OSFI issues proposed new rules to govern conduct of mortgage insurers

OTTAWA – Canada’s financial regulator is looking to issue new guidelines governing high-risk mortgages in the country’s housing market. The Office of the Superintendent of Financial Institutions has asked for comments on the guidelines that would compel mortgage insurers to do due diligence on the ability of borrowers to service their debts and also require them to tighten monitoring procedures. But OSFI has stopped short — so far — of further tightening mortgage rules, such as requiring that low-risk mortgages also be subject to 25-year amortization periods. Currently the rule applies only to higher-risk mortgages with less than 20 per cent down payment, where insurance is mandatory. CIBC deputy chief economist Benjamin Tal says the new guidelines, once adopted, would have only minimal impact on the market. They would formalize what is already the practice in Canada among lenders, such as Canada’s banks. Tal adds that OSFI and the government are no doubt monitoring the spring housing market to determine if stricter measures are needed, but are likely encouraged that the market is showing signs of cooling. In yet another indicator of the softening trend, the Teranet–National Bank index released Monday showed that house prices were unchanged last month, the first time in 15 years there hasn’t been an increase between February and March. Last week also saw deep fall-offs in both starts and building permits for the months of March and February, respectively. Ottawa has moved four times to tighten mortgage rules in the last five years or so, including requiring banks to apply means tests on the ability of borrowers to handle higher interest rates. In a release, Superintendent Julie Dixon said the guidelines make clear “expectations for both lenders and insurers operating in the housing market.” “The industry’s adherence to these principles will contribute to the continued stability of the market.” Among the proposed requirements, insurers would be required to determine if down payments are from a borrower’s own funds — or if borrowed, to consider increasing premiums. As well, it says incentive and rebate payments should not be considered part of the down payment. The guidelines are directed at the country’s three mortgage insurers — Canada Mortgage and Housing Corp., which underwriters most high-risk mortgages and is backed by the government, and private sector insurers Genworth MI Canada and Canada Guaranty. OSFI said the consultation period is open until May 23, after which it will issue a final guideline and implementation period.