dbvirago/123RF

The solution to the deteriorating dream of home ownership cannot be more household debt or weak mortgage underwriting standards, argues a federal banking regulator.

Speaking today at a lunch in Toronto hosted by the Economic Club of Canada, Carolyn Rogers, assistant superintendent with the Office of the Superintendent of Financial Institutions (OSFI), defended the recent adoption of tougher mortgage underwriting rules.

Last year, OSFI introduced a stress test for borrowers to its underwriting guidelines, known as B-20, which was itself first introduced in response to the global financial crisis. The stress test component was added last January amid concerns that both borrowers and banks were taking too much risk, given the low interest rate environment and relentlessly rising house prices.

“Against a backdrop of record levels of consumer debt, this was a level of risk-taking that OSFI decided needed to be reined in,” Rogers said today.

However, that step has been met with a number of criticisms, including that it is being driven by particularly hot housing markets in Toronto and Vancouver; that tougher rules on banks may drive borrowers to unregulated lenders; and that the policy has a host of other unintended consequences, such as freezing out young homebuyers, driving up rents and exacerbating economic inequality.

Rogers addressed these sorts of criticisms in her speech today, acknowledging that “the escalating cost of homeownership in Canada, and its knock-on effects to the economy and to society, is a problem. And it’s a problem that is proving very challenging to address.”

However, Rogers insisted that the solution to the problem is not greater household debt, enabled by weak underwriting standards. “Recent history has shown that relaxing bank underwriting standards can lead to extreme and persistent levels of financial instability that more than undo any economic gains they were intended to support,” she said.

Rogers also conceded that the risk of pushing more borrowers to deal with unregulated lenders is a legitimate worry. “But it cannot be a reason not to act, or not to do our job,” she said.

Instead, Rogers called on the real estate industry — mortgage brokers in particular — to help borrowers avoid making bad decisions, or being exploited by unscrupulous lenders. “If you see risks, if you think these options put your borrower in a vulnerable position, you can steer them away. That would be the right thing to do,” she said.

Rogers also rebuffed criticisms that the tougher rules are a broad, blunt response to an issue that is largely confined to the hot housing markets in Toronto and Vancouver. She said that such criticism misses the fact that the stress test was introduced to target mortgage underwriting standards, not home prices.

“Sound underwritings look the same no matter what city or province you live in. Ensuring a borrower is not over-leveraged and can withstand a change in circumstances, including a change in interest rates, is sensible regardless of what city you’re in,” she said. “And when interest rates rise, they will go up in Calgary and Winnipeg at the same time and by the same amount that they will go up in Vancouver and Toronto.”

That said, Rogers also allowed that the stress testing requirements may evolve as economic conditions change. “The introduction of the stress test was, itself, an adjustment… in response to a shift in the environment – a shift in risks facing the financial sector,” she said. “OSFI monitors the environment on a continual basis and when we determine that adjustments to our standards and guidelines are warranted, we make them.”