Sound mortgage underwriting more important than ever

By Andrew Rickard | November 30 2016 09:45AM

The Office of the Superintendent of Financial Institutions (OSFI) is keeping a watchful eye over the country's mortgage lenders.

OSFI Superintendent Jeremy Rudin spoke at a conference of mortgage professionals in Vancouver earlier this week. Since almost 80% of Canadian mortgages are held by lenders that OSFI supervises, the regulator is on the watch for any systemic vulnerabilities in the mortgage market and wants to ensure that institutions can withstand a wide variety of “severe yet plausible” scenarios.

Rudin warns that a pronounced or prolonged economic downturn could trigger a drop in housing prices, which might translate into significant losses for lenders and insurers.

House prices have never been higher

"When house prices have been rising for several years and interest rates have remained at all-time lows, complacency can set in. Lenders might be led to believe that weak underwriting standards will be mitigated by ever-rising collateral values," he commented. "Our view is the opposite. House prices in most Canadian markets have never been higher, supported by mortgage rates that have never been lower. In these circumstances, prudent lenders put less reliance on collateral values, not more."

Expectations and increasing scrutiny

As a result, OSFI is tightening its expectations and increasing scrutiny around residential mortgage underwriting practices, especially when it comes to verifying borrower income and employment information, managing riskier or non-conforming loans, and ensuring adequate debt service ratios.

"An essential part of sound underwriting is having reliable information about the borrower and the property. This requirement can only be met if lenders and mortgage insurers verify that the customer-facing part of the process is doing its part," said Rudin. "

The full text of Rudin's speech is available on the OSFI web site.