Grassroots Lobby For Sensible Mortgage Underwriting – “As a horrified observer of the effects of excessively lax lending in Vancouver I want to draw attention to the 1st May 2012 deadline for commenting on the OSFI Guideline for Residential Mortgage Underwriting Practices and Procedures.”

AN writes by e-mail, 26 Apr 2012:

“I want to draw your readers’ attention to the May 1st, 2012 deadline for commenting on the Office of the Supervisor of Financial Institution’s Draft Guideline for Residential Mortgage Underwriting Practices and Procedures found at:
OSFI – Draft Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures

As a horrified observer of the effects of excessively lax lending in Vancouver, I have summarized the five principles in the Draft Guideline for federally regulated financial institutions as follows:

Principle 1 – Follow an institutional Residential Mortgage Underwriting Policy
Principle 2 – Verify identity and credit history of borrowers
Principle 3 – Verify income of borrowers
Principle 4 – Appraise real estate properly
Principle 5 – Don’t substitute mortgage insurance for sound underwriting practices
Reading between the lines, it basically says: “Knock it off with the cash-back mortgages”.

These Principles are hyper-obvious and sensible. However, I don’t expect that Canadian lenders will agree. They will probably spend millions of dollars on lawyers and lobbyists, both before and after the deadline, in a concerted effort to water down guidance from the OSFI.

I think there should be a grassroots lobby in favour of more sensible mortgage underwriting. I would like to urge your readers to craft an email in support of the Draft Guideline and send it to OSFI before the deadline on Tuesday, May 1st, 2012.

The email address for feedback to OSFI is:
B20@osfi-bsif.gc.ca

Related documents:

Draft Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures (pdf)

Accompanying letter (pdf)

News Release (pdf)

We, too, have been struck by the deleterious effects of “excessively lax lending” in our city.
The described tightening of lending criteria would be very sensible.
If you feel the same way, write an e-mail to the OSFI.
– vreaa

35 responses to “Grassroots Lobby For Sensible Mortgage Underwriting – “As a horrified observer of the effects of excessively lax lending in Vancouver I want to draw attention to the 1st May 2012 deadline for commenting on the OSFI Guideline for Residential Mortgage Underwriting Practices and Procedures.”

  1. Renters Revenge

    Regulatory oversight won’t fix the problem of lax lending. The bank lobby is too powerful and they already have their tentacles all over the Canadian government.
    If you want to fix excessively lax lending, remove market interference in the form of taxpayer backstops. And replace income tax with a Land Value Tax.

  2. Here it is… Flaherty cites Toronto condos as need for CMHC oversight

    Video: http://toronto.ctv.ca/servlet/an/local/CTVNews/20120426/mortgage-cmhc-bill-fed-toronto-condo-120426/20120426/?hub=TorontoNewHome&cid=top

    “Flaherty said the booming condo markets in Canada’s major cities were at the core of the decision.”

    Why would F link Vancouver and Toronto condos to CMHC? Because he knows the condo market is about to collapse. Bailout now imminent.

  3. LandlordRescue.ca

    I think CMHC should have a deductible just like any other insurance. In the case of my car it’s $1000. This is standard practice in any insurance business and prevents malfeasance by the beneficiary. The idea of CMHC is to reduce risk for lenders not remove every iota of risk, Certainly the amount of the deductible should sting a little?

    They’ve created a situation ripe for abuse where the person who benefits financially from the insurance is the one who has the choice to increase risk and takes any profits if there are any.

    There should also be a clause in the insurance if retroactively it is found to be fraudulent the issuer is on the hook.

    • It costs at least 20k in the u.s. for a bank to process a foreclosure. The banks have that hanging over there head for every bad loan they pawned off on CMHC. Not that hanging more over it isn’t worthwhile . . .

    • Agreed. This is a good way to tighten up lending standards without raising the downpayment for everybody.

  4. Thanks so much, AN and VREAA host, for this information. I will definitely send an email with my two cents’ worth to the OSFI.

    Anyone else reading this blog who is involved in any kind of letter-writing or petition campaign for constructive change, I would like to suggest that you don’t hesitate to post here so readers can join you if they wish.

    I have to add: as someone who’s been active in trying to change some of the catastrophic things happening in Vancouver wrote me recently (I’ll paraphrase), “Interesting how nothing’s real till it’s happening in Toronto.”

    • “Interesting how nothing’s real till it’s happening in Toronto”

      Well can you blame them. Vancouver has seen a relatively meagre influence change in the past 20 years, with the advent of improved communications and data systems it’s possible to centralize office duties and decisions in Ontario and Quebec. The rise of the west is touted more for jingoist pursuits and a long-standing inferiority complex.

      Most of the money and influence is with the guys “back east” and I doubt that will change any time soon. Any look at GDP figures should be indication of that.

      • Yep, I can blame them! When, as Gord pointed out in his letter to Flaherty, there are no houses available in a lot of the Lower Mainland of Vancouver for less than half a million dollars, and Vancouver is (am I correct?) the third largest city in the country, I’d say that ought to register as news with *somebody* in Ottawa, or Toronto, or wherever the movers and shakers are gathered.

      • pb solved … citizens of the maple kingdom respond strongly to symbolic displays

        but seriously, if a lot of time and effort is to be expended, get to the heart of it and frontrun – push risk the back onto the lenders -> privatize cmhc BEFORE they need to tap the public purse. this other stuff won’t dial up the pucker factor much

      • I know people are on about privatizing CMHC and all that. But I’m sceptical that privatizing CMHC, and providing a government guarantee to some degree or no, could save the bubble. More strict underwriting perhaps but PMIs in Australia (and foreign ownership restrictions) hardly damped prices as high as Canada’s, if not worse.

        Now Genworth is hitting a snag down under and the industry is screaming to the moon for rate cuts to help a struggling housing market.

        The problem of the Canadian housing bubble extends well beyond CMHC.

      • underwriting stds? it sort of moot because the ceiling is what counts now, anyway. lobby to keep the ceiling from going up or lobby to reduce it. besides why are you having to the lender’s job of assessing risk? KEY is putting the risk back to the lender – else it will never price correctly. why is the public insuring lender contracts at all? what’s the mission? if helping underpriviledged is the goal, just give them the money/aid/time/etc. – make it transparent. one’s own money, no right to use another’s. the ability to spend other people’s money is another reason things are all screwed.
        the bubble? what’s done is done. iceland, us, eu, ch … choose your denouement.

      • chubster, what I am calling out is that an intent focus on CMHC is playing the puck. Banks have sneaky ways of hedging risk on low ratio loans that leave a giant matzo ball for a country if things head south. Careful underwriting of MI is a component of this, the risks associated with a once-in-a-century housing bubble are difficult to provision for because the amounts of capital required are so giant not even MIs will do it without some government backing, or by limiting the losses to the first 30% or whatever with the lenders/securityholders taking the rest up the rear end like they do in the US.

        CMHC’s tinpot risk analysis needs cleaning up, needs more transparency, and should be cast into the marketplace to keep it honest, but even with that there’s the problem of lenders finding ways to lend into asset bubbles with “decent” hedges. That’s where the government needs to step in and require exorbitant capital buffers on any loan made in a market that has prices detached from incomes. Draconian, yes perhaps, but oversight must be ubiquitous and not just at the high ratio end the CMHC controls.

      • @j. we are not in disagreement on objectives but perhaps tactics. i am not a specialist in your field and am surely missing the finer pts of your argument. my pt is if you cut the MIs loose (no govt guarantees), the risk they become insolvent must be borne by the lenders. they will tighten stds and/or raise prices; or else they risk insolvency themselves. then if the lenders become insolvent, let them go down – again no govt guarantees. behaviors are reformed and offending elements are removed. mistakes must be punished or it doesn’t work. bailouts and guarantees subvert this critically important principle.

  5. Basement Suite

    Principal 6 – Set mortgage rates above 3%

    • Why should they?

      • Basement Suite

        If the point is to lower housing costs, then that should be their first principle. Couldn’t figure that one out on your own?

    • “lower housing costs”

      what is their motivation to do this? I’m sure most policy-makers own their home.
      You have a pretty skewed opinion of your personal importance to think the government will set the bar low enough for you to tip toe over it.

      • Basement Suite

        I don’t have a skewed opinion of my value to the governemnt. I know full well they don’t give a shit about renters like me, isn’t it obvious. Principle 6 is what SHOULD be done, not what wil lbe done.

        You however F1 are the biggest self-important pompous asshole on this blog. Why is it when I mention interest rates, so many of you assholes come slithering out from under rocks to bitch and attack? Terrified aren’t you of the crash that would befall you? You would be RUINED if rates rose. IF that ever happens (and I’m not holding my breath), I will have a hearty laugh at your demise.

  6. P5 is key. If the risk is simply passed to another party, there is no incentive to assess it properly (P1-P4).

  7. For what it’s worth, here’s the letter that I sent to OSFI shortly after they released the draft guideline. It’s a bit long & wordy, but if anybody wants to copy it, or use it as a base for your own letter, you’re more than welcome to do so.

    ****

    Response to OSFI Draft Guideline B-20 Residential Mortgage Underwriting Practices and Procedures

    Income Verification, particularly for self-employed people, or stated-income loans: the proposed guidelines are good, but I would recommend that borrowers should be required to show consistent income over multiple years. This may be difficult for recent immigrants, but it would help to prevent numerous types of fraud committed against the government. There have been numerous instances of recent immigrants buying expensive homes, but the bread-winner remains offshore to earn a higher wage and evade Canadian taxes, while the family in Canada claims low-income family benefits. If the CRA discovers such a situation, the family’s assets could be seized and sold, presenting a traumatic situation for the family and adding to the FRFI’s risks. An FRFI’s careful evaluation of income sources may prevent the family from ending up in such a traumatic situation.
    Guarantors & Co-signors: the proposed guidelines are good.
    Debt Service Coverage: the proposed guidelines are good, but I think the guidelines should go further for the interest rate stress test, given that some banks are offering exceptionally-low 5-year fixed mortgage rates. In order to properly stress-test the borrower’s ability to service their debts in a rising-interest-rate environment, borrowers should be assessed against the 5-year posted rate, rather than the 5-year discount rate offered by the FRFI. This will ensure the borrower is able to continue to meet their payment obligations if interest rates are higher in 5 years, when they renew their mortgage. This rule would also prevent lenders from making excessive loans that a borrower will have difficulty paying.
    Home insurance to be reflected in total debt service (TDS) calculations: this is good; all reasonable costs of ownership need to be included in the TDS ratio.
    HELOC Amortization: this is good. The 5-year conversion and/or amortization requirements will ensure that borrowers won’t be able to continuously fund their lifestyles (and mortgage payments) from their home equity. Further, I would add that the FRFI needs to evaluate a borrower’s ability to service HELOC debt & make principal payments at the time the HELOC is granted; I know a few people who make their mortgage payments and finance their lifestyles from their home equity. For one such person, any fall in property values will throw them into bankruptcy; housing has become a one-way bet for them, as they have nothing to lose.
    HELOC limit to a maximum of 65% loan-to-value: this is good. This will help prevent people from continuing to borrow against their house to fund their lifestyles or to fund other investments. For many/most Canadians, their house is their retirement plan; this will help enforce that plan, and ensure that their dream of retirement isn’t turned into bankruptcy in case the housing market was to drop, or in case they were to recklessly draw funds against their house. I hope, however, that this LTV requirement will not be retroactively imposed on borrowers with HELOCs greater than 65%; such a clawback might be traumatic to the borrower.
    Property Appraisals: this is good. In addition, I would recommend comparing the payment to how much the property would be able to be rented out for, in case the borrower runs into difficulties and chooses to rent the property.
    LTV Ratios – down payment & “cash back” mortgages: I believe eliminating the ability to use a “cash back” mortgage product for down payment purposes should be elimited, and this requirement should be strengthened further, such that any “cash back” offered by a lender should be deducted from the down payment provided by a borrower. This would preclude a borrower from borrowing against a Mastercard, or using family money that has been “gifted” with the (undocumented) expectation of immediate repayment as part of the down payment. Prudent lending should require lenders to ensure that every borrower has some “skin in the game”. A down payment gifted from a lender (in exchange for the borrower agreeing to a higher interest rate) is not skin-in-the-game. A borrower who hasn’t shown an ability to save money is a poor credit risk—especially if the housing market were to falter.
    LTV Ratios – down payment equity on high-ratio mortgages: a high-ratio borrower purchasing a home should have sufficient equity so that, if they were to break the mortgage the next month, they could sell without being “underwater”. While mortgage insurance should cover the lender’s losses in such a situation, it would be traumatic to the borrower, and particularly since the mortgage insurer could continue to pursue the borrower for the deficiency amount. A borrower shouldn’t be able to roll the cost of the home-purchase transaction into the mortgage; all costs related to the transaction must be part of the closing costs —mortgage insurance needs to be paid up-front; applicable property purchase/transfer taxes must be paid up-front; GST/HST on new homes must be paid up-front, etc… And after that, the borrower should have a minimum regulated amount of equity, which should always be greater than the sum of the following: mortgage insurance premiums, mortgage early-termination penalties, anticipated Realtor fees (on sale of property), anticipated lawyer fees (on sale of property), moving costs, and any property transfer taxes payable by the borrower that may apply at the time of sale.
    LTV Recalculation at renewal & other intervals: good. I presume this would only apply in the case of uninsured mortgages. For uninsured mortgages, this is a good plan, provided that lenders follow this guideline, as it might require lenders to obtain mortgage insurance if the LTV has slipped, which would help to prevent a FRFI’s loss of capital in the event that prices decline further. In the event that the LTV has slipped into a negative-equity situation, I’m concerned that there could be a destabilizing effect—if the borrower has a good record of making payments to the FRFI, they should not be required to immediately bring themselves back to positive equity, but should be assessed based on their ability to pay. Perhaps, if acceptable to the FRFI, allow FRFIs to offer such borrowers an unsecured line of credit (equal to the ‘underwater’ deficiency), such that the mortgage is insurable?
    More scrutiny (by FRFI) for 3rd party mortgage originations: This is good; if a FRFI is buying mortgages from another lender, those mortgages need to be at least as strong as the FRFI’s standards.
    Disclosure requirements: from my perspective as an individual investor, this information would be very helpful to have to help evaluate a FRFI’s health, prior to making investments in a FRFI.

    Additional notes/commentary:
    Foreign borrowers, or new residents/immigrants should have their sources of income and down payment funds checked to ensure stability, legality, and appropriate reporting with CRA.
    I think the proposed regulations are all reasonable and prudent, and reflect good lending practices, especially for FRFI. I’m sure that lenders and mortgage brokers will worry that implementation of guidelines such as those proposed by OSFI will “break” the real estate market, to which I need to rhetorically ask: “does this mean that outstanding mortgages were made without such prudence or due diligence, and does this mean our real estate market is in a bubble?”
    As has been seen in the USA, those borrowers with the least skin in the game (ie, those with nothing to lose) have been the most likely to default on their obligations; it turned out their obligations were a one-way bet. Those buyers with nothing were gambling on rising prices; if the market falls, they haven’t lost anything; if the market rises, they could get rich quick. Borrowers with a proven track record of savings (ie, ability to save a good down payment) have been the least-likely to default, as they are less likely to find themselves underwater, and are more likely to maintain their payments without excess stress even if they are underwater.
    If poor loans have been made in Canada, sooner or later they will rear their heads. I’d argue that it’s better for our economy for any pain/adjustment to occur now, and then allow the resumption of a normal economy, rather than the Japanese or USA situation. Japan has been trying to recreate a bubble economy by allowing losses to be hidden, prolonging the weak economy for a generation; for over 20 years the Japanese have been worrying about the “brutal” state of their economy. The US has been in a similar situation for 6 years and counting. For both Japan and the USA, their zombie economies will continue to muddle along until such time as the banks’ and corporations’ losses are recognized and written down. I hope we won’t make the same mistakes here in Canada.

    Anecdote:
    I have a friend who wanted to buy an apartment in Vancouver in 2007. Her mortgage broker recommended a price range, but she couldn’t find anything of interest; she wanted an apartment a little above the broker’s price range. The broker worked the numbers (she was a low-ratio borrower), and got her into a 40-year amortization mortgage with TD. After buying, the real cost of owning reared its ugly head—in order to make her mortgage payments, car payments, strata fees, home insurance, property taxes, and the occasional special assessment from the strata corporation, she’s been working three jobs. One job is full-time, and two are part-time. Had her ability to pay been assessed against the 5-year posted rate (rather than the lower discount rate), or if her GDS/TDS had included all her costs and realistic home ownership costs, she might have been denied the reckless mortgage that she wanted. Yes, she’s responsible for her financial situation, but her condo has fallen below her purchase value, and her 40-year amortization isn’t earning her much equity; even though she had a low-ratio mortgage, it has now fallen into high-ratio territory, and she’s at risk of going underwater. She’s currently living hand-to-mouth, unable to save any money. If her health were to falter, she’d be unable to work all three jobs, in which case she’d be likely to default resulting in losses to TD.
    ****

    • Thanks very much, M-, this is very helpful.

    • all good recommendations and insightful commentary. But why do they care about your opinion? Who are you? i.e when I write a letter I ensure that I put my job title, experience, education, etc. otherwise the receiver would simply view me as some flake witha personal agenda

      • simply view me as some flake witha personal agenda – f1 self assessment … SUPERB

      • If nothing else, I signed off with my professional credentials. But as far as the commentary goes, they did ask for public commentary, and ANY member of the public can have their feedback taken into account.

        For what it’s worth, I work for a quasi-governmental agency. Management pays attention to all feedback and takes it into account, even from crazies with personal agendas, because they’ve often got good intentions, even if they’re gone off the deep end…

      • We’d all be better off concentrating on the content of critiques and less on the “credentials” of those who hold the opinions. History is packed full of examples of times that “the experts” got it wrong, often times tragically so.

      • vreaa,
        expecting change by creating this site is a bit misguided.
        I think your efforts would be put to better use by way of petitioning
        our government.
        Of course this means you’ll have to narrow the problem to one reason. If you needed to pick one reason to communicate in a petition what would it be? You know mine already.

  8. Garth Turner’s post tonite, like him or not, was great bear reading. It ended thusly:

    Nobody is more responsible for houses in Toronto, Vancouver, Saskatoon, Calgary or Winnipeg that people can no longer afford, than F. He’s the architect of the family debt he decries. Now that detached homes cost a million, while incomes trail inflation, he lectures us. How weak and disappointing.

    • Gotta disagree with you, Gord. The Conservative mantra is in much part about personal responsibility. His actions of allowing people to buy enough rope to hang themselves fits in with this world view, and the base of his party laps it up. I like to think he knew exactly what he was doing, for better or for worse.

  9. Good points, Dr. J. The second paragraph of my post are Garth’s words though, not mine. Just FYI.

  10. From time to time, people post letters they have written to various government officials on the housing situation, as well as the responses they have received.

    I just want to let everyone know that contributing to government consultations has MUCH more impact that writing letters. Your words will be included in material that is reviewed by those with the power and mandate to make decisions. Letters to ministers and such do not receive the same treatment (I am someone with informed insight on this process).

    If you care, please take the time to contribute your thoughts to the consultation process.

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