What? Two posts on mortgage regulations in one week! You must have been a delight in a past life. Proposed changes from the Office of the Superintendent of Financial Institutions (OSFI) have left people with a few misconceptions about stress testing. A few real estate bears have been assuming this is the end for any homeowners that are already stretched thin. The thought is a little scary to a lot of people, so I thought I would get a breakdown from OSFI themselves.
Proposed Stress Testing Rules
The OSFI B-20 proposal, if implemented, would subject uninsured mortgages to a whack of new rules. The most interesting (and most misunderstood apparently) is the mandatory stress testing of new mortgages. Stress testing involves lots of checks and balances, but the biggest changes are checking if borrowers can handle an interest rate hike of 2% more than they’re paying, and re-calculation of the loan-to-value (LTV) ratio. Keeping records, and ensuring people can afford the home they’re buying? Total outrage!
The real issue isn’t stress testing new mortgages. As I pointed out yesterday, only Vancouver and Toronto would really get a s**t kicking from the new proposed rules. The issue is, there’s dozens of forum threads, and financial insight blogs claiming that many existing homeowners that may have overpaid in some markets, won’t qualify on renewal. That’s not exactly true.
Stress Testing Rate Hikes
OSFI confirmed to us that under the proposed guidelines, existing borrowers would not be subject to stress testing of rate hikes if they renewed at the same financial institution. Borrowers that just renew at their existing lender, won’t technically have to prove that they can afford their mortgage at a higher rate. However, those planning on locking in a better rate at another bank, would have to undergo the whole stress-testing process like a new borrower. Many people won’t have the freedom to shop for the lowest rate, but they aren’t going to lose their homes because they can’t prove they can handle an outlying scenario of a 2% hike on their mortgage rate.
Stress Testing LTV Ratios
What happens if your home value experiences a massive drop, and your mortgage falls below the threshold of being uninsured? If you’re moving to another financial institution, you could be straight up f**ked if you borrowed too much. You’ll have to undergo stress testing, and prove you can carry a rate 2% higher than you have to pay.
If you are renewing with your current lender, that’s less clear. OSFI directed me to this line: “FRFIs should update the borrower and property analysis periodically (not necessarily at renewal) in order to effectively evaluate credit risk. In particular, FRFIs should review some of the aforementioned factors if the borrower’s condition or property risk changes materially.” If you’re not a policy nerd, that pretty much says they don’t have to check on renewal, and there’s no real time frame for when they will update it. It also suggests reviewing some factors, in the event a borrower’s “condition changes” (i.e. stops paying their bills on time), or “property risk changes materially” (i.e. there’s market capitulation).
Widescale capitulation of real estate markets, and regulators will have bigger issues than a few people paying their bills on time. Your lender doesn’t want your home, they want the interest on your mortgage payments. It’s not exactly in their best financial interest to voluntarily update the LTV ratio of your home with regular frequency, and extreme accuracy to kick you out. They could, but that’s at their discretion and it doesn’t make a whole lot of financial sense to try and seize homes that are dropping in value.
Meet Your New Predator, The Big 5
The most interesting thing is borrowers at risk of failing a refinance stress test, won’t be able to shop around for better rates. Almost all of the leverage falls into your existing lenders hands, and they’ll know you can’t leave. This could result in less mortgage competition, and higher borrowing rates than if you could just walk down the street and get a better rate. With half of all Canadian bank profits coming from mortgages, and growth set to taper – you better believe someone is going to pick up the slack. Ironically, those that can’t afford to do another stress test, will probably end up paying much more than those that don’t. So it’s not exactly all rainbows and unicorns for those that already own.
Update Sept 29, 2017: OSFI contacted us to remind people there will be an LTV exercise under the proposal, just not necessarily at renewal. Here’s the exact words they used:
The institution may do the LTV exercise at renewal, but not necessarily – it is a case by case situation.
Each loan and insurance underwriting circumstance is unique and lenders and mortgage insurers need to use appropriate judgement and are expected to conduct sufficient due diligence and have in place adequate processes, consistent with the guidelines.
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So instead of helping to ensure that existing owners are not in over their heads, our government is giving a gift to their friends the Banks. Does this mean that the banks have more skin in the game for these folks with 20%+ equity and will price the debt to account for that risk, or have they sold that risk down the river with securitized loans and credit default swaps?
It’s really tough to figure out what’s the lesser evil. Do you let people continue to inflate home prices with artificially low interest rates? Or do you ensure that people have the freedom to move from lender to lender?
It would lead to an unfair advantage to existing mortgage holders if they could switch financing, and not be subject to the same rules. Fixing a system where the government makes mortgages near risk free for banks, through further regulations, is going to have some hiccups.
If only all banks had to assume their own risks, and taxpayers weren’t subject to pick up the bail out whenever they fail. Then we’d see much more responsible lending practices enabled.
Toronto’s housing market needs true price discovery. Short of a recession, that will only happen when our government ensures there is open and honest information about market participants (who owns what), sources of funds, enforces tax and principal residence exemption laws, and insists that lenders are liable for a substantial part of a loan’s risk.
Downtown Toronto is booming. Saw around 15 building proposal signs along Yonge St from Bloor down to the Harborfront to construct condos no lower than 70 storeys….When you allow a Canadian woman a career, the economy grows.
so true!! “If only all banks had to assume their own risks, and taxpayers weren’t subject to pick up the bail out whenever they fail. Then we’d see much more responsible lending practices enabled.”
Good post. Thank you. More on this would be appreciated – clarity around when exactly these rules could come into effect. More breakdowns of what first-time buyers would be facing and how to calculate what they can afford.
Downtown Toronto real estate will continue to climb in value at a rate of 50% every year. Toronto is a city of equality, feminism and sexuality rights, and demand will continue to rise for our world class city which is way better than New York City.
Now, if the City of Toronto can enforce laws to round up all of the misogynistic and rapey-looking homeless men who harass us on how we dress, and send them back to where they came from, that will be great.
I, as a woman, should not be criticized, judged or harassed because I prefer to ride my bicycle in the nude every year at World Naked Bike Ride. It is legal to be naked in Toronto. Go back to where you came from if you have a problem with women in Toronto preferring to be nude in public during this heat wave.
I’m confused. Does this mean the price will keep artificially going up?
It’s a very sad state of affairs when governments must step in with regulations to protect their citizens from their own greed, ignorance and stupidity!
On another note, I notice Russian trolls are now alive and well in BD as well. After Brexit, Trump and now the Catalonia referendum, not sure what they’re trying to accomplish in Canada.
Some comments on here made me laugh; very interesting. To me, it looks like nothing really changed, except forcing the lenders to FOLLOW the underwriting principals; stop giving loans to non-qualify borrowers just because you are going to be bailed out anyway!! LOL I guess HCG case from this year was the warning, but greed is greed…
[…] No, Canadians Won’t Lose Their Homes As A Result Of Mortgage Stress Testing […]
So Government of Canada wants to protect the Canadian interest by sabotaging their dream of first home, and forcing them to pay more interest & fees to the bank. Brilliant ideas!
Our government is doing the right thing because the current real estate price is not sustainable. If government do nothing now, the price will fall dramatically in near future and that will hurt a lot of people. And the new rules will cut real estate price by 10% +, existing home owner should thank our government for pull us off the cliff, potential new buyer should thank our government for making home more affordable, and bank should thank our government for making boat loads of money. What a wonderful world!
Here is the play book. Regular people won’t be able to afford homes, massive number of sellers will flood the market, prices will crash and Wall Street will be buying up homes like they have done in the US after their real estate melt down. Greeeat!!! Bravo!!! There is no stress test needed but just better regulators for the subprime disasters and fraudsters
In July 2015 the average TorontoMLS price was $609,236
In June 2017 the average TorontoMLS price was $793,915
So……..”it’s not until 2015 that we break out of range”…..guessing the correction would then be around the +20% mark or $140,000 against today’s average price and spread over the next few years until support is met…….all the other downside global risk factors aside as if we live in a complete bubble?
[…] the borrower, their finances, and the home’s value for uninsured mortgages. We’ve already discussed most of this in painful detail, quite a few times. Heck, we even crunched the numbers on how many people can still afford a […]