• Proposal reflects ‘changing risks’ in home-loan market
  • OSFI updates guideline on Capital Adequacy Requirements

Canada’s financial regulator released proposed new mortgage rules that could see the country’s lenders hold more capital to offset risks.

The draft guidelines have been updated to “reflect the changing risks in the Canadian mortgage market,” the Office of the Superintendent of Financial Institutions said in a statement. The watchdog said in December it would seek to shift the burden of risks to banks and away from taxpayers, part of a broader effort by government to address what some observers say is an overheated housing market.

OSFI floated the policy as part of revised Capital Adequacy Requirements, or CAR, a set of rules governing federally-regulated banks, loan companies, and trusts and based on global requirements. The new CAR framework, published today, is open for comment until Oct.18. It will come into force as soon as November.

If a Canadian lender doesn’t follow the compliance policies set out by OSFI and the mortgage insurers, OSFI may “reduce the level of consideration of the mortgage insurance the lender is using as a guarantee to mitigate its credit risk," according to an agency spokeswoman.

“In addition, institutions are expected to have appropriate policies and procedures in place to originate, underwrite and administer insured mortgages," the agency said in a document posted to its website.

Policy makers have warned that Canada’s housing market is overvalued in some cities and the government is keen to limit taxpayer exposure to any potential downturn. Federal Finance Minister Bill Morneau and the government-owned mortgage insurer, Canada Mortgage & Housing Corp., have floated the idea of banks being required to hold more capital for residential mortgages to protect against defaults.

Morneau said this week additional measures may be needed to manage the risks associated with the “highly charged” Vancouver and Toronto housing markets, even after British Columbia imposed a 15 percent tax on foreign buyers to curb price gains.

Under current guidelines, lenders are required to maintain a certain amount of capital to back mortgages, as well as to comply with OSFI risk-mitigation rules. Under the proposed rules, if OSFI determines a lender isn’t following policy, it may reconsider whether its mortgage insurance adequately covers the loan risk, prompting the lender to take further steps, including shoring up capital.

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