The Office of the Superintendent of Financial Institutions (OSFI) is a federal agency established in 1987 under the Office of the Superintendent of Financial Institutions Act whose supervises all federally regulated financial institutions.
Below is the section regarding real estate from Superintendent Julie Dickson’s remarks to the Economic Club of Canada in Toronto on September 26th:
Let me begin with the issue of consumer debt and lending based on real estate such as mortgage lending and home equity lines of credit. The Governor of the Bank of Canada has warned that consumer debt loads are too high and that Canadians need to understand that eventually, interest rates will go up. The Minister of Finance has intervened three times in the past three years with respect to the insured mortgage market to tighten the rules, including a move earlier this year to reduce amortization periods, increase mandatory down payments, and lower the maximum loan-to-value ratio on refinancing.
In parallel, we, at the Office of the Superintendent of Financial Institutions (OSFI), have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.
The Financial Stability Board (FSB) – the body created by the G-7 and G-20 countries to promote financial stability at the international level – is also focusing on this type of lending, and developing principles for what constitutes safe mortgage lending. These principles would cover such areas as down payments, income verification, loan-to-value ratios, and so on.
This work is being done because the global crisis showed that the consequences of weak underwriting practices in one country can be transferred globally through securitization. And individual countries have seen once again that imprudent mortgage lending and imprudent home equity lines of credit can cause major problems.
With regard to North America, recent economic developments, as well as the U.S. Federal Reserve Board’s decision to maintain current interest rates until 2013 reinforce the view (in both Canada and the US) that extremely low rates will be with us for even longer than envisaged before the summer. This has likely increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.
The message from OSFI to financial institutions is that current levels of interest rates have already made borrowing extremely attractive to all borrowers. Further, institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.
As well, institutions should focus on controls around this activity more so than they have historically, because of the behaviours created by abnormally low interest rates.
At the outset of my remarks, I noted that I would say a few words about complacency. In general, Canadian financial institutions managed risk quite well in the period leading up to the financial crisis, and weathered the global storm in good order – particularly when compared with many of their international peers.
As a result, we, in Canada, have been fortunate that our system has held up well. But as I have said many times before, and will continue to repeat because it is such an important point: We must not become complacent. The “new normal” that I referred to earlier demands a much greater awareness of risk, and better management of risk, here and around the globe.
Canadian financial institutions must continue to invest in their risk controls and systems. In fact, control expectations are rising and spending must follow, particularly on data aggregation.
Many financial institutions are responding well; however, there may be a temptation on the part of some, perhaps feeling complacent after surviving the worst of the global crisis, to imagine that improvements in areas such as risk management, governance and information systems are not necessary. They may feel that given their status and strength, they should be allowed more leeway while others catch up to them, in the meantime allowing them even more flexibility to grow and expand.
In Canada, our financial institutions are playing from a position of strength. But we cannot let down our guard; we must continue to work hard at maintaining this enviable position. Our current strength should not be taken for granted – it was hard-won and it will be harder to maintain in the future, unless it is improved and supported now.
You can read it in its entirety here.
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