OSFI releases mortgage underwriting principles

The Office of the Superintendent of Financial Institutions (OSFI) has released the final version of its Residential Mortgage Underwriting Practices and Procedures guideline, which sets out expectations for prudent residential mortgage underwriting.

It builds on the Financial Stability Board’s international Principles for Sound Residential Mortgage Underwriting Practices, released in April 2012, and the OSFI’s own domestic supervisory work.

The guideline outlines five main principles for regarding proper mortgage underwriting and/or acquisition:

• Have a comprehensive residential mortgage underwriting policy;
• Perform reasonable due diligence to assess the borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis;
• Adequately assess the borrower’s capacity to service their debt obligations on a timely basis;
• Have sound collateral management and appraisal processes; and
• Have effective credit and counterparty risk management, including, where appropriate, mortgage insurance.

Also read: Mortgage rules tightened, will cool markets

The principles apply to all federally regulated financial institutions engaged in residential mortgage underwriting and the acquisition of residential mortgage loan assets in Canada. They complement relevant provisions of the Bank Act, Trust and Loan Companies Act, the Insurance Companies Act and the Cooperative Credit Associations Act, as well as the Government of Canada’s mortgage insurance guarantee framework.

OSFI expects all financial institutions to comply fully by the end of 2012 fiscal year. It won’t apply retroactively to in-force residential mortgages.

One American housing economist commented the move away from home lending could be spurred by a reluctance to deal with the associated risk in the event of a downturn in home prices. He notes U.S. banks don’t want to hold housing loans and rapidly offload them onto Fannie Mae, Freddie Mac, and the FHA.

“They’re looking South of the border and seeing how nasty things can get and deciding they don’t want to expose themselves to that,” he says. Given that other options exist for investing bank capital, it’s no surprise they’ll want to move away from housing lending as it gets riskier.

“They’re asking, ‘Is this really the business we want to be in?’ and they’re saying, ‘Not really,” he says. “They’re asking whether they want to answer to their shareholders about whether the return merits the risk. A US bank would act exactly the same way. They can park it in bonds.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.