Canada watchdog offers rules to cut mortgage insurance risk

Reuters

By Louise Egan

OTTAWA, April 14 (Reuters) - Canada's financial regulator issued draft guidelines on Monday for mortgage insurers to reduce risk in the housing market, a move analysts said could make it slightly harder for home buyers to get a loan.

The Office of the Superintendent of Financial Institutions (OSFI) guidelines apply to the country's three mortgage insurance companies: the state-owned Canada Mortgage and Housing Corp (CMHC), which insures 70 percent of residential mortgages in the country, and private companies Genworth MI Canada and Canada Guaranty.

The main thrust of the proposal for the C$730 billion ($664 billion ) industry is that insurers should be more proactive in ensuring that banks they deal with use sound mortgage underwriting practices. These include more rigorous income verification of borrowers similar to that used in the United States.

OSFI imposed stricter mortgage underwriting guidelines for federally regulated banks in June 2012. Those rules governed relations between banks and borrowers. This new set of rules governs dealings between insurers and banks, including institutions not under OSFI's supervision.

Ben Rabidoux, a housing market analyst and president of North Cove Advisors market research firm, said the changes could help slow down the housing market. But he noted that insurers have freedom to interpret and implement the principles, which could soften the impact.

"On balance, this is probably going to marginally affect credit availability in Canada," he said. "And then consequently it would be a pretty modest drag on the resale market if it's implemented as currently drafted."

Mortgage insurers have until May 23 to provide feedback.

Canada's housing market has boomed unsteadily for five years, raising fears of a U.S.-style crash. The market slowed at the end of 2013 and observers waiting to see how big the resurgence will be during the busy spring buying season.

OSFI's guidelines address a concern that mortgage insurers are more vulnerable to mortgage defaults than lenders are, and could suffer big losses if there is a crash or a sudden economic downturn.

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Insurers should assess the financial soundness of the lender and its mortgage lending practices as well as its ability to provide data on the performance of its mortgage loan portfolio, according to the proposed rules.

They would also be required to outline for lenders the criteria for mortgages that they would normally insure, including the maximum loan-to-value ratio and maximum amortizations.

A major change is that insurers would need to tell lenders how to verify a home buyer's income and their income history.

"As it stands, borrowers can get a prime, CMHC-insured mortgage with as little as a pay stub and a job letter," Rabidoux said.

CMHC is by far the biggest player in the residential mortgage insurance industry, and it is growing fast. Banks under OSFI's supervision must insure mortgage loans with a down payment of less than 20 percent. Other banks often use CMHC insurance to access its securitization programs.

The federal government, which guarantees 90 percent of a private insurers' residential mortgage loans, has already taken several measures to rein in CMHC's insurance business. Former Finance Minister Jim Flaherty, who died last week, openly mused about privatizing that part of CMHC.

The mortgage insurance market had insured loans in-force of C$730 billion ($664 billion ) in 2012, according to an International Monetary Fund report in February. OSFI declined to provide more recent information.

($1 - $1.10 Canadian) (Reporting by Louise Egan; Editing by Frank McGurty and Richard Chang)

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