Bank Regulator Moves on Mortgages, The Globe and Mail

This article came from the Globe and Mail on March 19th, 2012 and was written by Tara Perkins and Grant Robertson.

Canada’s banking regulator is looking at instituting new rules to ensure that banks know enough about borrowers before giving them a mortgage.

The draft rules, which the Office of the Superintendent of Financial Institutions has put out for comment, are designed to ensure that banks are collecting detailed information about a borrower’s identity, background, and willingness and ability to pay their debts on time before they approve a mortgage. In addition, the proposed rules deal with due diligence the banks should conduct on the value of the property that the mortgage would be for.

For example, OSFI says lenders should be doing an assessment of a prospective borrower’s assets (mutual funds, savings etc), anticipated living expenses and property ownership expenses such as maintenance costs. Banks should also assess whether the borrower will likely be able to keep up his or her income until the mortgage is paid off.

Notably, the regulator has issued a warning to banks about home equity lines of credit, or HELOCs, noting that while they can provide consumers with an alternative source of funds, “these products can also significantly add to consumer debt loads.”

Both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have been issuing warnings about the rise in Canadian consumer debt levels, and the potential problems that high debt levels could create both for individual borrowers and the greater economy once interest rates rise.

“While some borrowers may elect to repay their outstanding HELOC balances over a shorter period of time relative to the average amortization of a typical traditional mortgage, the revolving nature of HELOCs can also lead to greater persistence of outstanding balances, and greater risk of loss to lenders,” OSFI said. “As well, it can be easier for borrowers to conceal potential financial distress by drawing on their lines of credit to make timely mortgage payments and, consequently, present a challenge for lenders to adequately assess credit risk exposure.”

OSFI is also asking banks to step up the amount of public disclosure they provide when it comes to their mortgage portfolios. This includes details on the lengths of their mortgages, the proportion that are insured, average loan-to-value ratios, and a discussion about the potential impact on their portfolio of an economic downturn.

The OSFI report comes as the banking sector is locked in a heated price war over fixed-rate mortgages, with 5-year rates as low as 2.99 per cent and 10-year rates dropping to 3.99 per cent.

Lenders have been scrambling to gain market share in advance of the spring mortgage season, when home buyers tend to start looking for deals.

“It’s an interesting market, I will tell you,” Marcia Moffat, head of home equity financing at Royal bank of Canada, said in an interview Monday.

“What you tend to see is customers are quite savvy in terms of rate, and certainly the fixed rates are a very good deal for consumers, so we are seeing more consumers choosing fixed rates over variable these days, relative to, say, a year ago.”

A variety of banks have introduced cut-rate mortgage offerings, but Ms. Moffat said there are other important items to look at in a mortgage deal than just the rate. Early payment penalties and flexibility on payments are also key factors.

“We’re in somewhat uncertain times these days, this decade is characterized by that. So my main message would be that options and flexibility are important in times like that.”

The banks are still digesting the OSFI draft report, but Ms. Moffat said she supports efforts to bolster lending standards.

“We have quite a disciplined credit adjudication approach,” Ms. Moffat said of the bank’s standards.