Tara Perkins Globe and Mail Nov 19, 2012 (please read my comments at the end)
Canada’s financial regulator will release new guidelines for mortgage insurers early next year, including the government’s Canada Mortgage and Housing Corp. – but they won’t drag down the housing market as much as the guidelines for banks have, says the country’s banking watchdog.
The Office of the Superintendent of Financial Institutions will outline what standards it expects the country’s three mortgage insurers to follow when they underwrite a policy on a home. Ottawa has just recently given OSFI the job of overseeing CMHC, a federal Crown corporation that is the largest player in the industry; it was already regulating two private-sector rivals, Genworth MI Canada and Canada Guaranty.
Mortgage insurance, which covers the lender for losses if the homeowner can’t pay, is mandatory in Canada for borrowers who have a down payment of less than 20 per cent. As a result, any rules that make mortgage insurance harder to get tend to have an impact on real estate prices by pushing some buyers out of the market.
The mortgage guidelines that OSFI released for banks this summer are believed to have played a role in the decline in national home sales for the second half of this year. The new rules pushed lenders to be more cautious in areas such as background and credit checks on borrowers, document verification, and appraisals. The biggest impact is believed to have come from one particular rule that capped the amount that any individual can borrow on a home equity line of credit at 65 per cent of the home’s value.
“I would not expect the same impact” from the rules that OSFI intends to create for mortgage insurers in the new year, Julie Dickson, the regulator’s superintendent, said in an interview.
The final guidelines for banks came out in June. That was shortly before Finance Minister Jim Flaherty tightened up mortgage insurance rules, including cutting the maximum length of insured mortgages to 25 years, in an effort to stem the growth of consumer debt levels and house prices.
While Mr. Flaherty is focused on the risks to the broader economy, Ms. Dickson is responsible for ensuring that the country’s banks, insurers and mortgage insurers remain financially sound. Unlike Mr. Flaherty’s changes, the guidelines that she will release are more likely to focus on the things that mortgage insurers must do behind the scenes to assure that they are not taking on too much risk when they insure homeowners’ mortgages.
“We are in a market where there is a lot of growth in household debt, some froth, and I think whenever you see that you have to act early and try to ensure that people aren’t forgetting sound practices,” Ms. Dickson said.
“Having buttoned-down mortgage underwriting policies does slow things down a bit, so that if mortgages are presented that are outside the policy, [the financial institution] is going to have to take more time to consider it; that does have an impact.”
OSFI is taking action in this area after the Financial Stability Board, an international body made up of regulators and banking experts around the world, suggested that all countries review their rules for banks and mortgage insurers.
The board is chaired by Bank of Canada governor Mark Carney. It suggested, among other things, that mortgage insurers be regulated. Mr. Flaherty moved to put CMHC, which dominates the mortgage insurance business in Canada, under OSFI’s authority earlier this year.
Credit unions, who are NOT regulated under OFSI, currently have an edge with still being able to offer higher LTVs on HELOCs and 5% cash backs as down payments. However it looks like OFSI may have found a way to tighten some of their high ratio lending as well, by applying stricter guidelines to insurers directly.
To your wealth!