A federal banking regulator defended on Tuesday a stress test for uninsured mortgages that has been criticized for making it harder than it should be for some Canadians to own a home.
“The stress test is, quite simply, a safety buffer that ensures a borrower doesn’t stretch their borrowing capacity to its maximum, and leave no room to absorb unforeseen events,” said Carolyn Rogers, assistant superintendent at the Office of the Superintendent of Financial Institutions.
“This is simply prudent. It’s prudent for the bank and it’s prudent for the borrower.”
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In her lunchtime speech at a downtown Toronto hotel, Rogers worked to rebut concerns about the measure, which came into effect in January 2018 for federally regulated financial institutions.
Under the stress test, borrowers making a down payment of more than 20 per cent need to qualify at whichever is higher: the Bank of Canada’s five-year benchmark rate or the rate that’s on their contract plus 200 basis points.
The test was part of the revisions to a guideline known as B-20, one of many guidelines and advisories that OSFI has for mortgage lenders, Rogers said. B-20, however, is the only guideline with its own hashtag, she noted, underscoring how much attention it has gotten.
Rogers said in her address to the Economic Club of Canada that the most common criticism of B-20 was that a nationwide policy had been implemented to try to solve skyrocketing home prices in Toronto and Vancouver.
This assumed that the new rules were targeted at those prices, but they were actually aimed at mortgage underwriting standards, Rogers said.
“And sound underwriting looks the same no matter what city you live in,” she added.
While OSFI only oversees federally regulated financial institutions, concerns have been raised about borrowers turning to unregulated lenders to avoid the stress test.
The Bank of Canada, for instance, noted in November that private lenders had seen their share of the Greater Toronto Area’s mortgage market rise in the wake of the stress test’s implementation, to nearly nine per cent in the second quarter of 2018 from about six per cent a year prior.
Rogers said this was a concern, albeit the type of one that all regulators have to reckon with, and one that the real estate industry is well placed to give a warning about to borrowers.
“But it cannot be a reason not to act,” she said. “It can’t prevent us from doing our job.”
The stress test, however, has been a target of criticism from both industry and politicians amid higher interest rates and a cooler Canadian housing market.
“The government, through the stress test, changes to the mortgage rules, carbon taxes and higher daily costs of living, is suppressing the ability of people to meet the day-to-day needs and pay for their needs,” said Conservative MP Tom Kmiec in a speech in the House of Commons on Jan. 31.
Meanwhile, a report published in January by industry group Mortgage Professionals Canada said the stress tests not only “will suppress homebuying,” but also pose a potential risk to house prices and the broader economy.
“Our report illustrates that a more reasonable stress test level and lending restriction reforms are now needed to strike a better balance for borrowers and policymakers, improving housing affordability and Canada’s economy,” said Paul Taylor, president and CEO of the group, in a release.
The Canadian Real Estate Association also reported recently that national homes sales posted their fourth-straight monthly decline in December, the same month that the head of the Building Industry and Land Development Association said they would continue to call on the federal government “to undo the negative effects of the outdated stress test on consumers’ ability to purchase homes.”
But Rogers noted that the risks banks take can be partly borne by the public, as lenders’ mortgages can be funded with deposits, and insured by the taxpayer-funded government.
OSFI monitors the financial environment, Rogers’ speech said, and the regulator makes adjustments to its guidelines when they are warranted.
Rogers noted interest rates remain at historically low levels, while personal debt levels are at historical highs. A “margin of safety” in these conditions is sensible, she said.
“Now, should that margin of safety be monitored, and should it be changed and adjusted if conditions in the environment change? Of course it should,” she said. “OSFI monitors the environment on a continual basis.”
Rogers also addressed the fear of “unintended consequences” in her speech, saying recent history has demonstrated that relaxing underwriting rules can stoke financial instability that can cause its own economic issues.
The rising cost of homeownership in Canada and its accompanying threat to the economy “is a problem,” according to Rogers.
“But the answer to that problem cannot be more debt,” she added. “And particularly, it cannot be more consumer debt, fuelled by lax underwriting standards.”