OSFI Updated Proposal: Heloc's Restricted to 65%, Home Reno Market To Take A Hit?

Here is the updated press release from the OSFI regarding their proposals on mortgage tightening.

The following provides a brief description of OSFI’s decisions on key issues, which will be reflected in the final Guideline.

1. Re-qualification at Renewal – Current practice regarding residential mortgage renewals has served FRFIs well. OSFI agrees, for example, that having a good payment record is one of the best indicators of credit worthiness. OSFI, therefore, expects that FRFIs themselves will remain responsible for deciding what level of review to place on borrowers’ qualifications at the time of renewal. FRFI renewal practices should be articulated in internal policies governing their underwriting of residential mortgage loans. FRFIs, however, will be expected to refresh the borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively evaluate their credit risk.

2. Home Equity Lines of Credit (HELOCs) – OSFI is maintaining its position that the HELOC component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent. HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance. However, HELOCs at or below an LTV ratio of 65 per cent will not be required to be amortized, as the revolving aspect of a HELOC is a fundamental feature of the product.

3. Domestic vs. International Application of the Guideline – Guideline B-20 will primarily apply only to the Canadian operations of FRFIs. However, the international mortgage lending and acquisition activities of FRFIs would need to be reflected in the Residential Mortgage Underwriting Policy (RMUP) of FRFIs (or their residential mortgage underwriting policies) and in their governance and risk management frameworks (i.e., business strategy and risk appetite).
 
4. Disclosure Requirements – For greater transparency, clarity and public confidence in FRFIs’ mortgage operations, OSFI is maintaining disclosure requirements in Guideline B-20. These will now focus on the domestic residential mortgage operations of FRFIs and key mortgage metrics (e.g., LTV ratios and amortization). However, the disclosure requirements will not include information that is considered proprietary to FRFIs, the disclosure of which could cause a competitive disadvantage for FRFIs relative to non-FRFIs and international competitors that do not face similar requirements.
 
5. Residential Mortgage Underwriting Policy – Given the significance of mortgage operations to many FRFIs, OSFI expects FRFI Boards to play a substantive role in the development and assessment of the RMUP (or internal mortgage underwriting policies), as well as to provide general oversight of FRFIs’ mortgage operations and internal controls. OSFI will clarify the duties of the Board in this regard in the revised guideline.
 
6. Application of the Guideline to FRFIs that are Mortgage Insurers – Sound mortgage underwriting practices are critical for both mortgage originators (and acquirers) and mortgage insurers. However, given its general focus on the mortgage origination process, Guideline B-20 will only apply to FRFIs that are mortgage originators (or acquirers). A separate guideline applicable to FRFIs that are mortgage insurers will be published for consultation at a later date.
 
7. Automated Valuations of Property vs. On-Site Appraisals – No substantive changes will be made to the draft guideline in this regard. FRFIs are still expected to take a risk-based approach to assessing the value of a property, with more comprehensive valuation approaches for higher-risk transactions. It is OSFI’s position that FRFIs should generally not rely on any single method for property valuations.

While the teeth of the OSFI are not as sharp as some thought, there is still a huge reason why OSFI was not going to let the heloc proposal fail; it's because of the sure sign we are in a consumer credit bubble.  Even though the average house price in Canada has increased from around $300,000 in the second quarter of 2007 to over $360,000 at the end of 2011,

Home equity has decreased from 71% to 67% in that same time period.

Meaning that we have spent beyond our means. A sure sign of a credit induced bubble. 

Credit will be tightening, but not as much as the first proposal by OSFI as the mortgage industry did a bang on job of protecting their own bottom line. Still credit is tightening and the biggest impact, if gone through, will be heloc's loan to value shrinking from 80% to 65%.  This will lead to less consumer spending as people will not be able to borrow as much from their homes.   Instead of being able to borrow up to $288,000 from a $360,000 house, people will only be able to borrow up to $234,000 on that same house.

 And if I were to guess what part of the economy what take the brunt of this slowdown, home reno's. The long term percentage that home reno's have of GDP is at 2%, right now it is at about 2.8%