OSFI mortgage rule adjustments in the offing

Stricter rules to build upon OSFI's previous measures, including the mortgage stress test

OSFI mortgage rule adjustments in the offing

The Office of the Superintendent of Financial Institutions said that it might be rolling out stricter mortgage market regulations over the next few weeks.

This is in keeping with the agency’s mandate to deploy tools to enhance its vigilance over residential mortgage credit risk and reduce systemic fragility, OSFI said.

“We continuously refine and improve the capital requirements lenders must hold against residential mortgage credit risk. This includes the forthcoming domestic implementation of the Basel III capital standards in 2023,” OSFI said. “The package of reforms we proposed in our spring 2021 consultation, advances a more resilient and proportional bank regulatory regime in Canada that protects depositors, maintains market confidence and promotes continued financial stability, especially during times of stress.”

The Basel III standards aim to enhance credibility in the calculation of risk-weighted assets and improve the comparability and transparency of banks’ capital ratios, OSFI said. To achieve these objectives, OSFI will be revising Canada’s standardized approach and internal ratings based approach to credit risk, the operational risk framework, the leverage ratio framework, and the credit valuation adjustment requirements.

Read more: Can home buyers avoid the mortgage stress test?

“The results of our consultation and the final guidelines will be released in the coming weeks and they include reforms to requirements for residential lending exposures to address potential fragility and protect the financial system and taxpayers from severe financial stress,” OSFI said.

The agency said that these steps will build upon its previous actions, including the implementation of the mortgage stress test.

“Some observers have reasonably and responsibly pointed out that the strain of the minimum qualifying rate falls unevenly on new home buyers; that is fair – it adds to the already high burden of large down payments required by high home prices,” OSFI said. “But sacrificing this margin of safety is not the optimal solution. Particularly when there are near-term and long-term risks to consider when looking at Canada’s mortgage market.”

Chief among these prudential risks is the supply-demand imbalance in the housing sector, OSFI said.