tightens supervisory expectations for mortgage underwriting
Office of the Superintendent of Financial Institutions
(OSFI) recently issued a letter to all federally regulated
financial institutions (FRFI) in Canada. The letter expresses
concern about the rising levels of household debt in Canada
and serves to remind FRFIs of their obligations in assessing
and underwriting mortgage loans and mortgage insurance
in a prudent manner.
letter states: Given the current economic environment
in Canada, with record levels of household indebtedness
and growing risks and vulnerabilities in some housing
markets, OSFIs supervisory scrutiny in the area
of mortgage underwriting will continue. Moving forward,
OSFI will place an even greater emphasis on confirming
that financial institutions conduct prudent mortgage underwriting,
and that their internal controls and risk management practices
are sound and take into account market developments.
has identified the following five specific areas that
it expects lenders to consider diligently during their
diligence processes for lenders must be in place. Inadequate
income verification can adversely affect the assessment
of credit risk, anti-money laundering and counter terrorist
financing (AML/CTF) compliance, capital requirements and
mortgage insurability. More stringent due diligence for
incomes outside of Canada should be applied, and there
should not be any reliance on collateral values as a replacement
for income validation.
warns that the 65% loan-to-value threshold should not
be considered a demarcation point below which, sound underwriting
practices and borrower due diligence do not apply; a borrowers
character and capacity to service the loan should always
take precedence over the value of collateral when underwriting
mortgage loans or insurance.
should be conservatively calculated and appropriately
questioned. In particular, rental incomes from the underlying
property should be critically examined. OSFI also suggests
that relying on current posted five-year interest rates
to test a borrowers ability to service its obligations
does not represent an adequate stress test in a rising
interest rate environment.
and LTV Calculation
suggests that rapid house price increases create 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
Appetite and Portfolio Management
supervisory work indicates that the risk profile of newer
mortgage loans is generally on the rise. OSFI reminds
mortgage lenders and mortgage insurers to revisit their
Residential Mortgage Underwriting Policy and Residential
Mortgage Insurance Underwriting Plan regularly to ensure
a stringent alignment between their stated risk appetite
and their actual mortgage/mortgage insurance underwriting
and risk management practices.
letter further states that they are working on various
capital policy initiatives to strengthen the measurement
of capital held by the major banks and mortgage insurers
to ensure their ability to weather losses from residential
mortgage defaults. New measures are targeted for implementation
in November 2016 and January 2017 respectively. Risk Sensitive
Floors, Capital Requirements for Mortgage Insurers, and
BCBS Revisions to the Standardized Approach for Credit
Risk are each included in these reviews.
360 Best Interest Mortgages we are pleased that OSFI is
committed to consultations with our industry prior to
the implementation of these new rules. Mortgage Professionals
Canada will be involved in these discussions and we will
keep you informed of any developments.
Robinson is a Mortgage Broker and owner of 360º Best
Interest Mortgage Inc. in Orléans. You can visit
their website at www.bestinterest.ca)
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