September 26, 2011
OSFI Issues “Early Warning” on Mortgage & HELOC Lending
Canada’s lending industry is witnessing rock-bottom interest rates and unrelenting competition.
The former has fuelled borrowing volumes. The latter has been known, on occasion, to encourage looser lending criteria.
Together, the two can be destructive to a banking system and economy.
- Low rates have likely “increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.”
- As a result: “…We, at the OSFI, have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.”
- “The message from OSFI to financial institutions is that…institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.”
- FIs must protect against imprudent lending “more so than they have historically.”
After her speech, Dickson told reporters:
- “I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen [lending] standards."
- As a result, OSFI is “stepping in to increase the monitoring” of lender portfolios.
- “I think it's prudent to increase [FI] capital levels as soon as we can." (This was in response to a separate question on the new Basel III capital/liquidity standards.)
Dickson also noted that OSFI is presently cooperating with the international Financial Stability Board to develop global guidelines "for what constitutes safe mortgage lending." That includes down payment, loan-to-value and income verification parameters.
Despite the warning, Dickson acknowledged that Canadian banks have “managed risk” well to date, adding that Canadian FIs are in “a position of strength”.
Rob McLister, CMT