Since 2008, regulators have been trying to contain housing risk by piling on new mortgage rules, and bringing back some old ones. So far, the housing market has yet to crack under the weight of those policies.
In fact, home prices just keep reaching record highs. And each month they do, policy makers get more and more nervous about overextended borrowers.
In 2014, we're virtually guaranteed to see new mortgage restrictions. One casualty of those new rules could be the 30-year amortization.
"We have noticed that there has been a shift in the marketplace to offer more 30-year amortizations," chief banking regulator Julie Dickson said Monday at the mortgage industry's annual conference in Toronto. "About half" of new borrowers with down payments of 20 per cent or more are choosing 30-year amortizations, she added.
That concerns Ms. Dickson, who cautions, "Borrowers need to understand what they're getting themselves into." She said people need to "think about the leverage [they're] taking on," especially if a 30-year amortization is the only way they can afford their home.
A 30-year amortization potentially means extra years of making mortgage payments and up to 23 per cent more interest over the life of the mortgage. (I say "potentially" because borrowers have traditionally paid off their mortgages in 30 per cent less time than their original amortization, according to the Canadian Association of Accredited Mortgage Professionals.)
If regulators do decide to restrict 30-year amortizations, they could either:
• eliminate them altogether
• allow payments at a 30-year amortization, but make borrowers prove they can afford a 25-year amortization, or
• Put restrictions on those getting a 30-year amortization (like higher credit scores, higher down payments or lower debt ratio limits.)
Those latter two options would at least give strong borrowers flexibility to divert mortgage payments to better sources – like paying down high-interest debt, making investments, financing education, building a small business and so on.
But even if banks are banned from selling 30-year amortizations, there may still be a place to get them: credit unions.
Most provincial regulators have seen no need to impose OSFI's full slate of mortgage rules on credit unions.
"At this point and time there is no plan to do anything to change any of the [mortgage] regulations…" said Andy Poprawa, CEO of Ontario's credit union regulator.
"Credit unions have traditionally been very conservative," he said. "When credit unions lend money on a 30-year mortgage, they're also taking into account other debts" and other prudent underwriting criteria.
"Because credit unions are smaller than the large banks, they must be very very careful how they utilize their capital. They can't afford to have large delinquencies."
Ms. Dickson doesn't seem overly concerned about credit unions' impact on market risk, noting that, "the vast majority of mortgage lending is coming from the [federally] regulated sector."
On top of amortizations, OSFI is also "focusing on total debt servicing and gross debt servicing." The regulator is paying special attention to borrowers with high debt ratios and low equity or low credit score.
In addition, OSFI is recommending new restrictions for mortgage default insurers like CMHC. Those proposals, contained in "Guideline B-21," should be released for public comment by March, 2014, Dickson says. She assures that "any future changes to [mortgage] guidelines" will be put up for public comment before implementation.