December 4 2017 - Inform Your Buyers that They Need to Secure Their Mortgage Before January 1 to Avoid the New Stress Test

CHBA has been following-up on how the major chartered banks are handling the improved transition rules that CHBA was successful in securing from the Office of the Superintendent of Financial Services (OSFI) after OSFI mandated new Stress Test requirements for conventional mortgages effective January 1, 2018.

CHBA requested from OSFI, and received, transition rules to the B-20 Guideline to allow buyers who had signed a purchase and sales contract prior to October 17, 2017, to qualify under the ‘old’ pre-stress test rules. This was essential for many new home buyers, given the typical length of time between signing a contract and closing the purchase. At the time, OSFI committed to informing all federally-regulated mortgage lenders of this additional flexibility.

CHBA understands that all of the chartered banks have now adopted procedures to handle these pre-October 17, 2017 sales contracts.

To ensure you and your buyers are protected, you need to take action immediately. If your buyers have not done so already, advise them that they should contact their preferred mortgage lender now, and apply for full mortgage approval prior to January 1, 2018. This will allow the mortgage to be approved under the pre-stress test OSFI rules.

It is our understanding that these lenders are actively working to process these mortgage applications and have approvals in place, with rate caps or discount guarantees, prior to the year end. This will allow the mortgage to process after January 1, 2018 under the pre-stress test requirements, regardless of the eventual closing date.

Given the upcoming holiday period, time is of the essence. All builders and developers with buyers who want to avoid the new conventional mortgage stress test should act today to ensure these buyers are aware that mortgage pre-approval must be obtained prior to January 1, 2018.

October 31 2017 – CHBA Engagement Helps Lead OSFI to provide for lender discretion in applying the new stress test to protect deposits.

In response to Association concerns and representations, the Office of the Superintendent of Finance Institutions (OSFI) has released additional transition guidance that should ensure buyers of new homes can complete the purchase under the mortgage rules in place at the time they signed the purchase contract, even after the new ‘stress test’ for conventional mortgages comes into effect on January 1, 2018.

On October 31, OSFI confirmed in a response letter to CHBA that they will advise financial institutions that new home buyers in this situation will still be able to qualify under the old pre-stress test rules for conventional mortgages:

“In those instances where a borrower has put down a deposit and received a mortgage eligibility assessment or ‘pre-approval’ from a federally regulated lender prior to the release of the revised Guideline B-20, the lender has discretion to underwrite the loan based on the pre-existing guideline (including the prior qualification rate) … OSFI will be providing this information to federally regulated institutions as part of our ongoing supervisory communications.”

This additional guidance from OSFI for new home purchases protects both buyers and builders, without any additional red tape for industry.  It fulfills CHBA’s request for rules that ensured that new home buyers could qualify for mortgages under the requirements in place at the time they signed their purchase-and-sale contract, without further restriction.

Backgrounder

On July 7 the Office of the Superintendent of Finance Institutions (OSFI) published draft revisions to Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures.

Proposed revisions included:

• a 2% qualifying stress test for all uninsured mortgages;
• that Loan-to-Value (LTV) measurements remain dynamic and adjust for local market conditions where they are used for qualifying borrowers;
• prohibiting co-lending arrangements that are designed, or appear to be designed to circumvent regulatory requirements.

These changes followed the introduction of a stress-test on insured mortgages the previous year. The result from that move was an increase in uninsured mortgages as buyers put down larger down payments to get around new qualifications and insurance premiums.

CHBA Response to the Proposed Guidelines

CHBA vigorously opposed the proposed changes, especially the new stress test on uninsured mortgages:

• CHBA coordinated with other national organizations on a “do no more” to mortgage rules advocacy message in pre-budget consultations, Finance Committee appearances, etc.
• CHBA submitted substantial comments on the inappropriateness of a stress-test and the impact that it could have on housing markets.
• CHBA provided detailed estimates of the impact on housing starts, jobs and economic growth of cumulative government interventions.
• CHBA also emphasised the need for coordinated action on housing policy between various agencies and departments within the federal government and the three levels of government.
• CHBA estimates and quotes were covered in the media.

 

Release of the Final Guidelines

Despite advocacy by CHBA and other organizations cautioning the government against further tightening of mortgage rules, on October 17, OSFI implemented its new Guidelines.

The most impactful aspect of the new Guidelines required the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

CHBA (and many members) identified a transitional issue in the final guidelines related to new home buyers:

• Homebuyers that had signed purchase-and-sale agreements with closing dates after January 1, 2018, but did not yet have approved mortgages, would have to re-qualify under the new rules, potentially rendering them unqualified, and having to forfeit their deposits.

In response, CHBA:

• Surveyed a sample of developers to understand scope of issue and implications on selling process.
• Immediately brought these concerns to OSFI and the Department of Finance, and has been in dialogue with the agencies since.
• Provided both agencies with estimates of # of buyers potentially affected and amount of downpayments at risk:
• CHBA estimated that approximately 11% of new home buyers would be unable to secure mortgage financing under the new Guideline and so would risk defaulting on their purchase-and-sale contract.
• With an average deposit of $80,000 per unit, this equated to $1.548 billion in purchase deposits being at risk as a result of the new B-20 provisions.

CHBA advocated that sales contracts should be subject to the mortgage qualification requirements in place at the time the agreement was signed, up to October 17 when the new Guidelines were released to lenders.

With the input from CHBA, the amendments made by OSFI on October 31 to provide for lender discretion to protect deposits will avoid substantial financial stress for thousands of Canadians, and avoid the related problems for builders and developers. While CHBA continues to oppose the stress test in its entirety, these changes avoided the very worst that could have come from the new rules.