The Office of the Superintendent of Financial Institutions (OSFI) says it has enhanced its supervisory oversight of mortgage lenders due to increased risks.
The banking regulator says financial institutions are more vulnerable because Canadian household debt levels are at all-time highs, interest rates have continued to stay low, and home prices in some areas (Toronto and Vancouver, especially) have risen at a rapid pace.
OSFI has also identified a number of issues that warrant close attention by mortgage lenders and will continue its scrutiny in the areas of income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value (LTV) ratio calculations, and institutional risk appetite.
In a letter to all federally regulated financial institutions, the regulator says it’s “aware of incidents where financial institutions have encountered misrepresentation of income and/or employment.”
OSFI also says that relying on the prevailing posted five-year mortgage rate to test a borrower’s ability to service its obligations in a rising interest rate environment isn’t a sufficiently conservative stress test.
“Given current exceptionally low interest rates, mortgage lenders should ensure the qualifying interest rate appropriately accounts for the possibility that interest rates could be significantly higher at renewal, and over the full mortgage amortization period,” the letter says.
The regulator adds that a rapid increase in home prices has created more uncertainty about the reliability of property appraisals. “Institutions should use appraisal values and approaches that provide for a conservative LTV calculation, and not assume that housing prices will remain stable or continue to rise.”
OSFI expects mortgage lenders to verify that their mortgage operations are well supported by prudent underwriting practices, as well as sound risk management and internal controls that are commensurate with these operations.
- No Canadian Housing Bubble: Report
- Ottawa Creates Working Group to Monitor Housing Market
- Toronto, Vancouver Housing Price Increases Unsustainable: Bank of Canada
Flickr: DiAnn L’Roy