Proposed mortgage rules could hurt many borrowers, credit unions say

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Many less-wealthy home buyers could be shut out of the housing market and forced to continue renting if proposed mortgage stress-testing rules are adopted by Canada's banking regulator, an association representing Canadian credit unions has warned.

The Canadian Credit Union Association (CCUA), which represents 278 credit unions and caisses populaires outside of Quebec, is urging the federal government to reduce the proposed level of stress-testing that borrowers would have to meet to qualify for a conventional uninsured mortgage in Canada.

Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has proposed requiring home buyers who do not need mortgage insurance – those with down payments of more than 20 per cent – to provide they could still afford their mortgages if interest rates were 200 basis points (two percentage points) higher than they negotiated. The change would ensure lenders do not face high levels of loan delinquencies if interest rates spike.

In a submission to OSFI, however, CCUA said the two percentage-point test is "punitive" for lower-risk customers who are already making at least a 20-per-cent down payment on their home.

"In our view, the application of a 200 [basis point] test will have a material impact on the ability of many borrowers to qualify for a mortgage and either shut out borrowers or downsize their housing aspirations," CCUA assistant vice-president Marc-André Pigeon said in a written submission to OSFI.

In expensive cities such as Vancouver, CCUA said many borrowers "may be priced out of the market completely and forced to continue renting."

In rural areas, the association warned the change could have the "perverse" impact of pushing down house prices when there is no concern about housing-price inflation. CCUA said some buyers in those markets will not qualify for mortgages under the new rules, and sellers will have no choice but to reduce prices to levels where more people can afford the size of the mortgages.

Most credit unions in Canada are provincially regulated and not covered by OSFI's rules, but some credit-union systems are federally regulated. CCUA said provincial regulators also look at OSFI's standards when updating their underwriting rules.

CCUA joins many other groups that have urged OSFI to soften its proposed stress-test rule, including home builders, real estate agents and Canada's national mortgage-industry association.

Several of Canada's largest banks have said they anticipate relatively little impact from the proposal because they are already stress testing many of their loan applications at the tougher standard, and most applicants would still qualify. But those banks are having "an ongoing discussion" with regulators, according to Canadian Imperial Bank of Commerce chief executive Victor Dodig, aiming to strike a balance in housing policy after a series of recent regulatory changes.

"I don't think that you can expect much more of a wet blanket on the industry," Mr. Dodig said on Wednesday at an industry conference. "There's a lot of risk there if they go too far."

The OSFI changes are expected to have the greatest impact on smaller banks and other regulated lenders, whose customers often do not qualify for loans at major banks.

Canadian Western Bank CEO Chris Fowler expects the final rules could be announced in the second half of October. And while he expects some current applicants will find it harder to qualify for a loan, he also predicts larger banks would reject more buyers, some of whom would turn to alternative lenders.

"Over all, we're thinking [the impact would be] moderately negative" for his bank, he said at the industry conference.

Robert Goodall, CEO of Atrium Mortgage Investment Corp., which provides residential and commercial mortgage loans, said his firm could benefit from the changes because it is not OSFI-regulated, so would not have to apply the stress test.

But Mr. Goodall said he nonetheless opposes the proposal because it isn't necessary to force lenders to be even more cautious with their safest category of mortgage loans – those with significant down payments.

"It seems to me it is the lowest-risk segment of the market and the type of lending that should be encouraged," he said in an interview. "If there's a serious correction, these are the buyers to me that are best equipped to handle it."

Mr. Goodall said the changes will especially hurt entrepreneurs and small-business owners, who often can make large down payments on homes, but have inconsistent incomes. Income is the main factor used in mortgage stress-testing by banks.

"To penalize them, when they have more cash to put down than a typical CMHC-insured first-time buyer, I don't get it," he said.