Mortgage Broker

CMB MAGAZINE cmba-achc.ca fall 2017 | 19 overprotection I n July 2017, Canada's solvency supervisor, the Office of the Superintendent of Financial Institutions (OSFI), released proposed revisions to its guideline for residential mortgage underwriting. e proposals include a new stress test for uninsured mortgages, which are mortgages with a loan- to-value (LTV) ratio below 80 per cent. 1 e proposed test would examine the impact of a 200 basis point increase in prevailing mortgage borrowing rates on a borrower's capacity to meet payments. is research bulletin examines the existing regulatory framework and its adequacy for meeting regulatory objectives such as protecting depositors from loss, whether a prescribed standard for a stress test is necessary, and some likely adverse impacts of introducing the stress test. We find that, given the existing regulatory regime, introducing the stress test will do more harm than good. The Existing Regulatory Framework Canada's financial sector has generally received positive reviews from external assessments. For instance, in its most recent financial sector stability assessment, the IMF noted: "Canadian banks entered the global financial crisis with a solid funding base and high risk-based capital levels and recovered quickly from initial episodes of turbulence in funding markets… another important factor in the success of the Canadian financial system in avoiding the crisis has been the intensity and effectiveness of its supervisory framework and its positive influence on industry behaviour." Legislation for federally regulated financial institutions restricts uninsured residential mortgages to 80 per cent of a property's value. e borrower must have sufficient funds to cover the remaining 20 per cent (the equity portion of the financing). In contrast, insured residential mortgages only require a down payment of 5 per cent of the property's value up to $500,000 and 10 per cent above $500,000 up to $1 million; above this price insurance is not available. OSFI notes in Guideline B-20: Residential Mortgage Insurance Underwriting Practices and Procedures, "ose residential mortgage loans with higher LTV ratios generally perform worse than those with a lower LTV ratio (i.e., higher proportion of equity)." A core element of OSFI's regulatory framework is capital requirements. Capital serves as a buffer against unexpected losses. ere are layers of regulatory capital that banks are required to meet. e first layer is minimum capital requirements. e second layer is a "capital conservation buffer" to reduce the risk of a breach in minimum capital requirements. If this buffer is drawn down, a financial institution must submit a capital restoration plan to OSFI and may need to take actions such as reducing dividends. Banks can also be required to hold a "countercyclical buffer" if high aggregate credit growth is judged to be associated with a build-up of "system-wide risk," which is risk to the financial system as a whole rather than just a specific institution. Financial institutions must meet a target capital ratio that is greater than total minimum capital requirements and buffers. OSFI has the discretion to set a higher target capital ratio for individual institutions. Canada's six largest banks are subject to an additional surcharge as they are considered systemically important in Canada (i.e. "too big to fail"). 1 As of May 31, 2017, uninsured residential mortgages represented 11.7 per cent of total bank assets. Some smaller institutions specialize in residential mortgages and would have a much higher percentage in their portfolio mix. uninsured mortgage regulation: from Corporate governance to Prescription BY neil mohindrA, frAser institute

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