The real estate industry is breathing a sigh of relief after seeing the long-awaited set of guidelines for mortgage insurers that many had feared would cause home sales to slow.
The new rules from Canada’s financial regulator contain little to dampen the housing market, industry players say. That is welcome news to real estate agents and mortgage brokers, as home sales have recently turned sluggish.
The guidelines, which came out Monday, have been in the works since 2012. That was the year that the financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), released mortgage underwriting guidelines for banks.
Those guidelines, which were known in the industry as B-20, were mainly broad principles spelling out what banks must to do to ensure they were properly scrutinizing potential borrowers and the properties they wanted to buy.
But B-20 also imposed a cap on the amount that homeowners can borrow on a home equity line of credit at 65 per cent of the home’s value, a rule that real estate players said had a tightening effect on the housing market. As a result, there was concern that the new guidelines for mortgage insurers, known as B-21, might also affect the market.
In an interview Monday, OSFI deputy superintendent Mark Zelmer said he doesn’t expect the guidelines to have a major impact, observing that they’re similar to B-20 except that they are written for mortgage insurers rather than banks.
The guidelines spell out steps that mortgage insurers should take to ensure they’re not taking on too much risk, including assessing the banks that are selling the mortgages. Indeed, many of the guidelines essentially tell mortgage insurers they are responsible for ensuring that banks are being careful.
The general idea is to ensure that mortgage insurers are following strict practices that will minimize defaults of mortgages that they insure. As such, the full set of rules could have a tightening effect, but industry players say any such impact will be small.
“The market impact of these regulations [B-21] will be modest in comparison to B-20,” said Andy Charles, the chief executive of Canada Guaranty, the country’s third-largest mortgage insurer. “The impact of B-20 combined with previous changes by the Department of Finance, have resulted in insurers underwriting a much stronger borrower. The new guidelines serve to reinforce some of these practices.”
For instance, B-21 tells mortgage insurers that incentives and rebate payments (i.e. cash back from the bank) should not count as part of a down payment. B-20 told banks the same thing.
Mortgage insurance is mandatory for banks and other federally regulated lenders if the home buyer has a down-payment of less than 20 per cent. It compensates the lender if the borrower defaults.
Real estate players are breathing a sigh of relief because the guidelines come as home sales have levelled off.
The Canadian Real Estate Association will release March data on Tuesday, and Bank of Montreal chief economist Douglas Porter is expecting home sales to come in 3 per cent higher than a year earlier.
If that’s the case, sales will be only slightly above February’s level, having ticked up for two months in a row after sliding for five consecutive months. That would suggest a relatively lacklustre start to the all-important spring market. It would put March’s sales level about 10 per cent below March of 2012, Mr. Porter says.
Last month, marked the first March – with the exception of the recession of 2009 – that home prices basically didn’t budge from February, according to data released by the Teranet-National Bank house price index on Monday.
OSFI is taking comments on the guidelines until May 23, after which it will release final rules.