Federal banking regulators are calling on financial firms to be particularly diligent in their mortgage underwriting practices.
In a letter to financial firms released Wednesday, the Office of the Superintendent of Financial Institutions alerts firms to a proposed new set of mortgage underwriting principles that were recently published by the Financial Stability Board. The principles, which will be finalized by early 2012, are designed to strengthen global residential mortgage underwriting practices, it notes.
OSFI says that the FSB principles are largely with its expectations for residential mortgage underwriting, and that once they are finalized, firms should treat these international principles as minimum criteria, and should consider them in the context of their own current mortgage lending practices.
Additionally, OSFI reports that over the last 18 months, it has conducted focused work on retail lending products, and it plans additional analysis in this area in the coming months. In the meantime, it highlights several points which it sees as key supplements to the FSB principles.
Among other things, it says: lenders are expected to have an established, board-approved policy for mortgage underwriting that is consistent with the institution’s risk appetite and tolerance; that lenders should ensure that loans are subject to an appropriate loan-to-value ratio; and that they should have controls in place to review and recalibrate risk parameters, model validation and stress testing with respect to their mortgage lending.
“Given the current uncertainty and volatility in global capital markets, historically low interest rates, higher Canadian borrower debt-to-income levels, and relatively strong housing price appreciation, OSFI expects [firms] to be extra diligent in maintaining sound and prudent mortgage underwriting practices,” it concludes.