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4 February 2019

Calls for less strict mortgage stress test are growing

The Office of the Superintendent of Financial Institutions (OSFI) is facing more calls from banks and mortgage industry lobbyists to ease a stress test, created to reduce risky lending. However, according to three reliable sources, the regulator will probably stay put in terms of changes so far, Reuters says.

Supporters of the change say easing the test may restrain the housing slowdown and cut the number of borrowers who have to address private lenders. Nevertheless, one source says the regulator is not eager to interfere with the test, implemented only 13 months ago.

As you know, OSFI introduced the new rules last January, demanding from banks to test borrowers’ ability to pay off mortgages at an interest rate 2% higher than their contract one.

The test is a part of the rules set, named B-20, developed for making sure the banks keep the necessary mortgage underwriting standards amid hot housing markets in Toronto and Vancouver.

CIBC’s deputy chief economist Benjamin Tal says he supports the main idea of the test, but it should be more flexible with the focus on interest rate changes and market conditions.

“It should be more dynamic,” - he noted. “It’s important to assess the damage to the real estate market, its range, and what other factors are causing the growth slowdown at the market”.

At the same time, since its implementation, the markets have in fact cooled down: sales were decreasing during the last four months of 2018, and the average home prices was down in all three final months.

As a result, many started calling for reviewing the stress test, especially after three rate hikes last year and other new measures, e.g. foreign buyers’ taxes in Toronto and Vancouver.

OSFI says it keeps watching the situation closely and will make all the necessary changes when appropriate.

Meanwhile, according to one anonymous senior banker, more and more industry members support the idea of lowering the test rate to 1.5% in case the interest rates go up. Financial markets see a 50% possibility of one more increase this year.

 

 

 

 

 

 

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