In response to elevated dangers within the mortgage market, Canada’s banking regulator has issued a reminder to lenders about their threat administration obligations.

The Workplace of the Superintendent of Monetary Establishments (OSFI) this week launched a regulatory discover reminding federally regulated lenders of their obligations pertaining to mortgage threat administration and underwriting pointers.

The measures vary from being proactive with susceptible accounts, together with “early and proactive engagement with susceptible debtors,” to credit score loss provisioning and “sound” mortgage underwriting.

“Not one of the measures outlined in our newest regulatory discover are new,” a spokesperson from OSFI instructed CMT.

OSFI says the discover is supposed to enhance its Guideline B-20, whereas particularly drawing consideration to and reinforcing the regulator’s expectations for lenders within the present financial and rate of interest atmosphere.

“The discover responds to the heightened threat atmosphere associated to current mortgage accounts and lender portfolios,” OSFI stated. “These dangers embrace potential cost shocks and renewal and refinancing dangers, notably for debtors with higher-risk mortgage merchandise like variable-rate mortgages with fastened funds.”

OSFI confirmed that the discover isn’t in response to a selected lender or their mortgage threat administration practices, however as a substitute “reinforces to all lenders the significance of sound mortgage threat administration practices by the total lifecycle of the mortgage.”

As a principles-based regulator, OSFI stated it communicates its expectations and tries to keep away from being “prescriptive” as a lot as attainable. “…we assess dangers to make sure alignment with our expectations and take corrective motion when mandatory.”

Dangers embrace elevated family debt and excessive rates of interest

OSFI says dangers have elevated resulting from a mixture of elevated family indebtedness, excessive rates of interest and continued elevated inflation.

Because of this, many debtors are already dealing with increased mortgage funds, with many extra anticipated to face cost shock upon renewal or of their effort to return to their contracted amortization obligations.

“These dangers can result in extra defaults and are notably acute for debtors with increased threat mortgage merchandise, similar to variable-rate mortgages with fastened funds,” OSFI says.

Canada’s mortgage market is dealing with a surge in renewals within the coming years, with analysis from RBC Economics estimating that that $900 billion price of mortgages—nearly 60% of all excellent mortgages at chartered banks—are resulting from renew between 2024 and 2026.

Based mostly on present rate of interest forecasts over that horizon, a report from CIBC says debtors will face a median cost shock of about 15% per yr.

OSFI has beforehand communicated its issues about rising dangers out there in its 2023-24 Annual Threat Outlook that was launched final April. At the moment, OSFI cited a housing market downturn as considered one of 9 key dangers it was monitoring.

“The steep enhance in rates of interest has eroded debt affordability [and] it is a rising concern from a prudential perspective,” it stated.

In response, OSFI unveiled adjustments to its Capital Adequacy Requirement in December for lenders and insurers with negatively amortizing mortgages with loan-to-values (LTVs) above 65%. These necessities got here into impact early this yr.

Considerations surrounding variable-rate mortgages

OSFI’s newest discover reiterates issues over the dangers related to fixed-payment variable-rate mortgages.

Fastened-payment variable-rate mortgages preserve month-to-month funds steady regardless of price will increase, resulting in increased curiosity prices and decreased principal repayments. Banks like RBC, TD, BMO, and CIBC provide these mortgages.

Default dangers are “notably acute for debtors with [these] higher-risk mortgage merchandise,” the regulator stated.

OSFI head Peter Routledge has gone so far as referring to them as a “harmful product.”