Canada's Housing Bubble

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OSFI lays out finalized mortgage rules; brokers not so happy Print E-mail

Jun 24, 2012 John Greenwood

Canada’s banking regulator announced finalized guidelines for mortgage lending that along with other measures unveiled today by Finance Minister Jim Flaherty are aimed at cooling the country’s frothy housing market.

The Office of the Superintendent of Financial Institutions first proposed the guidelines back on March 19, as part of an international initiative spearheaded by the Financial Stability Board in Basel, Switzerland.

The new guidelines, which come after much discussion with industry, are designed to compel lenders to look more closely at the credit history of borrowers even when mortgages are backed by the federal government and to limit the level of risk exposure.

Among the major changes:

— The maximum loan to value on home equity lines of credit (HELOCs) is cut to 65% from 80%

— The loan to value should be re-calculated upon any refinancing and whenever the lender deems prudent

—HELOCs will continue to as revolving lines of credit with no specific amortization period. However, OSFI says lenders must now expect borrowers to have the ability to fully repay HELOCs over time.

The new rules unveiled on Friday are in line with a draft update released by OSFI June 6.

OSFI’s announcement comes the same day as Mr. Flaherty tightened rules around government-backed mortgages for the fourth time since the financial crisis, chopping the maximum amortization for home loans to 25 years from 30 years and reducing the maximum amount of equity borrowers can take out of their homes to 80% from 85%.

“The changes announced by Minister Flaherty are prudent, measured, responsible, timely and aligned with BMO’s ongoing efforts to encourage Canadians to choose a mortgage with a shorter amortization, ” said Frank Techar, head of Bank of Montreal’s domestic retail bank.

The Canadian Bankers Association welcomed OSFI’s guidelines but the CBA, which represents the banking industry, offered a more measured response to Mr. Flaherty’s actions.

In a statement the CBA described Mr. Flaherty’s new mortgage rules as the latest in a series of “targeted steps that he feels are necessary to ensure that mortgage debt continues to be manageable for people and that the housing market remains stable.”

The government may be doing ‘too much tinkering with the market’

The statement then points out that Canadian banks “have a strong track record in careful, prudent lending and for being the soundest banks in the world for four years running. We are in the business of lending to people who will pay it back.”

At least one industry group was sharply critical. The Canadian Association of Accredited Mortgage Professionals said it’s worried about the impact on the housing market.

“Taken together, the Minster’s … announcement Thursday and the OSFI final guidelines may have an effect of precipitating the housing downturn that the government desperately wants to avoid,” CAAMP chief executive Jim Murphy told According to Mr. Murphy, the government may be doing “too much tinkering with the market.”

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