Canada’s banking regulator is tightening the rules on mortgage insurance, part of an international effort to prevent irresponsible lending and the possibility of a housing bubble.
The Office of the Superintendent of Financial Institutions (OSFI) released a draft set of guidelines Monday that are meant to “contribute to the continued stability of the [housing] market,” in the words of OSFI Superintendent Julie Dickson.
Unlike then-Finance Minister Jim Flaherty’s rule changes in 2012, these don’t directly affect the sorts of mortgages Canadians can qualify for. They are a set of guidelines for the three companies that insure mortgages in Canada: The government-run Canada Mortgage and Housing Corp. (CMHC), and private insurers Canada Guaranty and Genworth.
The rules come two years after OSFI documents obtained by Bloomberg news found the banking regulator was growing worried about a possible “sub-prime” lending crisis in Canada, echoing the one in the U.S. that helped sink that country’s housing market.
OSFI had reportedly been concerned about banks handing out loans to people who can’t prove their incomes and to recent immigrants.
These loans “have some similarities to non-prime loans in the U.S. retail lending market,” the OSFI documents stated.
According to the Globe and Mail, the new rules put the onus on the mortgage insurers to make sure the banks whose mortgages they’re underwriting are making sound decisions. The insurers are urged to assess borrowers’ ability to pay on their own, and not rely on banks’ assessments.
Insurers should also demand full and timely disclosure of mortgage fraud, both suspected and verified, the OSFI guidelines state.
The changes come in the wake of a massive run-up in Canadians' household debt, including mortgages. Over the past decade, debt has grown three times as fast as income, with debt burdens rising to some 164 per cent of household income, from less than 100 per cent in the mid-1990s.
OSFI’s guidelines are meant to bring Canada in line with new international regulations meant to ensure that the U.S.’s subprime lending crisis is not repeated. The process is being overseen by the Financial Stability Board, an international body created by the G20 in 2009 and now run by former Bank of Canada Governor and current Bank of England Governor Mark Carney.
As part of those changes, in 2012 the federal government placed CMHC, the largest of Canada’s mortgage insurers, under OSFI’s supervision. The move was part of international efforts to ensure that mortgage insurers everywhere are regulated.
OSFI has made the draft rules available for public comment until May 23, after which the rules will be finalized.
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