Tag Archives: equity lending

The State of the Mortgage Market

 

Mortgage Professionals Canada released its marquis State of the Mortgage Market report last week.

While much of the media focus was on the report’s assessment of the mortgage stress test and its ramifications, the annual report was once again chock-full of enlightening statistics that help paint a picture of the current state of the mortgage market.

Author Will Dunning, Chief Economist of MPC, noted that consumer confidence is expected to dampen due to a “depressed” resale housing market and constrained house price growth.

“Housing markets across Canada were due to slow to some extent as a result of higher interest rates, but the reductions in activity that have occurred have been much larger than should have been expected, due to the mortgage stress tests, on top of prior policy changes that have constrained home buying,” he wrote.

We’ve extracted the most relevant findings below. (Data points of special interest appear in blue.)

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The Mortgage Market:

  • 6.03 million: The number of homeowners with mortgages (out of a total of 9.8 million homeowners in Canada)
  • 1.6 million: The number of Home Equity Line of Credit (HELOC) holders
  • 11%: The percentage drop in resale activity compared to 2017
    • Resale activity is down 15% from the all-time record set in 2016.

Mortgage Types and Amortization Periods

  • 68%: Percentage of mortgages in Canada that have fixed interest rates (The percentage is the same for mortgages taken out in 2018)
  • 27%: Percentage of mortgages that have variable or adjustable rates (30% for mortgages taken out in 2018)
  • 5%: Percentage that are a combination of fixed and variable, known as “hybrid” mortgages (2% for purchases in 2018)
  • 89%: Percentage of mortgages with an amortization period of 25 years or less (84% for homes purchased between 2015 and 2018)
  • 11%: Percentage with extended amortizations of more than 25 years (16% for recent purchases between 2015 and 2018)
  • 22.2 years: The average amortization period

Actions that Accelerate Repayment

  • ~33%: Percentage of mortgage holders who voluntarily take action to shorten their amortization periods (unchanged from recent years)
  • Among all mortgage holders:
    • 15% made a lump-sum payment (the average payment was $22,100)
    • 16% increased the amount of their payment (the average amount was $450 more a month)
    • 8% increased payment frequency

Mortgage Sources

  • 62%: Percentage of borrowers who took out a new mortgage during 2017 or 2018 who obtained the mortgage from a Canadian bank
  • 28%: Percentage of recent mortgages that were arranged by a mortgage broker
    • This is down substantially from 39% reported in the previous report in 2017 (and 43% in 2016; 42% in 2015). While Dunning says the latest 2018 figure could be the result of a statistical anomaly, he also surmises that broker share may in fact be down. “The lending environment has become more challenging for brokers, especially since changes to mortgage insurance regulations are making it much more difficult for small lenders to raise funds via mortgage-backed securities,” he wrote. “It also appears that some of the large banks are becoming less reliant on the broker channel.”
  • 5%: Percentage of recent borrowers who obtained their mortgage through a credit union (vs. 7% of all mortgages)

Interest Rates

  • 3.09%: The average mortgage interest rate in Canada
    • This is up from the 2.96% average recorded in 2017
  • 3.31%: The average interest rate for mortgages on homes purchased during 2018
  • 3.28%: The average rate for mortgages renewed in 2018
  • 68%: Of those who renewed in 2018, percentage who saw their interest rate rise
    • Among all borrowers who renewed in 2017, their rates dropped an average of 0.19%
  • 3.40%: The average actual rate for a 5-year fixed mortgage in 2018, about two percentage points lower than the posted rate, which averaged 5.26%

Mortgage Arrears

  • 0.24%: The current mortgage arrears rate in Canada (as of September 2018)
    • “The arrears rate… ( 1-in-424 borrowers)…is very low in historic terms,” Dunning wrote.

Equity

  • 74%: The average home equity of Canadian homeowners, as a percentage of home value
  • 4%: The percentage of mortgage-holders with less than 15% home equity.
  • 56%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
  • 58%: The average equity ratio for owners with both a mortgage and a HELOC
  • 80%: The equity ratio for those without a mortgage but with a HELOC
  • 92%: Percentage of homeowners who have 25% or more equity in their homes
  • 50%: Among recent buyers who bought their home from 2015 to 2018, the percentage with 25% or more equity in their homes

Equity Takeout

  • 10% (960,000): Percentage of homeowners who took equity out of their home in the past year (up slightly from 9% in 2017)
  • $74,000: The average amount of equity taken out (up substantially from $54,500 in 2017)
  • $72 billion: The total equity takeout over the past year (up from $47 billion in 2017)
  • $38 billion was via mortgages and $34 billion was via HELOCs (the HELOC portion is up from $17 billion in 2016/17)
  • Most common uses for the funds include:
    • $23.8 billion: For investments
    • $17 billion: For home renovation and repair
      • 55% of homeowners have done some kind of renovation at some point. 27% renovated between 2015 and 2018 with an average spend of $41,000.
    • $16.4 billion: For debt consolidation and repayment
    • $8.6 billion: For purchases
    • $6.2 billion): For “other” purposes
    • Equity takeout was most common among homeowners who purchased their home during 2000 to 2004

Sources of Down payments

  • 20%: The average down payment made by first-time buyers in recent years, as a percentage of home price
  • The top sources of these down payment funds for all first-time buyers:
    • 52%: Personal savings (vs. 45% for those who purchased between 2015 and 2019)
    • 20%: Funds from parents or other family members (vs. 16% over the last four years)
    • 19%: Loan from a financial institution
    • 9%: Withdrawal from RRSP (this has been trending down over the last decade)
  • 98 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
    • This is down from 105 weeks in 2017, but nearly double the figure from the 1990s.

Homeownership as “Forced Saving”

  • ~43%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
    • Down from ~50% in 2017, but up from 25% 10 years ago
    • Dunning notes that rapid repayment of principal means that “once the mortgage loan is made, risk diminishes rapidly”
    • He added that “net cost” of homeownership, “which should include interest costs, but not the principal repayment,” is low in historic terms when considering incomes and relative to the cost of renting equivalent accommodations. “This goes a long way to explaining the continued strength of housing activity in Canada, despite rapid growth of house prices,” Dunning writes.

A Falling Homeownership Rate

  • 67.8%: The homeownership rate in Canada in 2016 (the latest data available)
    • Down from 69% in 2011

Consumer Sentiment

  • 90%: The percentage of homeowners who are happy with their decision to buy a home
  • 7%: Of those who regret their decision to buy, the regret pertains to the particular property purchased
  • Just 4% regret their decision to buy in general

Outlook for the Mortgage Market

  • Data on housing starts suggests housing completions in 2019 will decrease slightly compared to 2018. “The data on housing starts tells us that housing completions in 2019 will be slightly lower than in 2018, but will still be at a level that results in a significant requirement for new financing,” Dunning writes.
  • “Another factor in the past has been that low interest rates mean that consumers pay less for interest and, therefore, are able to pay off principal more rapidly,” he adds. “Recent rises in interest rates are resulting in a slight reduction in the ability to make additional repayment efforts, and this will tend to fractionally raise the growth rate for outstanding mortgage principals.”
  • 3.5%: The current year-over-year rate of mortgage credit growth (as of September 2018)
    • Vs. an average rate of 7.3% per year over the past 12 years
    • Dunning expects outstanding mortgage credit to rise to $1.60 trillion by the end of 2019, from $1.55 trillion at the end of 2018

Source: Canadian Mortgage Trends – Steve Huebl Mortgage Industry Reports

Survey details: This report was compiled based on online responses compiled in November 2018 from 2,023 Canadians, including homeowners with mortgages, homeowners without mortgages, renters and those living with family.

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Why the wealthy are heavily focused on real estate

Getty Images/iStockphoto

Real estate averages 27 per cent of the investments of the ultra wealthy.

SHELDON KRALSTEIN/GETTY IMAGES/ISTOCKPHOTO

With markets roiling in 2016 and commodities lingering in low-price limbo, the holdings of high-net-worth investors can serve as indicators of where the rest of us might consider parking our nest eggs. It turns out that a good chunk of wealthy peoples’ investments is in real estate.

“Real estate is generally accepted as an alternative investment [by high-net-worth investors],” says Simon Jochlin, portfolio analytics associate at StennerZohny Investment Partners, part of Richardson GMP in Vancouver.

“It has the characteristics of an inflation hedge: yield, leverage and cap gains. It does well in upwardly trending markets, it pays you to wait during market corrections and typically it lags equities in market declines – it buys you time to assess the market.”

While the definition of high net worth can be flexible, in Canada and the United States it is generally considered to be someone who has at least $1-million in investable assets.

Thane Stenner, StennerZohny’s director of wealth management and portfolio manager, says a good way for determining what the wealthy do with their investments is to look at reports from Tiger 21, an ultra-high-net-worth peer-to-peer network for North American investors who have a minimum of $10-million to invest and want to manage their capital carefully.

Every quarter the network surveys its members, who number about 400 members across Canada and the United States. Some of the participants are billionaires, and most have a keen eye for business, Mr. Stenner says.

Though the Tiger 21’s Asset Allocation Report for the fourth quarter of 2015 found that its members were becoming cautious about Canadian real estate, they still on average put 27 per cent of their investment into real estate, the largest portion of their allocations. The next largest were public equities (23 per cent) and private equity (22 per cent) with smaller percentages going to hedge funds, fixed income, commodities, foreign currencies, cash and miscellaneous investments.

The real estate portion declined by 1 percentage point from the previous quarter. “While this is the lowest we have seen this year, it is at the same level observed in the fourth quarter of last year, which consequently was the high of 2014,” the report said.

“Real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment,” says Darren Coleman, senior vice-president and portfolio manager at Raymond James Ltd. in Toronto.

In his experience, real-estate investors, wealthy or otherwise, seem to behave with more logic than those who focus on markets. “For example, if you own a rental condo, and the one across the hall goes on sale for 30 per cent less than you think it’s worth, you wouldn’t automatically put yours on the market and sell, too, because you think there is a problem. Indeed, you may actually buy the other condo,” he says.

“And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”

Real estate also allows for considerable leverage, Mr. Coleman adds: “Banks love to lend against it. Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.”

At the same time, Mr. Jochlin says there are disadvantages to real estate that investors should beware of. Property is not particularly liquid, so if you need to sell you could be stuck for a while.

“It’s also sensitive to interest rates and risks from project development,” he says. There are administrative and maintenance costs, and an investor who buys commercial rental property will be exposed to the ups and downs of the entire economy – look at Calgary’s glut of unleased office space, for example.

“Timing is key. You do not want to chase the performance of a hot real estate market,” Mr. Jochlin says.

“Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”

As to how one goes about investing in real estate, Mr. Jochlin says it depends. The factors to consider include determining whether your investment objective is short- or longer-term, your liquidity requirements, your targeted return and whether you have any experience as a real estate manager.

“Sophisticated high-net-worth investors have a family office, and thus a specialist to manage their real estate assets,” he says.

How the rich buy real estate

The wealthy don’t necessarily buy and sell real estate the same way ordinary investors do, says Mr. Stenner. Ordinary people buy something and hope that when they sell it they’ll get a better price. Meanwhile, they like to do things like live on the property or rent it out, whether it is residential or commercial. If it is vacant land they might build something. Not always so for high-net-worth (HNW) investors, Mr. Stenner says. While everyone who invests hopes their investment will rise, Mr. Stenner says that in real estate, HNW people tend to fall into four categories:

Developers

“The real estate developer is looking for substantial returns from individual/basket real estate projects, typically 30-50 per cent IRRs [internal rates of return],” Mr. Stenner says. Developers are highly experienced investors who often take big risks, looking at a raw, undeveloped property and envisioning what it could look like with, say, a shopping mall or office tower. This requires lots of access to capital and a strong stomach, as there can be huge delays and setbacks.

Income Investors

“These HNW investors typically look for a stable, secure yield, tax-preferred in nature and structure if possible, with modest capital growth potential,” Mr. Stenner says. They take the same businesslike approach to property as the developer-types, but they’re more conservative, focusing on cash flow and long-term profit as opposed to getting money out after a development is complete. Often they’re building a legacy that they hope to pass down through generations. Mr. Stenner says lower net worth people can emulate income investors, for example, through REITs that are based on apartment buildings.

Opportunists

These HNW investors tend to look for more short-term higher risk, higher return “asymmetric” payoffs. Income from the investment or project is secondary — they’re in it for the quick buck. Often they see real estate in contrarian terms – investments to look at when the market is low and to sell on the way up, rather than hold. After 2008, many HNW investors bought up depressed-price housing in the U.S. Sunbelt. The sizzling Vancouver and Toronto markets might be the opposite of what they’re looking for right now; commercial property in the stagnant Canadian economy that can be purchased for low-trading loonies right now might be more interesting.

Lenders

This refers to HNW investors who lend capital to developers or opportunistic investors, for a fixed return, plus as much asset coverage from the property as possible. They fund mortgages, invest in real estate financing pools or put money into companies involved in this type of investment. “Because wealthier investors tend to have more liquidity, this also creates more optionality to deploy capital in various ways, while using the real estate as collateral or protection,” Mr. Stenner says.

Being a lender is a way to diversify. In addition, money lent in this way puts the lender high up in the creditor line if something goes wrong. If things go right, it generates income as the mortgage is paid back to the HNW investors or the funds they buy into.

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Canadians weighed down by lines of credit they don’t understand

3 million Canadians have home equity lines of credit, but half of us don’t know how they work

A survey suggests 35 per cent of Canadians have a home equity line of credit and 19 per cent said they’d borrowed more than they intended. (Canadian Press)

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Over the past 15 years, home equity lines of credit have emerged as the driver of mounting non-mortgage debt in Canada — yet many Canadians don’t understand what they’ve signed up for and are not moving to pay them off, a new survey suggests.

The more than three million Canadians holding a HELOC owed an average amount of $65,000, the study released Tuesday by the Financial Consumer Agency of Canada (FCAC) found.  About one quarter of HELOC holders had a balance of more than $150,000.

Yet 25 per cent of respondents said they only made the interest payments month to month.

Ipsos conducted the online survey of 4,800 Canadians, most of them homeowners, from June 5-28, 2018, on behalf FCAC, a federal agency that promotes financial education.

 

HELOCs are revolving credit products secured against the equity in a home. Banks can lend up to 65 per cent of the value of a home. Such lines of credit have been easy to get and banks offer them as a default credit option to anyone with home equity.

Of the homeowners surveyed, 54 per cent had a mortgage and 35 per cent had a HELOC.

Cheap source of credit

“You can’t deny the fact that for the consumer it is a cheap source of credit. However, you have to use it well,” said Michael Toope, communications strategist for FCAC.

The problem is that people borrow more than they intended and end up struggling with the debt, he said.

The survey suggested there is a lack of understanding among consumers of how these lines of credit work.

Only half of respondents knew basic facts about the terms of HELOCs, such as:

  • Banks can raise the rate of a HELOC at any time.
  • The bank can demand the balance of a HELOC at any time.
  • There are fees to transfer a HELOC to another institution.
  • The bank can raise or lower the credit limit on a HELOC.

Interest rates began climbing in 2017 and 2018 and are likely to rise further this year. That affects the interest cost of these loans and the overall cost of paying them off. Your HELOC is more expensive than a mortgage as the interest rate is higher.

“Each bank sets its own prime rate based on the Bank of Canada rate and HELOCs are usually set at prime plus a premium, but the bank can change that premium at their discretion,” Toope said.

For some, HELOCs are risky

Almost two-thirds of respondents said they used their HELOC only or mostly as intended, as a revolving line of credit.

Yet for some, HELOCs are a risky product that eats away at their ability to build wealth, Toope said.

The equity they build in their home as they pay off a mortgage is a way for Canadians to build wealth over time, but that won’t happen if they have a debt secured by the house.

“In the end, you’re losing the long-term value of the mortgage you have in your home,” Toope said.

 

In a 2017 report, FCAC found home equity lines of credit may be putting some Canadians at risk of over-borrowing.

That report found most consumers do not repay their HELOC in full until they sell their home.

About 19 per cent of respondents to the new survey said they’d borrowed more than they intended.

How much do I owe?

And 18 per cent said they did not know the full balance on their HELOC.

Among those who paid only the interest on the debt, the majority were young Canadians, aged 25 to 34. That’s not unusual, as people at that stage of life tend to have lower incomes and may be burdened with student debt as well as a mortgage, but it still indicates a lack of understanding, Toope said.

About half of respondents said they used their HELOC for a renovation, but another 22 per cent consolidated other debt. (Elise Amendola/Associated Press)

The survey found 62 per cent of those who paid only the interest expected to repay their HELOC in full within five years, a plan Toope called a “mathematical impossibility.”

 

Half of Canadians borrowed against their HELOCs for renovations, but another 22 per cent dipped into it for debt consolidation, with vehicle purchases and daily expenses also common uses, according to the survey.

“People should know what they are going to use it for and how to pay it down, so it doesn’t become an eternal revolving debt,” Toope said.

Source: CBC.ca – Susan Noakes · CBC News · 

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Second mortgages in Canada: 6 reasons you may need one

We’re living in a world where certain financial obligations must be settled on time. It could be college tuition, renovation costs, emergency repair bills, debt consolidation or even paying for a wedding. Whatever it is, it can’t wait, and it needs to be resolved as soon as possible.

As the saying goes, time waits for no one. And, neither do the bills lurking around the corner.

So what are your options? You may think of getting another credit card, but you’re past the limit or have a poor credit score. Traditional lenders have turned you down too, and you couldn’t be more disappointed.

However, if you’re a Canadian currently paying for a primary mortgage, you could have an ace in the hole to sort out your financial hurdles. This is where a second mortgage comes in.

What are second mortgages?

A second mortgage is a secondary loan held on top of your current mortgage. A different mortgage lender will typically provide this product. It’s important to note that second mortgages have their own rates and terms, and is paid independently of your primary mortgage.

In layman’s terms, second mortgages are loans that are secured by your home equity. Usually, you can acquire up to 80 percent of your home equity through a second mortgage and if you’re in a major city, up to a maximum of 85 percent.

In contrast to the primary mortgage, a second mortgage has its own terms and conditions. Hence, the second mortgage is paid separately with different rates from the first mortgage. Nonetheless, in case of a default, the second mortgage will only be repaid after the primary mortgage has been sorted out.

So what are some of the reasons you may need a second mortgage?

1. You want to pay off high-interest consumer debt

A recent report released by Statistics Canada shows that for every dollar of disposable income, Canadians owe $1.68 in credit market debt. In fact, Statistics Canada estimates that the accumulated consumer credit is $627.5 billion; not including mortgages. If you’re an average working Canadian, it is very likely that you have consumer debt.

Keep in mind that the average credit card interest rate in Canada is 19.99 percent. Of course, the longer you delay the payment, the more you keep paying higher interest rates. No wonder, most Canadians prefer low-interest credit cards.

However, there is another option. Even though the interest rate of a second mortgage is higher than the primary mortgage, it is lower than the accrued interest on credit cards and personal loans. A minimum payment of a second mortgage can be much lower than that of a credit, creating better cash flow for the borrower.

That means you can acquire a second mortgage to pay off high-interest consumer debt and save a lot of money in the long-run.

2. You have a poor credit score

According to the Huffington Post, the average Canadian credit score is 600 points. If you’re a Canadian, anything below 650 points is considered a bad credit score and you will probably find it challenging to obtain new credit.

Maybe it was that single loan that you defaulted for a month or that credit card charge-off—as long as you have a poor credit score, you will likely be the last in line when applying for loans.

The good news is that you can get a second mortgage even with a poor credit score. The lender can overlook the poor credit score based on your consistency on paying the primary mortgage and if you have a lot of home equity, albeit the interest rate will be higher due to the risk involved.

If you can pay off bad credit loans and defaulted debts by leveraging a second mortgage, you can start to repair your credit.

3. You’ve been turned down by traditional lenders

You never know when mortgage rules will change. Since the recent strict new rules on mortgage lending, more Canadians have been turned down by traditional lenders. In fact, mortgage brokers reckon that the rejection rate has increased by 20 percent. Even those who were approved for a mortgage before 2018 can have their mortgage renewal or refinance request turned down due to the stress test.

So what should you do if you’ve been turned down by traditional lenders? Simple; apply for second mortgages offered by private lenders. Unlike traditional banks, private lenders don’t have their hands tied down by the new OSFI rules.

4. You need funds quickly

There are many reasons why you would need quick funds. Perhaps you’ve experienced an unexpected tragedy or looking for a new job, and you need quick cash until you’re back on your feet.

You could go for an unsecured loan, but you don’t want to end up paying high-interest rates. Payday loans are even worse, the fees and interest rates are exaggerated. Even if you did get a payday loan, the credit limit is $1500, and you probably need more than that.

What about RRSP withdrawal? Well, you will get penalty taxes for making that early withdrawal. For instance, if you withdraw $30,000, you will only receive $21,000 after the bank remits $9000, or 30 percent, to the government.

On the other hand, second mortgages will give you liquidity to your home equity without too much interest rates or taxes especially if the amortization is short-term.

5. You want to avoid high mortgage penalties

Prepaying the remaining balance of a closed low fixed rate mortgage loan can be expensive for Canadians. Most lenders will impose a breakage fee if you decide to walk out of the contract before the term expires. Sometimes, the mortgage lenders can overestimate the liability and proceed to double or triple the penalties, leaving you in a tight spot.

Nevertheless, instead of pre-paying the first mortgage early and selling the house to gain funds for investment capital or debt relief, you could apply for a second mortgage to access the funds and wait a little longer. A short-term second mortgage would prove to be cheaper than paying the high mortgage penalties.

6. You want to outsmart PMI

Canadians who can’t afford 20 percent down payment of the property’s value when applying for a mortgage are required to pay private mortgage insurance (PMI). There are also borrowers who don’t want to give out the 20 percent down payment so they can have funds for renovation and repairs. Even so, PMI premium rates aren’t cheap especially if you’re putting up 5% to 9.99% down payment.

But did you know taking a second mortgage could lower the overall mortgage expenses than going the PMI route? Despite second mortgages having higher annual payments than first mortgages, they cost less than PMI.

Consult a professional to find a convenient second mortgage

As much as applying for a second mortgage seems like a straightforward process, finding a second mortgage without professional assistance is like climbing a slippery mountain without a harness.

Every situation is different, and there are always details in the contracts that you need to understand clearly.

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OSFI to take new measures to address equity-based mortgage loans

The federal regulator plans to address uninsured mortgages granted only on the equity of the property and loans where the lender didn’t apply other ‘prudent underwriting principles’

OSFI is taking measures to tighten the scrutiny of mortgage lending practices.THE CANADIAN PRESS/Sean Kilpatrick

A federal regulator says it will have to take further action to address mortgage approvals by Canadian banks that still depend too much on the amount of equity in a home, and not enough on whether loans can actually be paid back.

The Office of the Superintendent of Financial Institutions telegraphed the move in an update released Monday on the effectiveness of new underwriting rules it announced last year. Those rules included a new “stress test” for uninsured mortgages, where a borrower makes a down payment of 20 per cent or more.

According to OSFI’s October newsletter, the tweaks were needed after the regulator identified possible trouble spots caused by high levels of household debt and “imbalances” in some real estate markets that could have added more risk for banks.

There have been improvements in the quality of new mortgage loans since the revised B-20 guidelines came into effect this past January, OSFI says, “including higher average credit scores and lower average loan-to-value at mortgage origination.”

But even though OSFI said the new rules “are having the desired effect of helping to keep Canada’s financial system strong and resilient,” the regulator claims more work is needed.

“Although reduced, there continues to be evidence of mortgage approvals that over rely on the equity in the property (at the expense of assessing the borrower’s ability to repay the loan),” the newsletter said. “OSFI will be taking steps to ensure this sort of equity lending ceases.”

OSFI spokeswoman Annik Faucher told the Financial Post in an email that the regulator was referring to uninsured mortgages that were granted based only on the equity of the property — the difference between a property’s value and the amount remaining on a borrower’s mortgage for the property — as well as loans where the lender did not necessarily apply the other “prudent underwriting principles” laid out in the B-20 guideline, such as those aimed at proper documentation of income.

“Sound underwriting helps protect lenders and borrowers and supports financial system resilience,” Faucher said. “Having a larger amount of equity in a property does not mean sound underwriting practices and borrower due diligence do not apply.”

She added that OSFI “has a number of tools in its supervisory toolkit, and when we identify potential issues, we intervene and require financial institutions to implement remedial measures that are commensurate to the risk profile of the institution.”

OSFI said in its October newsletter that there are signs “that fewer mortgages are being approved for highly indebted or over-leveraged individuals.” According to the regulator, the amount of uninsured mortgage originations with loan amounts greater than 4.5 times the borrower’s income has dropped from 20 per cent from April to July of 2017 to 14 per cent for the same period of 2018.

In general, the Canadian housing market has cooled following intervention by regulators and various governments. But OSFI also said it realizes that its tighter underwriting rules might cause some would-be homeowners to use less-than-truthful means to obtain mortgages.

“OSFI recognizes that tightened underwriting standards may increase the incentive for some borrowers to misrepresent their income, while it has also become easier to create authentic-looking false documents,” the newsletter said. “Given that the revised B-20 calls for more consistent application of income verification processes, financial institutions need to be even more vigilant in their efforts to detect and prevent income misrepresentation. This is particularly important for financial institutions that depend on third-party distribution channels.”

Source: Financial Post – Geoff Zochodne October 9, 2018

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