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Changes to Mortgage Stress Testing: Learnings One Year Later
It’s been just over a year since Canada introduced new mortgage stress testing regulations for uninsured mortgages, and some think it’s time for a change.
Mortgage Professionals Canada is one of the organizations is calling for reform to the stress tests.
“The mortgage stress tests are raising the risks to house prices and the economy of Canada,” wrote MPC Chief Economist Will Dunning wrote in the organization’s annual report for 2018.
The new regulations came into effect on January 1, 2018 and imposed a new mortgage stress test on uninsured mortgages – those with a down payment of more than 20%. Previously, only mortgages with a lesser down payment were required to be stress tested.
The B-20 guidelines also created stricter lending guidelines, including putting less focus on the LTV (loan-to-value) ratio, and more on the GDS (gross debt service) and TDS (total debt service) ratios.
These guidelines, however, only applied to federally-regulated lenders.
Dunning pointed to this stipulation in his report, saying that these regulations, intended to remove risk from the housing market, have had the opposite effect by driving a greater share of buyers to alternative lenders that are not federally regulated.
“The expansion of alternative mortgage lending is certainly an added risk for the entire financial system,” Dunning wrote. “If it adds to risks for the broader economy, then OSFI’s B-20 Guideline indirectly adds to risks for the lenders that it regulates.”
The Teranet Market Insights Report from October of 2018 found that 20% of refinanced mortgage transactions (defined as mortgages registered on a property that did not involve a sale) during the second quarter of 2018 were sourced from private lenders — a 67% increase over two years ago. Turning to mortgages for properties with a sale, private lenders accounted for 6.8% of mortgage transactions in Q2 2018, up from 4.9% two years ago.
According to Mortgage Professionals Canada, since the 2018 stress test changes came into effect:
- 100,000 Canadians have been prevented from buying a home by the stress test.
- 18% of prospective buyers, who could currently afford their preferred purchase, would fail a stress test. Of those affected, the average adjustment needed is $28,750.
- Resale activity in Canada has fallen 12.5% compared to 2017 (down 16.5% from 2016).
- It’s estimated that these regulations will result in 200,000 fewer jobs being created over the next three years.
“…the cumulative impact of rising rates, a 2% or greater stress test, provincial government rules in Ontario and British Columbia, and further lending restrictions are negatively suppressing housing activity, not just in Toronto and Vancouver, but throughout the country,” said Paul Taylor, President and CEO of Mortgage Professionals Canada.
Mortgage Professionals Canada aren’t the only ones calling for reform. Requests for change have also come from real estate boards and the Canadian Home Builders Association (CHBA).
CHBA has said the rules are hitting millennials and struggling markets like Calgary particularly hard.
Brad Carr, Chief Executive Officer of Mattamy Homes Canada, told the Bloomberg News Toronto office that Mattamy would “continue to lobby for a pullback now on B-20.”
“That had a very targeted outcome,” Carr said. “It’s been achieved so it’s kind of overkill now.”
Not everyone agrees, however.
National Bank Economist Kyle Dahms told The Montreal Gazette, “If you increase the amortization period, you’ll have people taking on more debt and as a result you’ll increase prices. It’s hard to say if those are the right solutions.”
Dahms pointed out that “the data seems to be saying that there’s going to be an improvement in affordability in the short-term.”
In the past year since the new B-20 regulations were introduced, Canadian interest rates have also increased to 1.75%.
OSFI also weighed in on the importance of stress testing, in remarks by Assistant Superintendent Carolyn Rogers to the Economic Club of Canada on February 5: http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/sp-ds/Pages/cr20190205.aspx.
However, Dunning wrote in the 2018 Year End report from MPC that the lobbying isn’t necessarily about getting rid of the stress test entirely – it’s making it so that the real issues are addressed. These include:
- Using the correct interest rate (to take account of income growth and principal repayment).
- On renewal, borrowers should not be subject to stress tests, so long as they are current on their payments (to prevent “capture” by their current lenders).
- Also, related to a later discussion about private lending; federal policies have made it much more difficult for mortgage borrowers with small, alternative lenders to transfer to more liquid, lower-cost lenders. That needs to be fixed.
Source: The Annual State of the Residential Mortgage Market Year End 2018, Mortgage Professionals Canada
“One senior official in the federal system has been publicly saying that the stress tests are about what will happen if ‘Mrs. Jones loses her job’ – can she and her family continue to make their payments?” Dunning wrote.
“But there is absolutely nothing in the stress test that considers or tests the consequences of future job loss. Those comments are a disingenuous attempt to avoid discussion of the real, substantive issues related to the stress tests”
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