The recent economic stress in Canada will be expected to force lenders to be stricter in qualifying borrowers. The huge variation of income from different cities will lead to differences in property values for the real estate markets. We know that increasing income in some cities will attract people to converge there. It will be expected that the demand for real estate will also increase for those areas, and thus, there will also be an increase in new mortgage applications.





The two factors that the OSFI mentioned which will increase the risk in lending is the alarmingly “high household indebtedness and vulnerabilities in some housing markets”.

OSFI mentioned five areas for lenders to watch for in loan underwriting:

• Income verification

Since these are generally the determinants of credit risk scores, and loan rates, lenders should be more diligent in conforming to regulations regarding these. Current regulations require households to have a debt load of at most 40% of the total household income to pass insurance requirements.

• Non-conforming loans

Non-conforming loans should not deviate far from general regulations. Also, the borrower’s capacity to pay should be deliberated more than the value of the collateral since the market is currently volatile.

• Debt service ratios

Debt service ratio of the different States also affects the credit risk scores of the population of those states. This implies that regulations should vary by State.

• Appraisals and loan-to-value ratio calculations, and

The unstable market requests the need of forecasting property values by area. Changes in property values will both be problematic to borrowers and lenders especially in selling and foreclosures since both parties will not get their money’s worth.

• Institutional risk appetite

Since lenders have their own policies regarding this, they should always reexamine their contracts with borrowers to remain stringent with their policies.

There may be policy changes with the different lending institutions. Real estate institutions should be ready with these changes. Since Real Estate individuals cater to the needs of their clients, preparedness is crucial to make real estate transactions successful from here on out.


Sources:

1.       http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/nr20160707.aspx

2.       https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_003.cfm