The Office of the Superintendent of Financial Institutions is issuing a draft advisory that sets out its view on the capital treatment of reverse mortgages.

OSFI notes that it has been asked to express a view on the capital treatment that would apply to reverse mortgages held by a federally regulated deposit taking institution.

“Reverse mortgages more closely resemble investments in real estate than they do residential mortgages as defined in the Basel Framework,” the regulator says.

“Reverse mortgages are limited recourse loans — the lender looks solely to the residential property securing the loan for repayment of principal, accrued interest and costs. Assuming there is no event of default, the amount recovered on a reverse mortgage is capped at the fair market value of the home at the time it is sold and the lender has no recourse to the borrower for any shortfalls,” it explains.

“In contrast, a residential mortgage is, first of all, an exposure to an individual person secured by recourse to a residential property. The lender has recourse to the borrower for any shortfalls or deficiencies in property value,” it says. “Nevertheless, under appropriately conservative conditions, a large number of reverse mortgages should be able to qualify for the 35% qualifying residential mortgage risk weight under the standardized approach,” it notes, adding that it is proposing that only the standardized approach be made available for this type of lending, “as this is consistent with the treatment observed in other Basel member countries.”

Comments on the draft advisory are due by April 17.