OFSI wants to ban bundled mortgages

The practice of regulated and unregulated mortgage lenders ‘bundling’ loans could be banned under a proposal by OSFI.

The regulator has published a public letter setting out its expectations for residential mortgage underwriting and has identified some key areas where improvement.

OSFI wants to reinforce the principles of OSFI Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures) and, where applicable, OSFI Guideline B-21(Residential Mortgage Insurance Underwriting Practices and Procedures.)

Superintendent Jeremy Rudin sets out several areas that it wants to highlight within the mortgage industry including:

• income verification – ensuring that misrepresentations are identified;
• underwriting for non-conforming loans – should be as stringent as for conforming loans;
• uninsured mortgages – all should be stress tested;
• Requiring that Loan-to-Value (LTV) measurements remain dynamic and adjust for local market conditions where they are used as a risk control, such as for qualifying borrowers;
• Expressly prohibiting co-lending arrangements that are designed, or appear to be designed to circumvent regulatory requirements.

“The draft changes to Guideline B-20 released today are consistent with messages that OSFI has been delivering through public statements and in direct conversations with federally regulated financial institutions through our supervisory work,” said Carolyn Rogers, Assistant Superintendent, Regulation Sector.

The regulator also noted that the risk profile of some new mortgages is rising and wants lenders to ensure they are taken into account in risk appetite expectation.