The Fraser Institute has come out against changes to uninsured mortgage lending regulations proposed by the Office of the Superintendent of Financial Institutions (OSFI), saying that the changes could be detrimental to the residential mortgage market.
In a study called Uninsured Mortgage Regulation: From Corporate Governance to Prescription, public policy consultant Neil Mohindra takes an in-depth look at OSFI's proposal to stress test home buyers with uninsured mortgages by requiring them to qualify for a mortgage rate that’s two percentage points higher than their actual rate.
OSFI's proposal is an attempt to reduce the risk to the Canadian economy posed by mortgage defaults. It mirrors a similar move made last year in which a stress test was introduced on insured mortgages. However, Mohindra argues that this change would come with several negative effects — consequences that would be worse for the residential real estate market than if OSFI keeps the rules the same.
“This proposed stress test for financially sound homebuyers is unnecessary and will do
more harm than good — Canadian homebuyers will pay the price,” Mohindra says in his report.
His core argument is simple: Canadians may owe a lot of money, but they have a great track record of paying off their debt, too. The rate of mortgage arrears in Canada has remained below 0.45% since 2002. For context, the rate of mortgage arrears in the U.S. during the 2009 financial crisis was nearly 5%.
What’s worse, Mohindra says, is that the new rules could actually make things worse for homebuyers in five ways:
It could be harder for potential homebuyers to access mortgages (especially higher priced ones in cities such as Toronto)
It could force some homebuyers to settle for a less-desirable home, instead of the one they want
More homebuyers will turn to less-regulated mortgage companies, which are funded by private investors and can result in higher interest rates
More homebuyers may be encouraged to choose short-term variable rate mortgages which are more vulnerable to fluctuating interest rates than longer fixed-rate mortgages
The mortgage industry could become less competitive as smaller lenders would struggle to stay in business with less qualifying borrowers
While these are all valid points, it’s not objectively clear that these consequences would necessarily “do more harm than good,” as Mohindra concludes. For example, the consequence of forcing homebuyers to settle for homes they don’t prefer isn’t really bad for the Canadian economy. Most homebuyers have to compromise in some way or another when shopping for a home
Secondly, if all it takes is a small interest rate increase to make housing unaffordable — well, then that suggests many Canadians who have bought actually can’t really afford a home. They can only do so because of unrealistically low interest rates.
If people are buying houses only because they can afford them with a mortgage rate at 2.5%, but can’t afford that same home at 5%, then Canada has a serious problem. And it’s better to fix it then allow this problem to fester — the way many allowed the same problem to fester south of the border a decade ago.
Regardless of how likely Mohindra’s predictions are to come true, others — mainly economists and those in the housing industry — have also criticized the new OSFI rules. OSFI is set to release the updated mortgage lending guidelines at the end of October, and they’ll go into effect a few months later.