DICO warns Ontario credit unions high- risk borrowers may come looking for mortgages
The Deposit Insurance Corporation of Ontario has told Ontario credit unions that changes in federal mortgage requirements may send risky borrowers their way and they need to be prepared.
The provincial regulator sent an advisory to Ontario credit unions on Nov. 23 warning them that new, tighter rules on mortgage requirements that apply to federally regulated banks could lead to the “migration of riskier borrowers from banks to the credit union sector.”
A cover letter from Suzanne Tucker, Senior Manager, Policy and Research, says: “This advisory also reinforces DICO’s expectations for credit unions to continue to enhance their mortgage lending practices in response to the elevated financial risks and associated vulnerabilities in the Ontario housing market.”
Tucker suggests questions that credit union directors should be asking to ensure their organization is managing risk. For example, she says directors should ask:
“What steps are being taken to assess that all borrowing members will be able to continue repaying their mortgages upon renewal should rates rise?
“How would we know if another lender is lending against the same property?”
The advisory follows similar actions by FICOM, the B.C. credit union regulator. It told B.C. credit unions in late October that it was not considering changes to its mortgage underwriting guidelines, but it held two meetings with credit unions to get their feedback.
“FICOM is currently monitoring any potential impacts to the system from the recent federal changes,” it said.
In its Financial System Review released on Tuesday, the Bank of Canada said it’s likely some home buyers who cannot qualify under the tighter federal rules will head for credit unions.
“Around 17 per cent of outstanding uninsured mortgages is held by provincially regulated credit unions, which are not directly affected by the OSFI guidelines,” the report says. “Provincial regulators may implement the same stress test requirement. In addition, the Canada Mortgage and Housing Corporation is assessing whether additional measures are needed to control risk in low-ratio mortgages by lenders outside OSFI supervision who participate in government securitization programs.”
The Bank said it will monitor the migration of higher-risk mortgages outside the federally regulated financial system.
In October, the Office of the Superintendent of Financial Institutions (OSFI) announced new rules that will apply to federally regulated financial institutions in January. The revisions to its guideline on Residential Mortgage Underwriting Practices and Procedures (B-20) require the stress testing of uninsured mortgages and introduce a restriction on co-lending or bundling of loans.
The guideline requires all mortgage loans be stress tested to ensure that borrowers can still service their mortgage at a higher interest rate than the contractual mortgage rate.
Lenders must also consider the risk associated with the potential loss of income from a supporting spouse or co-borrower.
For insured mortgages, lenders must use the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada for all variable interest rate mortgages, regardless of the term, and for fixed rate mortgages with a term less than the standard five-year term.
For uninsured mortgages, the minimum qualifying rate is the greater of the five-year benchmark rate published by the Bank of Canada, or the contractual mortgage rate plus 2%.
The revised guideline also restricts co-lending arrangements (or bundling of loans) designed to circumvent maximum loan-to-value requirements for OSFI-regulated lenders.
DICO told credit unions it expects them “to ensure their risk of exposure to borrowers that may become unable to service their debt obligations under stressed conditions is appropriately managed by implementing prudent policies and practices.”
It warned directors that “credit union boards should be aware of any unique exposure their credit union may have to the residential mortgage market in their geographic location.”
DICO said it is currently reviewing its lending guidance as the result of the changes to the Credit Unions and Caisses Populaires Act and assessing whether to apply “some of the elements of OSFI’s B-20 guideline as it updates existing lending guidance.”