The Office of the Superintendent of Financial Institutions (OSFI) announced yesterday it would increase its scrutiny of mortgage lending practices across Canada as regulators everywhere are becoming increasingly nervous about surging Canadian housing prices.
OSFI identified a number of issues it says banks have to do better during the mortgage underwriting process.
The biggest issue for OSFI is income verification, particularly if said income comes from outside of Canada. “Income that cannot be verified by reliable well-documented sources should be treated cautiously when assessing the ability of a borrower to service debt obligations” OSFI said in a letter sent to top lenders.
OSFI also told lenders to treat today’s low interest rates as a temporary anomaly, and not as a new normal. Most mortgages in Canada have a term of five years, and interest rates could potentially be much higher than today in 2021. Thus, lenders will be more likely to decline a borrower that can just barely afford a house today.
OSFI is one of many who are concerned with high prices in Toronto and Vancouver. It urged banks to be careful about lending in these areas. It told banks loans made in these areas “could generate significant loan losses if economic conditions deteriorate.” It’s obvious OSFI wants lenders to exercise more caution when lending in these markets.
Overall, these increased regulations will lead to slightly longer underwriting times and the need for at-risk borrowers to provide greater documentation. It’s a good thing for the banking system as a whole but will likely be bad news for individual borrowers.
Related Stories
