There have been a lot of changes to home financing and home borrowing lately. Of those changes the most to be talked about lately was the one Finance Minister Jim Flaherty imposed in July, lowering the amount homeowners could borrow against their home equity to 80 per cent. And while this new regulation has gotten some buzz, you can expect the new OSFI rules, which go into effect at the end of this month, to get a lot more attention. In fact, they already have as The Globe and Mail has indicated that most lenders opposed the new rules from the beginning.
The new rules were proposed by the OSFI in March, and finalized in June. Among them it stated that borrowers would be able to borrow only 65 per cent through HELOCs, down from the 80 per cent Jim Flaherty just instated. That means that homeowners can’t get in too deep with debt, a mission the government has been working on for the past two years.
For banks though, it means lowered profits as fewer consumers will be able to take out loans; and those loans will be smaller, equaling lost interest profits for the lenders. A lot of lost profits. Consider that the amount of lines of credit along with mortgage refinancing increased from $8 billion in 2001 to $64 billion in 2010. That’s a monumental increase, and right now the government is more concerned about household debt than ever. That one stat is a good indication why.
When OSFI announced the rule changes in June, they asked lenders to comply with them immediately; and some did. Others however, have waited until the very last possible second and now, that’s fast approaching.
Some won’t even change their lending standards, as credit unions – especially those outside of overheated markets – aren’t required to change their lending policies.
Andy Poprawa, chief executive officer of the Deposit Insurance Corporation of Ontario, the organization that is responsible for overseeing credit unions, says that most credit unions will continue to operate, and lend, as they have been.
“Our credit unions would mostly be operating in the non-GTA markets – smaller communities, towns,” he says. “And there the real estate market is a little bit different. It’s not as overheated as the GTA, especially the condo market. So we don’t have the same level of concern that OSFI would have with respect to the large banks.”
But while credit unions might not be concerned, those in the big banks are. They think that the OSFI should “find alternative options that would be more costly for consumers and more risky for the bank,” said one source inside of The Globe’s obtained documents.
Which alternative options would those be?
Another industry insider says (anonymously) within the documents, “Applying a risk-based approach to individual accounts and portfolio management would be more prudent as it would focus attention on the higher-risk aspects of the portfolio while limiting the negative impact on lower-risk borrowers.”
But isn’t lowering the amount eligible to borrow against going to be more costly for consumers on its own? In essence it gives them less cash flow, forcing them to make do with what they have, and increasing their own costs to pay for their own expenses – and all without increasing the risk to the banks. Because really, banks don’t want that either.
OSFI knows this, and that’s why they believe that reducing the amount allowed to borrow is the best option. And they think taking individual portfolios into account is a risky alternative.
“Applying on a portfolio basis could be challenging,” an internal note from the regulator stated. “[It] would create the wrong incentives for branch-level employees. A 65 per cent limit on individual clients is clear and compliance can be monitored by the bank.”
What do you think? Is lowering the amount available on HELOCs to 65% just the kind of regulation we needed? Or is it going too far? Let us know either by commenting below or, checking out our Facebook page!