The office of the superintendent of financial institutions (OSFI) released a letter on Wednesday providing an interim update on Draft Guideline B-20. These guidelines are the proposals put forth by OSFI to tighten the mortgage lending practices of federally regulated financial institutions (FRFI’s). The purpose of this letter is to provide a brief description of OSFI’s key decisions on their proposals after having incorporated industry feedback.
The good news is that it appears that OSFI has been made aware of the facts and has backed off on some of its previous outrageous proposals. Left on the table is only one significant underwriting change to be mandated to FRFI’s and that’s the reduction of the limits on home equity lines of credit (HELOC’s). Currently mortgage lenders will leverage your residence up to 80% of the appraised value, but under the new OSFI regulation the new limit will be reduced to 65% of the appraised value. This is a significant although not unreasonable change. Borrowers who are borrowing for periods of 1 year or longer are better off with a closed variable rate mortgage. The lower interest rate will off-set any penalty that may be levied due to early re-payment. The elimination of this product will prevent borrowers who no longer qualify for a higher loan amount from automatically leveraging their homes back up to 80% of the appraised value.
Although OSFI has backed off on some heavy handed mortgage underwriting proposals they will be imposing a softer approach to holding FRFI’s more accountable for their credit policies. The letter to FRFI’s indicates that their Board’s will be required to provide oversight to mortgage underwriting policies, more public reporting will be required as well as increased disclosure. Given that our banks are some of the strongest financial institutions in the world, this increased transparency should have little impact on current operations. It will however, help to maintain the stability of the Canadian financial system. It appears that OFSI is doing the right thing.