Guidelines recently imposed by Canada’s federal financial regulator serve as a perfect example of the state of Canada’s mortgage sector, and why the alternative markets, such as mortgage investment corporations (MICs), often fill the void when over-regulation occurs in the sector.
Specifically, the Office of the Superintendent of Financial Institutions (OSFI) is making it harder for Canadians to qualify for mortgages in the so-called regulated market by creating a “stress test” that makes it more difficult to acquire uninsured mortgages. Other new regulatory measures include a stricter adherence to loan-to-value (LTV) measurements and limits, as well as banning practice by regulated lenders of bundling lending arrangements with unregulated lenders.
The upshot of all of this is that the federal regulator has essentially made it harder for Canadians to borrow from regulated mortgage lenders, which has many of those lenders now crying foul at the new guidelines. They believe that, yet again, the void will be filled by so-called unregulated lenders, such as MICs.
As a bit of a background, OSFI, the federal regulator, essentially has jurisdiction over all federally-regulated financial institutions, which include banks, trust companies, loan companies, life insurance companies, fraternal benefit societies, and property and casualty insurance companies. What the OSFI doesn’t regulate is the alternative market, such as MICs. That doesn’t mean that MICs operate in a world without rules. It just means that the OSFI federal guidelines don’t apply and, instead, provincial and/or other financial guidelines are upheld.
As has been discussed on these pages previously, politics is often at the root of financial policy, and these current regulatory guidelines are not immune to such forces. Although the speculation is rampant about the current politics, a good guess would the failure of other measures to “cool down” the housing markets in Vancouver and Toronto, as well a general desire to at least appear to address the always-present “bubble” everyone’s been expecting to burst for the last decade.
Paving the way for alternatives
However, as has also been discussed on these pages, other sectors of Canada’s construction market, including the commercial sector, have not been the target of some of these government measures and, as a result, are growing at a steady rate, thank you very much.
So, are there any lessons to be learned from all of this? Of course. Over-regulation in Canada’s mortgages sector is nothing new, and alternatives such as MICs will continue to fill the void. Also, politics doesn’t always lead to ideal policy in the sector, but the markets have a way of being resilient regardless of any policy intentions.
ASCEND MIC is a mortgage investment corporation, with offices in Toronto and Richmond Hill, that specializes in various aspects of mortgage investing, lending, administration and more.