It seems that there’s been worry over Canada’s housing market since forever now. Rising home prices, interest rates that are eventually going to rise, and historic levels of household debt are enough to make any Canadian worry; and to keep Mark Carney up at night. But now, the Office of the Superintendent of Financial Institutions (OSFI) is stepping in to make sure that Canadians don’t get in over their heads when it comes to their mortgages – and to make sure that the banks don’t let them.
For those who don’t know, the OSFI is Canada’s bank regulator, making sure that policies are being adhered to, and that banks continue to protect both themselves and the customer. They have just proposed new rules that are going to force the banks to be much more transparent with their lending and mortgage policies. The first change is that now banks must submit their mortgage underwriting practices to their Board of Director’s for approval at least once every year. This will help cut back on risks as banks will be forced to analyze their own policies and processes and understand what parts are working, and which parts are not.
Along with the proposed new rules, banks and lenders would also need to submit much more information about the mortgages they currently have on loan, including the geographic locations that most of their loans are concentrated in, how many mortgages were issued using public or private mortgage insurance, and how many mortgages were given out to employees.
What might make Bank of Canada governor, Mark Carney, and Finance Minister, Jim Flaherty, happiest about the new proposed rules though, is the fact that they also call on banks to put any individual applying for a home equity line of credit in Canada under much more scrutiny. These lines of credit, also known as HELOCs, are an area that both Mr. Carney and Mr. Flaherty have expressed direct concern over, perhaps because the popularity of them has increased by about 40% over the past 20 years. For these two government officials, there’s no doubt that the timing for these proposed rules couldn’t be better.
The OSFI hasn’t implemented any of these new rules yet. Remember, they’re just proposals that could help lessen worry over the housing market, and the mortgage market, in Canada. The agency would like to hear public comments on the proposals before May 1, but banks so far seem to be on board. The rules are being proposed after all, to protect them and not the consumer.And according to Marcia Moffat, head of home equity financing at Royal Bank of Canada, “Ultimately it comes down to cash flow. You need to make sure that you’ve got enough flexibility to continue to make payments on your mortgage through the term.” And these proposed OSFI rules, which will mean tighter lending practices, will help banks make sure customers can do just that.