Uninsured Mortgage Regulation: From Corporate Governance to Prescription

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Uninsured Mortgage Regulation: From Corporate Governance to Prescription


  • The Office of the Superintendent of Financial Institutions (OSFI) is proposing amendments to its guideline on residential mortgages including a requirement to stress test individual uninsured loans against a 200 basis point increase in interest rates.
  • The guideline was originally introduced to meet an international standard of the Financial Stability Board. The international standard was a response to weak underwriting practices in the US that contributed to the global financial crisis.
  • Arrears data indicate that underwriting standards in Canada have consistently remained strong. For uninsured mortgages, the homeowner’s equity provides significant protection to the lender against loss.
  • The proposed stress test risks negative impacts on the Canadian residential mortgage market including higher loan pricing and reduced loan access for some consumers. It could also lead to less competition and creates an incentive for riskier behaviour in some circumstances.
  • The proposal to write a prescriptive requirement directly into the guideline is not necessary for OSFI to meet its regulatory objectives. Financial institutions currently have the flexibility to choose a mix of underwriting criteria to ensure mortgage loans are consistent with the board’s appetite for risk. OSFI already has the regulatory tools to address any concerns it may have including the power to direct financial institutions to correct any deficiencies in underwriting practices.

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