OSFI pulls back on some mortgage proposals, all in on others

financialpost.com:

Canada’s top banking regulator is shelving some key proposals aimed at keeping homebuyers from loading up on too much debt and protecting bank bottom lines.

Based on feedback from lenders since January, the Office of the Superintendent of Financial Institutions said Oct. 16 that it will not pursue putting tighter regulatory limits on debt-service coverage, part of a proposal to cap lenders’ loans with high debt service ratios. Most of the January proposals were directed at uninsured mortgages.

“After careful consideration of stakeholder feedback, we agree that regulatory limits on debt service coverage should not be pursued,” OSFI said. “While such limits could result in greater consistency, they would remove too much risk-based decision-making and risk ownership from lenders.”

The regulator said there are certain limits that apply to insured mortgages, under the law, but noted that those generally serve public policy objectives beyond the scope of OSFI prudential soundness and financial stability mandate. 

“A strengthened principles-based expectation could therefore be more suitable” than the initial regulatory limits proposed, OSFI said.

The regulator is overhauling its B-20 guideline that includes the mortgage stress test, first introduced in 2012 with additional thresholds added in 2018. 

OSFI proposed a bevy of possible changes in January 2023 including  new “affordability” stress tests to adapt to heightened payment and renewal risks of higher interest rates, while making it easier to qualify for longer fixed terms that post less risks.

“Depending on what OSFI finally decrees, the implications could be significant for home prices, lender volumes and the options available to individual borrowers,” said Rob