20%) are exempt from the stress test when switching lenders. However, those with uninsured mortgages (down payments of 20% or more) must undergo OSFI’s stress test when switching lenders or refinancing.

This requires them to qualify at either the Minimum Qualifying Rate (5.25%) or two percentage points above their contract rate, whichever is higher. In today’s high rate environment, nearly all mortgages are qualified at the higher rate.

During the finance committee questioning, MP Adam Chambers asked Routledge if he found there was an “imbalance” in how insured and uninsured borrowers are being treated.

“I acknowledge that there is an imbalance, from the experience of a borrower who doesn’t have mortgage insurance as opposed to one that does. It’s an imbalance we accept because of the sound underwriting principles behind it,” Routledge said.

When pressed by Chambers if OSFI is reconsidering the underwriting requirements, Routledge replied: “Not at this time, no.”

“From our perspective, the rules—from an underwriting standpoint—make sense to us. If you’re taking credit risk anew, you’re re-underwriting,” he said. “If, credit risk stays with the same counter-party, in the case of mortgage insurers, I don’t think you need to re-underwrite.”

Competition Bureau recommended dropping mortgage stress test

MP Chambers noted that the Competition Bureau has recommended that OSFI drop the mortgage stress test on uninsured switches, something OSFI rejected in comments to CMT in March.

At that time, OSFI explained that insured mortgages present a lower risk to financial institutions since the credit risk is assumed by default insurers, not the lenders themselves.

Asked during this week’s finance committee appearance why OSFI wasn’t willing to “loosen the reins” to support borrowers facing payment shock at renewal, Routledge said this:

“Loosening the reins will typically mean lessening or lowering underwriting standards in an individual’s case. You’re right, someone might be able to get a little bit bigger house. Or stay in a house that interest rates have made more difficult to afford. But, over time, we would be building risk, credit risk in the system that would ultimately, in our judgment, metastasize into a broader financial stress event.”

OSFI remains concerned about fixed-payment variable-rate mortgages

OSFI has made no secret that the mortgage borrowers it remains most concerned about are those with fixed-payment variable-rate mortgages. These mortgage products, which are offered by most big banks except for Scotiabank and National Bank, keep monthly payments fixed even as interest rates fluctuate.

“We’re particularly worried about folks who have that product that are negatively amortizing mortgages or are interest-only mortgages,” Routledge said.

On a positive note, Routledge noted that over the past 18 months, the total number of such households has dropped to roughly 175,000 from 270,000 households “as a result of households and financial institutions taking preemptive steps,” he said.

He added that he has been “pleasantly surprised” with the very low level of mortgage delinquencies, which remain at just 0.19% of the more than five million mortgages outstanding, according to the Canadian Bankers Association.

This is well below the highs seen during the pandemic, when the arrears rate reached a peak of 0.27% in June 2020, but also up from the all-time low of 0.14% reached in 2022.

“I have been pleasantly surprised at the very low level of delinquencies in the Canadian mortgage space,” Routledge said. “And I attribute that to six years of the mortgage stress test, primarily.”

Source: Canadian Mortgage Trends

Mortgage Consumers, OSFI, Stress Test