OSFI says mortgage risks were up “only slightly” and now it focuses on monitoring HELOCs

According to Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), residential mortgage credit risk was up only slightly.

The statement appears amid sharp home prices gains, which reported a 23% annual increase last month on a seasonally adjusted basis to an average level of $716,585.

The residential mortgage credit growth shows an annual pace of almost 10%.

“While we may call the real estate markets in many Canadian cities exuberant since the fall of 2020, we at OSFI believe that residential mortgage credit risk has grown only modestly,” – Routledge noted. “In spite of a strong activity and growing mortgage credit levels, Canadians are spending less income for servicing such debts as mortgages, automobile loans and credit cards.”

In addition to it, Routledge says OSFI has used several “conservative tools to raise the margin of safety” in Canada’s residential mortgage market, including stress-tests for borrowers at a higher rate (today it’s 5.25%), stricter property valuations and setting “dynamic” loan-to-value ratio limits that better show the risk of certain housing units and markets.

“However, we believe today’s imbalance between housing demand and supply presents a significant risk, and all members of the national real estate system need to take actions if we want to reduce it,” – he added. “The main threat to Canada’s financial system is the housing supply/demand imbalance.”

In his opinion, we need intergovernmental efforts to solve this issue.

In terms of the rate type affecting the risks, Routledge noted that variable-rate mortgages are extremely popular these days. They account for 51% of all new residential mortgages reported recently.

“Variable mortgage rates are lower than fixed ones today, that’s why new buyers are ready to accept the possibility of a higher rate in exchange of becoming homeowners,” – he explained.

Routledge also pointed to non-traditional housing-backed lending products, e.g. Combined Mortgage-HELOC Loan Plans (“CLPs”), as they may be supporting prices growth due to including a readvanceable credit component that goes up with principal payments.

He says such products could make it far more difficult for lenders to assess credit risks quickly enough during stressing times.

“When OSFI notices a sharply growing product, we must understand the reason of this growth and assess the risks that growth may pose to institutions and the national economy,” – he said. “Then, as product structures change, there is a possibility that such products become non-compliant with our underwriting expectations anymore. We’ve already asked lenders to thoroughly review the risks coming from their combined loans and HELOC-mortgage structures.”

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