Canada

Canadian Real Estate Has “Amplified Risk” For Lenders, False Income Common: OSFI

Canada’s bank regulator is getting its ducks in a row after a routine audit to assess financial system risk. The Office of the Superintendent of Financial Institutions (OSFI) published its first Annual Risk Outlook last week. The report covers systemic risks to the system, including a home price crash. Amongst the issues uncovered was mortgage income verification and over-leveraged borrowers. OSFI plans to address the risks in the next few weeks, likely meaning tighter lending.

Canada’s Bank Regulator Questions Mortgages, False Incomes Is “Common”

Mortgage loan underwriting risks are common, according to the agency. For those unaware, underwriting is the process to ensure a quality loan. This includes income verification, checking assets and debt, and property details. Bad underwriting is a disaster waiting to happen during risk periods. 

“Recent supervisory reviews identified several common issues around underwriting, specifically income verification in areas that have been raised as being problematic in the past including business for self, rentals, exceptions to income sustainability as well as collateral management.” read the report.  

In other words, incomes may have been inflated to obtain more leverage. It was a dry way of wording it, but this is a big problem whether it persists or if there’s a crackdown. If it was really common, this would see investors (the largest segment of borrowers) dry up fast. 

Extending Prudential Regulation To Other Products

Non-traditional mortgage products are becoming very common and may require further regulation. Reverse mortgages, shared equity, and combined loan plans (CLPs) are becoming popular. The regulator cites the popularity of these formerly niche products as an area that needs stronger rules. B-20 Guidelines, which ensure quality underwriting, may be extended to other areas soon.

CLPs may be a bigger issue than the public knows, considering the frequency mentioned. These combine a mortgage and a home equity line of credit (HELOC) into one product. By doing this, borrowers see their HELOC credit limit rise with each payment. OSFI has previously cited CLPs as a valuation risk, believing it hides distress.

Mortgage Stress Test Rate May Rise This Winter 

The mortgage stress test is another issue OSFI cites as a concern these days. Uninsured mortgages are “stress tested” with a minimum qualifying rate (MQR). The MQR is currently 5.25% or the contract rate plus 2 points, whichever is higher. That is, a borrower needs to qualify for a mortgage at the higher of the two regardless of what they’ll pay.

As the overnight rate is forecast to climb nearly 2 points in a year, the MQR may need a revision. The next planned MQR announcement date is on December 15, 2022 — about seven months from now. 

Remember, risk takes care of itself while prices are rising. A homeowner is unlikely to default in a market where they can sell a home within days of an emergency. Additional equity also makes it easier to cover distress, like with CLP mortgages. Only when the bid dries up do real valuations become apparent, in a non-stimulus market. That can be considerably lower than right now.

16 Comments

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  • ravi 2 months ago

    Wow….false income is common?…..everybody surprised that How come is it possible?

    • Amjad Shaikh 2 months ago

      Wondering if the banks’ credit assessment teams verify the applicant’s income from CRA?

  • A 2 months ago

    Let it crash!

    • Amjad Shaikh 2 months ago

      still the brokers claimimg tht the market will rise: woondering how long they will fool the people!
      Seems the brokers getting strong backing from influential circles.

  • Swami 2 months ago

    They know everything, but they don’t want to do anything
    I have a friend whose friend works in bank and he says that you can get whatever mortgage you want, if you don’t know how , bank will recommend some shady mortgage brokers who make fake documents to get the desired amount of loan from bank.

    • Amjad Shaikh 2 months ago

      this proves that there is huge corruption in our so called “sound banking system”. Wodering what the OSFI and banks’ risk departments doing – incompetent or complacent behaviour?
      The common canadians are paying the cost of this negligence.

  • Raging Ranter 2 months ago

    So much of this phuckery would not be a problem had they not been suppressing interest rates since the late 1990s, creating massive asset bubbles and thus giving every incentive to every idiot out there to try to game the system and get their piece of it. Trying to plug the gaps with “macro-prudential” policies won’t do a damned thing. Get rates up and keep them at a level that discourages asset bubbles. Yes, that will mean several years of pain before things recover, but I’ll take several years of pain and slow/no growth (with a likely recession or two) over another 2 decades of of the “Bro Economy” where work is for suckers and the real ballers are playing the stock/crypto/real estate markets. Economies thrive on productive work! They die when incentives turn people away from productive work. Even if your brother-in-law is spitting food all over the table explaining how the BRRRR method is making him rich. He doesn’t know what real wealth-building is any more than a lottery winner would. At least a lottery winner isn’t leveraged.

    • Jason 2 months ago

      Couldn’t agree with your comment more. It’s unbelievable that the government has allowed this to continue on for decades.

      • R.Froos 2 months ago

        the governments debt levels are so high they need the interest rates to be suppressed.

        • Amjad Shaikh 2 months ago

          Yes, reduce the interest rates for new home buyers to make it affordable for the middle class families earning less than$50K annually..
          But the govt , CRA and BOC and OSFI should also rein in the investors, foreign buyers and mortgage brokers who took undue advantages of low interest rates.

          Its govts responsibily to keep the home prices within reach of comon people.

    • Alan 2 months ago

      Fed up of mainly middle-aged double dippers bragging that their homes are worth millions, while young people have to work harder just to afford the extortionate rents.

      • Amjad Shaikh 2 months ago

        The assets price bubble will promote rent seekers, which will lead to unproductive activities in the economy.
        Its the time the govt puts a limit on the speculative investment buyers and also the Mortgage brokers , who, by way of unethical practices, promoting escalation of this speculative moves, despite the interest rate hikes by the BoC.

  • Amjad Shaikh 2 months ago

    OSFI should have raised red flags last year when the banks were blindly extending mortgage loans through Brokers, without proper verification of incomes.
    If found negligent, the bankets must be penalized for risking depositors’ money into the hot risky market for which BOC had been warning since past 5 years (windering why BoC remained silent in paademic days, when the housing market actually inflated abnormally ).

    • Alan 2 months ago

      It’s because many politicians own investment real estate, relying on serfs to work dead-end jobs 44 hours a week to fund their retirement and investment portfolios.

      Should you refuse to participate in this? Toronto Police are ready to kick you like an animal!

      Canada is becoming no different than a third world country where the serfs have to pay high rents for the political elite.

  • David Todtman 2 months ago

    Oh gosh. Who would ever have thought that right here in River City Canada we’d have liar’s loans?

    On a serious note, we’d better not revel in the idea of a crash. It may very well come to that. A crash will provide us with another opportunity to point out that the market system is fundamentally anarchic and irrational. As useful as that may be, the level of destruction and damage to ordinary people’s lives will be horrible. There is no glee in that, unless you’re a misanthrope. The fat cats will walk away, as they did in 2007-2009 and its aftermath with their pockets full. And, those full pockets will help feed the next economic crisis.

  • robert christian 2 months ago

    Isn’t there enough government regulations on everything? Have the banks lost a great deal of money on real estate over the last 25 years, or even a dollar?
    It’s good to have strong banking rules to keep the banks from having stress, but they have their own individual rules on top of what OSFI puts out. These regulators need to lay off half their staff, because its pretty obvious its too many people’s jobs to come up with new regulations every quarter.

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