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A member of the federal Conservative Party has spoken out against the government’s latest salvo of mortgage rules.

MP Pat Kelly, a former mortgage professional and president of AMBA before becoming the representative for Calgary Rocky Ridge, told the House of Commons last week that he doubts the government’s blanket approach to mortgage rule-making.

“I’m concerned for young families who…may now have a harder time achieving their dream of home ownership,” Kelly said (the full speech can be viewed in the video below).

CMT spoke to Kelly for his position on the changes and on how they were implemented.

“Many people are concerned about affordability in some housing markets, yet the policy appears to have a one-size-fits-all solution that will have perhaps unintended consequences…for the 27 million Canadians that don’t live in Vancouver and Toronto,” he said.

Kelly noted that many members are hearing from consumers who are worried about the restrictions—particularly the new stress test requirements, since that’s the issue they most clearly understand and can relate to.

“We’re right to be concerned about [taxpayer risk]. But addressing this correctly and in a way that doesn’t target the wrong borrowers is important,” he added.

Even members of the Finance Minister’s own party have publicly questioned the consequences of his mortgage policies. “I have some concerns about it and I want to look at it more closely to see how it affects [the market] and trickles down,” Liberal MP Randeep Sarai told The Hill Times. “We want to make sure young families are not excluded from the markets…”

In the House of Commons, Kelly also expressed uneasiness about how the Minister’s announcement impacts competition in the mortgage business, adding that he’s “disappointed that this important policy change was imposed on consumers, Parliament and the mortgage industry with no consultation or notice.”

“When you change rules that affect millions of consumers, consultation with industry is generally expected,” he explained. Parliamentarians, even members of the Finance Minister’s own caucus, only heard the rules on the day they were announced.

Kelly also suggested that the government look at its own over-borrowing before dictating how all Canadian households must manage their finances. He suggested that making homes harder to purchase nationwide was “hypocritical of a government who said in the House that low interest rates are a great time to invest, a statement they made in response to their out-of-control deficit…A home that you raise your family in is an investment. A $40-billion deficit is not an investment.”

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Ten years ago this week, CMT sprang to life. What started as a consumer education site has transformed into a chronicle of what makes this business tick and its constant change.

We’ve reported on 2,800 stories since 2006 and my oh my, what changes we’ve seen since then—from the days of zero-down rentals, 95% LTV insured HELOCs and 40-year insured amortizations to today’s 20%-down uninsured rentals, 80% LTV uninsured HELOCs and (possibly soon to be) 25-year conventional amortizations.

A decade goes by quick and CMT has had a tremendous team along the way. My eternal thanks to:

  • a content editor who is second to none and embodies the 16-hour workday, Steve Huebl
  • our trusty copy editor Gina Fusco, whose definition of “maternity leave” is editing stories at 7:30 a.m.
  • the late Elizabeth McLister, who proofed every last word in the first four years, 
  • my amazing wife and broker, Melanie, for “paying the rent” while I do fun stuff like write, and
  • Mortgage Professionals Canada for its tremendous support of this publication.

We’ve had no shortage of spirited debates over the years, with a dash of controversy to keep things interesting. I’m not sure if I’ll make it another decade, but for now it stays fun. Whatever side of the mortgage debate you’re on, hopefully you’ve at least found the content stimulating.

Thanks for all your readership these past 10 years. Gratefully yours…….Rob

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Based on CMHC’s debt ratio distribution, up to 15-20% of high-ratio buyers may no longer qualify for the same home they could buy yesterday. Maybe more. That’s because today’s new mortgage qualifying rate (MQR) policy could push them above the 39% GDS limit.

Many young buyers will now be riding pine until they scrape together a bigger down payment, get a raise, settle for up to an ~18% cheaper home or find a co-buyer.

Thankfully, the feds did add one key exception for buyers who already have a firm purchase agreement, dated Oct. 16 or before. That would theoretically exempt folks, for example, who bought on pre-sale and won’t close for a few years. Unfortunately, lots of lenders will still enforce the MQR when these people go to apply, thus limiting their options. Nevertheless, this attempted foresight gives federal regulators at least 20 IQ points on B.C. politicians, who recklessly applied B.C’s 15% foreign buyers’ tax retroactively.

 

Low-Ratio Implementation Date Pushed Back

The Department of Finance (DoF) says it won’t enforce the MQR on low-ratio insured mortgages until Nov. 30. Its original proclamation said Oct. 17. More on that.

Mortgage finance companies now have another six weeks to find balance sheet buyers for their low-ratio refis, rentals, jumbos and long-am mortgages. We’re hearing that most of the big boys have found funding backups for these loans, albeit at material rate premiums for deals closing on or after Nov. 30. These rate surcharges will make MFCs more prone to undercutting from deposit-taking lenders, and set back mortgage competition by 5-10 years.

 

Time for Higher Covered Bond Limits

With policy-makers’ unilaterally deciding to pare back government’s role in mortgage-backed securities, perhaps it’s time to rethink covered bond limits. The DoF is still talking a big game about maintaining mortgage “competition” (in some parallel universe). But on earth, the reality is that there’s no liquid market to sell uninsured mortgages at competitive economics, except the covered bond market.

Unfortunately CBs are accessible mainly to banks, and CBs can’t comprise more than 4% of their assets. But foreign investors have been eating up covereds at near 0% coupons. Since the DoF is now heaving billions worth of low-ratio mortgages onto banks’ balance sheets, the least they could do is give banks more leeway to sell these uninsured NON-TAXPAYER-BACKED mortgages to willing investors (I wonder if we emphasized these words enough for housing critics. Thinkin’ I might need a bigger font…).

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“In essence, bank loyalty is not a factor for borrowers in shopping for a mortgage loan.”

That was the conclusion of Accenture in last year’s Digital Banking Survey (an excellent report we haven’t had the opportunity to cover until now). 

The consulting firm elaborated by stating:

  • “…Banks are in the unenviable position of competing in a commoditizing industry.”
  • “Differentiation based on price or products and services is a zero-sum game for many banks. They get trapped in an endless loop of one-upping and matching each other on discounts and product offers where no one wins.”
  • “Brands ultimately become interchangeable in customers’ eyes.”
  • “Borrowers tend to select a mortgage originator based on product price and their expectation for an easy, speedy transaction process.”
  • “Consumer perceptions that switching is hard have eased…”

Accenture listed an assortment of strategies that banks can use to win over today’s new breed of customers. It just so happens that all of those ideas can also be adopted by forward-thinking mortgage brokers and non-bank lenders.

Many of its recommendations are online related, which is not coincidental. Last year, Accenture found that, “For the first time in our research, consumers ranked online banking services as the number one reason for staying with their bank, ahead of branch locations and low fees.”

Among other things, the firm suggested that banks:

  • Add robust mortgage research tools to their websites.
  • Automate back-end systems to provide real-time approval and closing updates.
  • Incent borrowers to download the bank’s mobile app.
  • Develop self-serve interfaces so borrowers can submit documents, track deal status and electronically close mortgages via their computer or smartphone. (The goal: cut back-office staffing and fulfillment costs.)
  • Provide term and product advice to borrowers via video chat.
  • Securely share mortgage closing statuses with realtors (if the client consents).
  • Facilitate connections between borrowers and service providers (e.g.,  home inspectors, renovators, handymen, movers, lawn services, furniture retailers, lawyers and so on).

In 2015, almost 7 in 10 Canadians surveyed preferred to get their mortgage from their primary bank, says Accenture. But change is in the air.

The firm asked that same group how they’d categorize the relationship with their bank. Three out of four (75%) characterized it as merely “transactional,” as opposed to an “advice-driven” relationship. (That was up 10 percentage points from the prior year.)

Meanwhile, close to half (46%) of consumers said they’d be willing to receive robo-advice in lieu of human advice. People cited speed and convenience as the #1 reason why. What an eye-opening stat given that mortgage advisors’ raison d’être is personal guidance.

“The digital borrower’s need for a loan officer can be satisfied via call centre and online chat capabilities,” Accenture added.

That said, we’re still far from the point where the Internet replaces face-to-face contact throughout the mortgage process. A full 79% of borrowers still get mortgages in a branch or office. Canada’s major banks and their armies of mortgage specialists and branch reps remain dominant, but dominance is not insurmountable. In the U.S., despite its structural banking differences, only 44% of borrowers get a mortgage through a branch/office location.

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Credit application FBPeople who apply for mortgages are up to three times more likely to seek additional credit in the 12 months that follow.

That stat comes from TransUnion Financial Services, which ran a study a few months back surveying U.S. mortgage applicants with a prime or better credit rating.

(Side note: TransUnion didn’t report any Canadian-specific data in this survey, but it’s a fair bet that things aren’t drastically different up here.)

The finding is important because “it quantitatively confirms the conventional wisdom,” said Ezra Becker, co-author of the study and senior vice president of research and consulting for TransUnion. The report also found that mortgage applicants were:

  • 50% more likely to open a credit card over the next 12 months following their mortgage inquiry
  • Up to three times more likely to seek a car loan compared to overall consumers.

This proclivity to borrow (more) is partly why lenders covet mortgage borrowers. Such customers are ripe for cross-selling and in the broker space, probably no one does that better than Scotiabank. Hopefully TD and other deposit-taking lenders in our channel take the same opportunity to offer financial services promos to new broker-referred clients. And for all the brokers who complain about branch signings, think about how much you’d complain if banks deemed our channel unprofitable (because of insufficient cross-sell opportunity) and pulled out entirely.

TransUnion’s study also found something else somewhat curious. Credit card spending actually rises just before a mortgage is about to be paid off. In fact, in the month prior to discharge, consumers were found to increase credit card spending up to three times the level they spent just six months earlier.

“A long held assumption among lenders is that new mortgage applicants spend less on their credit cards prior to their mortgage closing event – either to ensure their credit picture does not change or simply because they anticipate spending more once they move into their new home,” said Charlie Wise, VP at TransUnion and study co-author. “Our research indicates that millions of consumers actually increase their card spending in the months before the new mortgage origination. Whether it’s to purchase furnishings or make updates to their existing property, many consumers who move increase their spending before moving into their new residence.”

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Market share FBThe Globe and Mail reports that “unregulated lenders” now own a 15% share of Canada’s mortgage market, according to a Finance Department memo it obtained. That sounds somewhat concerning as a layperson, doesn’t it?

It sounds like Canada has some drunken, unrestrained Wild West lending going on. You can hear Joe Public thinking, “These yahoos must be selling those insidious teaser rates and doling out those NINJA (no income, no job, no assets) mortgages that sunk the U.S. market in 2008.”

That’s unfortunate…because it’s not true.

Right off the bat, let’s dispense with the term “unregulated” as it applies to prime mortgage lending. It’s complete baloney (I’d rather use another term but kids might be reading).

Virtually all prime non-bank lenders are regulated. They must conform to:

  • Federal regulations that apply to the banks providing their funding
  • Federal regulations that apply to insurers providing their default insurance and securitization
  • Provincial regulations applying to mortgage brokerages, administrators, etc.

On top of this, non-deposit-taking lenders must withstand the regular audits and scrutiny of their OSFI-regulated bank funders and investors.

All told, this puts them under a microscope that’s just as intense as the major banks, if not more so. Anyone who thinks banks would risk their capital and reputation by funding them otherwise is woefully misinformed.

Note, of course, that the aforementioned regulations do not generally apply to private subprime lenders. Those lenders account for roughly 1 in 16 mortgage originations, according to CIBC (see its chart below). Yet, they present arguably no material systemic risk because they’re predominately investor- and self-funded, require higher borrower equity, and price and underwrite commensurate with their risk appetite. (Incidentally, the rise in private lending is directly attributable to policy-maker’s own actions — i.e., stricter federal lending guidelines.)

Source: CIBC, Teranet

Source: CIBC, Teranet

The Globe further reports, “The government memo estimated that about 90 per cent of the business of unregulated lenders is subject to federal mortgage rules, which include meeting the strict underwriting standards set by CMHC and the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.”

The message here is that non-deposit-taking lenders have countless checks and balances and ample supervision to assure their stability. That’s vital because, as the Department of Finance is quick to point out, they’re “enhancing competition in the mortgage market.” Moreover, they account for roughly half of broker originations.

So let’s not allow news stories without context to send the wrong idea about non-traditionally regulated lenders. They and their mortgage broker partners are overwhelmingly responsible for keeping rates and prepayment penalties down, and that keeps more money in Canadians’ pockets.

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Laptop Online FBThe growth of rate comparison sites over the last six years has paralleled the surge in online mortgage shopping.

With the burgeoning demographic of web-savvy mortgage consumers comes greater demand for decision support tools. More than a few firms in our space are presently developing technology to help borrowers compare rates, costs, features and terms.

The latest example comes from RateHub.ca, which just got a grant from the National Research Council of Canada’s Industrial Assistance Program (NRC-IRAP). RateHub will receive up to half a million dollars to develop personalized online product recommendations for its site users. (By the way, this funding is available to other industry participants as well, but the qualification process is not easy.)

RateHub says its technology will allow users, among other things, to enter detailed financial information and receive personalized mortgage product recommendations. The site will develop tools for credit card, savings account and insurance comparisons as well.

“The benefit to the mortgage shopper is being able to go online at their convenience and find a product that is suited to their individual situation,” RateHub CEO Alyssa Furtado told us. “It will make the at-home, online research process much more accurate and seamless. As mortgage brokers know, not all borrowers are created equal. We want to improve the online experience, and take specific borrowing circumstances into consideration, such as investment properties, those with income from freelance work, etc., to help the user find what they are looking for and deliver a tailored rate and product.”

This naturally begs the question: Could automated mortgage recommendations ever replace the advice of a mortgage professional?”

Furtado doesn’t go that far, at least publicly. She sees the increasing range of tools available to web-based consumers as complementary to the services of a broker rather than being in direct competition. alyssa-furtado

“They can and do work hand-in-hand,” she said. “We know most consumers start their mortgage research online, and there is an expectation by the average user to be able to find the information they are searching for [online].”

“A mortgage broker will always have offline experience and be able to offer offline services that benefit the (more knowledgeable) mortgage buyer, like being able to negotiate on behalf of the customer.”

The risk is that consumers blindly gravitate to the lowest rate, or that the comparison technology leaves out key contract considerations.

Those concerns aside, the ability to better filter mortgage options online saves people time and makes for smarter borrowers. That’s clearly a win for consumers as information power leads to more effective negotiating and lower borrowing costs. 


Sidebar: Here’s some technical research if you want to read more on the cost of information asymmetry in Canada’s mortgage market.


By Steve Huebl & Robert McLister

 

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RMA and BFGBroker Financial Group (BFG) and Real Mortgage Associates Inc. (RMA) announced today that they plan to unite. The two brokerage companies say they’ll enter a joint share purchase agreement and take ownership in the other.

The reported benefits of the deal are sharing of technology, administrative resources, payroll, compliance and corporate relationships. Of course, with mortgage revenue being volume-based, the combination should also help the two garner slightly better compensation from certain lenders. “The industry pays on volume,” says BFG CEO Joe Rosati.

Both firms are relatively small as far as broker networks go. The companies haven’t disclosed their volume but we hear it’s in the $1.5 to $2 billion neighbourhood, combined. By teaming up, the two will also improve their economics with financial partners for greater cross-sell opportunities.

Both organizations will continue to operate their separate brands. Some might think that focusing finite resources on one brand would be wiser, but Rosati says the two firms don’t want to disrupt their brokers’ branding and operations.

The advantage that BFG heralds most is its “Scarlett” broker technology, with its CRM, digital marketing and back-office functionality. (Here’s a look at “Scarlett.”) “A partnership with BFG gives RMA access to a piece of technology that is vital to the future growth of our organizations,” said RMA President David Yuzpe in the company’s release today.

Brokerage consolidation is well underway in the mortgage business. This deal is just the latest example and the trend will only intensify. In a thin-margin industry that measures profits in basis points, scale can make or break a business model. The big boys (e.g., DLC, VERICO, Mortgage Alliance, TMG, etc.) are all looking to capture the highest producing agents. Hence, smaller shops may increasingly try to protect themselves and bulk up, to make their offerings more compelling. In that vein, this combination appears to be a sound move for both BFG and RMA.

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Divorce FB The nation’s biggest credit union, Vancity, is pulling out of the mortgage broker channel.

The Vancouver-based company sent an email to notify brokers this morning. It has been in the mortgage broker channel since 1991, when it acquired Citizens Trust Company. The channel was administered through Vancity’s subsidiary, Citizens Bank, until 2007 when it was transferred directly to Vancity.

When asked why it was leaving, John Derose, Vancity’s Director of Mobile Sales, explained:

As a member-owned financial co-operative we place a high priority on building strong relationships with our members. The business we generate through our mortgage broker channel often does not allow the best opportunity to build these relationships and we want to focus on those channels that do.

We are able to make this move in large part because our mobile [sales force] capacity has grown significantly since the 1990s. Historically, people have used brokers to get mortgage support and advice at the times and locations that suit them best. Now, with our mobile capacity, we have an expert capability to do this in-house.

Finally, the industry as a whole has been moving towards greater transparency and our members and prospective members can always see our rates posted on Vancity.com. This allows people to determine the best rates without necessarily having to use a mortgage broker.

Vancity did have some success with brokers. Reportedly its Victoria, B.C. market penetration was thanks in large part to broker-originated customers.

That aside, and while it’s sad to see a big brand name leave the market, Vancity was truly a marginal player in the broker space. It has been for a long time. As of the first quarter, it was only the 27th largest lender in the channel according to D+H data, a ranking it’s been more or less stuck at for years. Vancity’s overall broker market share was a mere speck at one-tenth of one percent.

Part of that is because of service issues, say Vancouver brokers we interviewed off record for this story. The other part is price competitiveness. Its broker rates have been absolutely horrendous in the last year. Its 5-year fixed, for example, has been over 3.00% for months. Meanwhile, it’s openly advertising 2.79% on its website for the general public.Vancity

Clearly the company didn’t want much broker business and we suspect this decision was in the back of its mind for a while. “The mortgage broker channel represents less than 5% of our overall mortgage portfolio,” said Derose. “We are confident we can replace this business through our branches, our call centre and through our mobile mortgage specialists.”

Naturally, brokers have a different take.

“I think it’s regrettable for a couple of reasons,” said Paul Taylor, CEO of Mortgage Professionals Canada, the country’s main broker industry association. “For our member brokers and the growing number of consumers who choose to use a mortgage broker, Vancity will no longer be an option to consider. With the difficulties many consumers are already facing in the real estate market in Vancouver, less financing options is not a good thing.”

Taylor went on to add, “It is also a disappointing that Vancity couldn’t find a way to make their broker relationships work for them…As other new entrants to the mortgage broker channel are finding, brokers offer a great way to access portions of the marketplace that direct marketing often doesn’t reach. Their individual customer relationships also ensure product suitability when presenting options, simplifying internal underwriting and approval processes.”

One of the new entrants Taylor is referring to is Manulife Bank. The bank invested millions of dollars to enter the broker channel earlier this year, and has reportedly been pleased with its performance to date. Brokers currently account for roughly one-third of all mortgage originations in Canada.

“I hope Vancity revisits this decision soon and reconsiders its position,” Taylor added. “As broker market share grows, it’s difficult to understand why any lender wouldn’t want to be a part of it.”

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Analysis FB

It looks like it’s going to get harder (and/or more expensive) to get approved for a mortgage—if you’re not a strong borrower, that is.

The nation’s banking regulator (OSFI) put banks on notice today that it’s stepping up policing of their underwriting practices. Here’s OSFI’s official letter.

“Risks associated with mortgage lending practices are, in general, adequately managed by Canadian financial institutions,” OSFI’s Annik Faucher told CMT. “…However we have identified areas that require close attention by mortgage lenders, and at the same time, increased scrutiny by OSFI. As noted in the letter released today, OSFI will continue its scrutiny in the areas of income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value (LTV) ratio calculations, and institutional risk appetite.”

When asked how often OSFI came across imprudent or unduly risky underwriting, Faucher said, “We would not be able to give you a specific number, but as we note in the letter, OSFI is indeed aware of a number of incidents where financial institutions have encountered misrepresentation of income and/or employment.”

Here’s more of what we’ve gathered thus far…

On why OSFI made this announcement:

  • Banks have already been under increased scrutiny since OSFI’s B-20 underwriting guideline took effect in 2012. Among other things, OSFI’s actions have resulted in stricter approval guidelines, more compliance audits, restrictions on securitized lending and more onerous capital requirements.
  • OSFI knows that the public and financial markets are growing more nervous about housing overvaluation by the day. It also probably realizes that both it and the Liberal government will be held partially accountable if any housing markets implode.
  • For these reasons, and due to its legitimate concern about overleveraging and overvaluation, OSFI wants to make a public statement that it’s doing its job of enforcing prudent risk management and protecting bank customers.

On the overall industry impact:

  • One might expect a slight drop in mortgage volumes at federally regulated lenders, other things equal, once lenders adjust to OSFI’s underwriting guidance.
  • Despite domestic lending accounting for about half of Big 6 bank profits overall, this development likely presents only a small earnings challenge.

On expected lender outcomes:110714_0511_OSFIsB21is1.jpg

  • Federally regulated lenders and lenders who source their funding from federally regulated lenders, will be impacted by this announcement.
  • Those lenders will respond in one or both of the following ways:
    • By tightening underwriting guidelines.
    • By making fewer exceptions to their underwriting policies.
  • Most provincially regulated lenders (i.e., credit unions) will not be directly impacted by this announcement when it comes to uninsured mortgages.
  • This could give certain credit unions a slight edge in low-ratio underwriting flexibility, for some period of time.
  • According to analysts we’ve spoken with, capital requirements will increase considerably on a percentage basis come November. However, the impact on an absolute basis should be small, but still large enough to trigger a slight reduction in mortgage discounting.

On how borrowers may fare:

  • Mortgage applicants, particularly foreign borrowers and self-employed applicants who don’t earn a traditional T4’d salary, should expect to be asked for more income documentation (e.g., tax documents, pay statements, bank account statements, etc.)
  • Some homeowners who can’t prove income in the traditional manner will be pushed into the arms of non-federally regulated lenders (credit unions, mortgage investment corporations and private lenders).
  • In turn, more of those borrowers will be forced to pay interest rate premiums, as federally regulated lenders have traditionally provided the lowest cost of borrowing in this market.
  • Lenders will make fewer debt-ratio exceptions. As a result, a small percentage of borrowers will see their requested loan sizes cut back.
  • In certain cases, homeowners with rental income will not be able to use as much of that income to qualify for their mortgage.
  • Lenders may no longer be able to rely on the 5-year posted qualifying rate (currently 4.74%) when measuring a borrower’s debt ratios. If this qualifying rate is raised, it will further restrict credit (maximum loan amounts) for borrowers with above-average debt loads.
  • Some lenders may start calculating and relying on more conservative lending values, as opposed to normal appraised values. This could slightly reduce the equity available to homeowners, a key consideration for those who want to refinance up to 80% of their property’s value (the current refi limit for prime mortgages).

Questions

One of the key questions remaining:

The qualification rate is currently established as the mode average of the Big 6 banks’ 5-year posted rates, as determined by the Bank of Canada. That number is presently 4.74%, about 250 basis points above the typical 5-year rate.

But OSFI isn’t satisfied with that. It says: “Relying on the prevailing posted five-year mortgage rate to test a borrower’s ability to service its obligations in a rising interest rate environment does not represent a sufficiently conservative stress test.”

If OSFI requires a higher qualification rate, that’ll make it harder for many borrowers to get a variable or 1- to 4-year fixed term. We’ve reached out to the regulator for clarity on this point and will update this story once we know.

Update — 6:09 p.m. ET:

Here’s OSFI’s response to the question on whether the qualification rate will be set higher:

Each application is unique, and the qualifying rate is something that financial institutions should look at and ask if it is appropriate as a minimum level to ensure ongoing mortgage affordability. As for future changes, as noted in the letter today, OSFI will be reviewing its Guideline B20 more broadly to ensure it is aligned with prudent industry practice and Canadian housing market realities.

Update 2 — 11:49 p.m. ET:

Here was OSFI head, Jeremy Rudin’s, response when BNN’s Andrew Bell asked if he’d increase the mortgage qualification rate:

“..We’re more inclined to reinforce [a] principles based approach..rather than pick a qualifying rate..”