Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.
Issue link: http://digital.canadawide.com/i/906457
CMB MAGAZINE cmba-achc.ca fall 2017 | 21 Adverse Impacts of the Proposed Changes Introducing a prescriptive stress test will have some impacts on the Canadian residential mortgage market. e impacts likely include: aCCessiBiliTy: Potential homebuyers will find their access to mortgages more limited, especially in higher priced markets as their buying power is reduced. Because of that, they will only be able to afford a less desirable home or may have to postpone their purchase. alTernaTive lending Channels: Many borrowers could turn to lenders that are not subject to solvency supervision, such as mortgage finance companies that are funded by private investors. ese borrowers will likely find they must pay significantly higher interest rates to these lenders. When borrowers turn to alternative providers, the providers accept higher risk in return for higher pricing. Payday lenders are an example of this. In addition, the consumer protection framework for regulated financial institutions would not apply. is framework consists of the regulatory standards under the auspices of the Federal Consumer Agency of Canada in areas such as disclosure as well as access to an independent redress mechanism. Because these channels are more opaque, policymakers would find available data on the mortgage market less complete. The Bank of Canada reCenTly flagged This issue, noTing: "Borrowers affected by any of the new rules may seek out less- regulated, higher-cost lenders, such as mortgage investment corporations and private mortgage lenders. Since these lenders are not subject to OSFI regulations and, unlike mortgage finance companies, do not use mortgage insurance, they are not constrained by the new rules. Careful attention from authorities will be needed to monitor any increase in vulnerabilities resulting from greater use of alternative lending channels." Business sTraTegies: Financial institutions will find their flexibility to pursue niche strategies more limited. An institution might target segments based on different combinations of pricing, down payments, terms and conditions, and income history. For example, a 200 basis point standard for stress testing may be excessive when a borrower has other assets (i.e. an investment portfolio) that could be sold off to meet higher payments or seized by the lender in the event of default. e mandatory standard for stress testing could result in a less competitive and more concentrated mortgage market. Some financial institutions that are niche players in the residential mortgage market may find their ability to pursue their business strategies (such as focusing on segments such as self-employed individuals) impaired. is runs counter to the federal government's objective of promoting more competition by smaller banks. Perverse inCenTives: Some borrowers may find they can increase their buying power by securing shorter-term variable loans. For example, a mortgage with a short-term variable rate might be selected over a longer-term fixed rate. is leaves the borrower more vulnerable to fluctuations in interest rates. Conclusion OSFI describes its primary goal as safeguarding depositors and policyholders from loss (OSFI, 2010). Its mandate as set out in the OSFI Act is to ensure that institutions are regulated to contribute to public confidence in the financial system. e Act states that OSFI's role is to monitor and evaluate systemwide issues. OSFI is not responsible for "cooling" overheated markets. Is there is a rationale for treating uninsured mortgage loans differently from other assets such as commercial mortgages or credit card receivables? OSFI introduced the existing guideline on residential mortgage underwriting for compliance with the FSB standard rather than historical experience in Canada. e FSB standard was inspired by problems unique to one country. e FSB standard states that supervisors may wish to consider requiring lenders to adopt more conservative underwriting standards in situations where underlying risks are higher, such as asset price bubbles in specific geographical areas. is could be why OSFI has proposed the stress test. But the FSB standard also states compensatory tightening in one dimension may offset another. Rather than insist on a prescriptive test in its guideline, OSFI could use its existing powers, such as its ability to direct an institution, to correct what it believes are deficiencies in policies and procedures. Doing so would address any concerns OSFI may have over losses to depositors. At the same time, it would minimize disruptions to the residential mortgage market because financial institutions would continue to have the flexibility to choose a mix of underwriting criteria that ensure mortgage loans are consistent with the board's risk appetite. Reprinted with permission of the Fraser Institute. Headquartered in Vancouver, the Fraser Institute has regional offices in Calgary, Toronto and Montreal. They produce research about government actions in areas that deeply affect Canadians' quality of life such as taxation, health care, aboriginal issues, education, economic freedom, energy, natural resources and the environment. Canada and the united states Rather than insist on a prescriptive test in its guideline, OSFI could use its existing powers, such as its ability to direct an institution, to correct what it believes are deficiencies in policies and procedures.