OSFI's stress test change sparks industry confusion

Canada’s banking regulator threw the mortgage industry a curve ball last week when a representative suggested there were some restrictions to a recent policy change most brokers weren’t aware of.

In September, the Office of the Superintendent of Financial Institutions (OSFI) announced that the mortgage stress test would no longer apply to uninsured straight mortgage switches starting November 21 in a bid to remove barriers for uninsured borrowers seeking a better rate.

The change in policy removed the Minimum Qualifying Rate (MQR) requirement for those switching an uninsured mortgage from one lender to another, provided there is no increase in the loan amount or amortization.

As the change was about to take effect, however, Assistant Superintendent Tolga Yalkin shed light on an additional restriction that seems to have caught the industry by surprise.

During a Q&A session with stakeholders, Yalkin said that the change only applies to mortgages moving from one federally regulated financial institution (FRFI) to another, “because we have a degree of confidence in the expectations and their application associated with sound mortgage underwriting when it comes to federally regulated financial institutions.”

In other words, the stress test still applies to uninsured mortgages that are either originated by or transferred to non-federally regulated institutions—such as provincially regulated credit unions and mortgage finance companies—a significant restriction that was not explicitly outlined in OSFI’s written guidance.

This unexpected revelation has sparked confusion and frustration among industry professionals, particularly since some feel the new restriction contradicts the guidance provided by OSFI.

“Why are we discriminating against provincially regulated credit unions?” asked Ron Butler of Butler Mortgages. “Is OSFI saying that provincially regulated credit unions don’t know what they’re doing, and we don’t trust you?”

Butler’s sentiment was shared by several other industry members who spoke to Canadian Mortgage Trends off the record. Many felt that Yalkin’s comments were not consistent with OSFI’s written statements and are awaiting further clarification.

However, while some lenders are awaiting clarification, at least one major bank, CIBC, has confirmed that it has already implemented the changes.

One lender head questioned whether this was truly OSFI’s intended policy or merely an ‘off-the-cuff remark’ by an OSFI official. ‘What if that particular question that unearthed this restriction hadn’t been raised during the Q&A session?’ he wondered.

When asked for clarification on the matter, OSFI told Canadian Mortgage Trends that all information regarding its recent changes to mortgage switch requirements is available in its published industry materials, and that “there is no further guidance in the works.”

More symbolic than impactful

According to the Competition Bureau, three out of four borrowers are uninsured, but only one in eight—about 12.5%—switches lenders at renewal. As the industry braces for the largest wave of mortgage renewals in Canada’s history, Butler says the rule change is poised to have a dramatic impact.

“It’s very meaningful to that 12% of mortgage borrowers we had to say ‘no’ to before,” he says. “That means the 12% that had to stay with their lender can now move; that’s positive for the consumer, that’s a positive for the borrower, and a positive for people like us and other banks who want to compete and get the borrower a better deal.”

At the same time, Butler acknowledges that the proportion of borrowers who would no longer be able to make the switch in the wake of Yalkin’s comments is relatively small.

“First of all, those that transfer from a credit union is a small percentage, and the idea that the stress test would prevent them from transferring is an even smaller number,” he says. “What we should be talking about is the fairness issue, like ‘hey federal regulator, are you attacking the credibility or professionalism of provincial regulators and saying they’re not adequate to be accepted by the federal regulator?’ that would be highly improper.”

It may be a simple matter of jurisdiction

Yalkin’s comments caught many in the industry off-guard, not only because they seemed to introduce a previously unspecified restriction to the rule change, but because they seemed to imply a lack of “confidence” in the “sound mortgage underwriting” practices of non-FRFIs.

However, some suspect the unscripted remark may have been unintentionally harsh in its implication and could instead reflect a simple jurisdictional reality. After all, OSFI is an independent agency that reports to the Canadian Minister of Finance and has no direct authority over provincial regulations, even if many non-FRFI institutions choose to adhere to federal standards.

Another consideration is whether buyers of securitized mortgages will continue to require that the mortgages being securitized have undergone the stress test. This could introduce additional complexity, potentially affecting how non-FRFIs operate under the new rules.

“A lot of the mortgage finance companies automatically adopted this stress test because they want to be able to sell their mortgages to financial institutions that are federally regulated,” explains Maria Pimenta, Chief Operating Officer at mortgage insurance provider Canada Guaranty. “I think therein lies the rub; when they relax a requirement, they’re relaxing it only to the institutions that they regulate.”

Pimenta notes that while OSFI’s original guidance does not explicitly state that the policy change applies only to FRFIs, the guidance is clearly directed at federally regulated financial institutions.

Rather than looking to OSFI for further guidance, Pimenta suggests non-FRFI lenders should be looking to their own regulators to implement similar and compatible changes.

“As a mortgage insurer, the stress test for us is not governed by OSFI, it is actually governed by the Department of Finance,” she says. “Unless the Department of Finance actually comes out with changes to the stress test for us, any net new mortgage that’s insured by an insurer must be stress-tested, and that is the case today. That has not changed.”

Pimenta says Canada Guaranty has contacted the Department of Finance to request a policy change that aligns with the new OSFI regulations, but has yet to receive a response.

Source:  Canadian Mortgage Trends