Credit risk

Residential mortgage credit risk has increased only “modestly”, says OSFI


The head of the agency overseeing Canada’s federally regulated lenders said Tuesday that residential mortgage credit risk had increased “only modestly.”

Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), made the comment during a virtual speech to financial analysts in Vancouver.

This is against the backdrop of “very large” increases in home prices, which rose 23% in October from a year ago (on a seasonally adjusted basis) to an average price of $ 716,585. In some markets, house prices have increased by more than 30%. At the same time, the supply of housing has fallen to record levels, with just 1.9 months of inventory on hand, compared to a long-term average of around five months.

Overall, residential mortgage credit growth is increasing at a rate of about 10% per year.

“While the word ‘exuberant’ has characterized the housing markets in many Canadian towns and cities since the fall of 2020, we at OSFI believe residential mortgage credit risk has only increased modestly,” said stated Routledge in his Remarks. “Despite this exuberance and increasing levels of mortgage credit, Canadians are spending less income on debt service payments such as mortgage payments, auto loans and credit card payments.”

Routledge added that OSFI has used several “prudential tools to increase the safety margin” in the residential mortgage lending market. This includes stress testing borrowers at a higher interest rate (currently 5.25%), as well as scrutinizing property appraisals and setting “dynamic” loan-to-value limits that better reflect the risk of specific properties and markets.

“Nonetheless, we see the current imbalance between demand and supply of housing as a significant prudential risk, and all players in the Canadian housing system must take action if we are to reduce the risk,” he said. . “The greatest prudential risk in the Canadian financial system is the imbalance between supply and demand for housing.

He noted that intergovernmental efforts are needed to meet the demand for and supply of “mismatch” housing in Canada.

Commenting on the role of rate product selection in overall risk assessment, Routledge noted that variable rate mortgages are “more popular than ever” and now account for more than half (51%) of all new. residential mortgages in recent months.

“Because variable mortgage rates are lower than fixed mortgage rates, new home buyers can accept the high interest rate risk that comes with variable rate mortgages in order to become homeowners,” he said.

OSFI re-evaluable HELOCs

Routledge added that non-traditional home-backed loan products, such as Combined-HELOC Mortgage Plans (“CLP”), could also fuel an increase in home valuations, as they often include a reducible credit component that increases as principal payments are made.

“CLPs are an area of ​​interest to OSFI as they represent a significant portion of the mortgage debt of uninsured Canadian households,” he said. “The use of HELOCs and non-traditional home-backed products can result in larger and more persistent outstanding principal balances, thereby increasing the risk of loss for lenders. “

He added that these products can make it more difficult for lenders and regulators to quickly assess credit risk exposure during times of stress.

“When OSFI sees rapid revenue growth, it’s up to us to understand why and assess the risks that growth may present to institutions and the economy,” he said. “In addition, as product structures evolve, it is possible that these products will not meet our underwriting expectations. We asked lenders to take a close look at the risks associated with their own combination loans and HELOC mortgage structures.

BoC says high household debt is a concern

In a separate speech On Tuesday, Bank of Canada Deputy Governor Paul Beaudry said the growing prevalence of heavily indebted households is a growing concern for the Bank.

“… the upward trend that we have observed for two decades in the share of households considered to be very indebted – that is to say with a debt greater than three and a half times their income – has stopped” , he said in prepared remarks at an Ontario Securities Commission Conference. In 2019, nearly one in six households with any debt was considered to be heavily in debt.

“From our analysis, we found that the overall prevalence of heavily indebted households likely improved in the first year of the pandemic,” Beaudry said. “But we have also found that the deterioration in the quality of new mortgages in recent quarters is now probably the main driver of household debt. By the end of 2021, the share of heavily indebted households will likely have more than reversed its initial improvement and surpassed its 2019 peak. ”