John Greenwood Financial Post
Tough new mortgage guidelines announced last month by the federal banking regulator are aimed at letting some of the air out of Canada’s over-inflated housing market. The trouble is, some of the rules don’t affect credit unions, which make up a significant chunk of the consumer loan market in British Columbia, Quebec and other provinces.
That’s because credit unions, as provincially regulated institutions, are not part of the jurisdiction of the Office of the Superintendent of Financial Institutions.
According to CanadianMortgageTrends.com, which provides a detailed explanation here, that loophole may provide an important competitive advantage for credit unions at a time when financial institutions are fighting tooth and nail for lending market share, especially on the consumer side.
The idea behind the rules is simple: Restrict the flow of credit and consumer spending has to come down.
Among the rules at issue:
– OSFI has lowered the maximum size of popular home equity lines of credit (HELOCs) to 65% loan to value. But for Credit unions in provinces such as British Columbia and Ontario, the previous limit of 80% loan to value is still in force
– OSFI has been on a mission to compel lenders to be more careful about lending to the self-employed and under the new rules, so-called stated income mortgages will no longer be allowed. But as far as credit unions are concerned, the bar for income proof remains low.
Credit unions argue that the discrepancy shouldn’t be a problem because as member-owned institutions they tend to be more cautious than banks. Still, there’s no denying it creates a competitive advantage for a sector that has long chafed at restrictions around funding — few credit unions can issue bonds at a cost effective rate and none can sell shares.
For the past decade retail borrowing has been on the rise, driven primarily by mortgage borrowing, with total mortgages outstanding now sitting at a whopping $1.1-trillion. That’s lifted the ratio of household debt to income to a record 152%, well into the danger zone, according to Bank of Canada Governor Mark Carney. Since 2008 policy makers have been gently trying to persuade consumers to start paying down debt, but with only limited effect until recently.
In British Columbia, home to some of the country’s most expensive real estate, credit unions have about 25% of the mortgage market with chartered banks holding the rest.
The B.C. Financial Institutions Commission is currently conducting a review of its mortgage rules, according to Doug Mclean, the deputy superintendent.
“We are concerned about the current level of consumer debt in the province and we want to ensure that credit unions are following prudent underwriting practices,” said Mr. Mclean.
In most cases the provincial regulators follow pretty much in step with OSFI so any significant loopholes will likely get closed over time, analysts said.
The new OSFI guidelines “all sound very reasonable and I would expect the credit unions would [already] be following them,” said Helmut Pastrick, chief economist for Central 1 Credit Union, the industry association for credit unions in British Columbia and Ontario
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