11 October 2018

Even as the number of mortgage approvals relying on the equity in the property (and not on the proper assessing of the borrower’s ability to repay the loan) went down, there are still such cases. OSFI says it will be taking more measures on reducing equity lending.

OSFI spokeswoman Annik Faucher explained that the regulator referred to uninsured mortgages which were approved based only on the equity of the property (the difference between a property’s cost and the remaining mortgage amount), and to loans where the lender did not use other underwriting principles, listed in the B-20 guideline. Especially, when it comes to proper documentation of income.

“Thorough underwriting protects lenders and borrowers. It also supports the national financial system,” – Faucher said. “In case a borrower has a large amount of equity in a property, it still doesn’t mean the banks can ignore sound underwriting practices and borrower due diligence.”

According to her, OSFI has a lot of supervisory tools, and when it finds the potential issues, it starts acting and requires financial institutions to take the necessary measures.

OSFI says there are already signs that fewer mortgages are approved for highly indebted borrowers. The number of uninsured mortgages with loan amounts exceeding the borrower’s income in 4.5 times or more went down from 20% during April-July of 2017 to 14% in the same period of 2018.

The national real estate market has cooled after different measures were taken by regulators and governments. However, OSFI realizes that its stricter underwriting standards could make some potential buyers use not fully truthful means of getting loans.

“We understand that tightened rules may lead to a situation when certain borrowers provide false data on their income, while it has also become easier to get such authentic-looking false documents,” – OSFI admits. “That’s why the revised B-20 demands a more thorough income verification processes. Financial institutions have to be even stricter when detecting income misrepresentation. Especially, in case of lenders which depend on third-party distribution channels.”