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Watchdog stands by controversial mortgage stress test

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The Office of the Superintendent of Financial Institutions Canada (OSFI) has taken a lot of heat for its mortgage stress test, aka B-20.

But Carolyn Rogers stood by the controversial test on Tuesday, defending it in a speech at the Economic Club of Canada.

“The stress test requires a borrower to be qualified for their mortgage with a buffer of affordability built in to ensure they can continue to pay their mortgage if conditions change,” says Rogers, assistant superintendent, OSFI.

“Those conditions could be a rise in interest rates that increase their payment obligation, or they could be a loss or reduction of income or an increase in other, non-mortgage expenses.”

A slew of hikes from the Bank of Canada has pushed interest rates higher since B-20 came into effect in January of last year. Critics say that should mean the stress test can be shelved.

“Interest rates, although they have adjusted upward, remain at historically low levels. And personal debt levels remain historically high. A margin of safety in these conditions is prudent,” says Rogers.

Rogers’ response to that criticism is that stress tests aren’t only in place to protect against rising interest rates, but it also protects against fluctuations in income or other unexpected changes to one’s financial situation.

Rogers says the most common criticism is that OSFI implemented a national policy to tackle huge price jumps in Toronto and Vancouver. So, borrowers in cities like Calgary — where the economic fallout from falling oil prices is taking a toll — shouldn’t have to pass the stress test.

Rogers reminds us that B-20 was not designed to target escalating home prices. It was designed to target mortgage underwriting standards, which look the same no matter what city you live in.

“Ensuring a borrower is not over-leveraged and can withstand a change in circumstances, including a change in interest rates, is sensible regardless of what city you’re in,” says Rogers.

“And when interest rates rise, they will go up in Calgary, and Winnipeg, at the same time and by
the same amount that they will go up in Vancouver and Toronto.”

Rogers says she understands the risk of competition from unregulated lenders. She urges mortgage brokers and realtors to steer their clients away from them.

She is also mindful of unintended consequences, like first-time buyers being locked out of the market because they can’t qualify for a mortgage.

“The escalating cost of homeownership in Canada, and its knock-on effects to the economy and to society is a problem. And it’s a problem that is proving very challenging to address,” says Rogers.

“But the answer to this important problem cannot be more debt. Particularly, it cannot be more
consumer debt, fuelled by lower underwriting standards.”

Rogers says OSFI will stay on its current path of guarding against complacency during the good times, but promises more transparency.

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