Follow-up responses from OSFI to questions posed by Committee members on January 21, 2022

Type of Publication: Letter

Date: January 31, 2022

Peter Fonseca, Chair
House of Commons Standing Committee on Finance
The House of Commons
Ottawa, Ontario  K1A 0A4
Canada

Dear Mr. Fonseca,

During the Superintendent’s appearance before the House of Commons Standing Committee on Finance on January 21, 2022, members of the Committee asked questions to which the Superintendent committed to providing further information. Specifically, the members wanted more information on the questions below which are followed by OSFI’s responses.

Reports/modeling from CMHC or OSFI related to the vulnerability of households or financial institutions in the event of a housing correction.

In addition to OSFI’s own publications and statements on vulnerabilities,^{Footnote 1} OSFI contibutes to the Bank of Canada’s Financial System Review, which reports on system-wide vulnerabilities in the Canadian financial system. In its May 2021 publication, it cited elevated level of household indebtedness and imbalances in the housing market as two of its six identified vulnerabilities. This publication includes charts and narrative explanations the contributing factors for these vulnerabilities and more.

Subnational debt figures from OSFI - showing debt to income of households by region.

Tables of average loan to income by province and selected municipalities and regions can be found appended in Annex 1 of this letter.

Minutes of Senior Advisory Committee (SAC) meetings for last 3 years including any reports and studies discussed. The Committee also requested any reports discussed at SAC that relate to an overheated housing market.

While OSFI participates in SAC meetings, those meetings are chaired by the Deputy Minister of Finance and we do not have control or ownership of reports or studies produced for these meetings.

Analysis or recommendations on the government’s vacancy tax proposal - how many homes would be subject to the tax and in what regions?

OSFI has not provided analysis or recommendations related to vacancy tax proposals.

During the Committee proceedings the Superintendent also committed to: providing information on the proportion of uninsured versus insured mortgages that were originated in 2021, how many mortgage loans were written with a 5% down payment, the proportion of those mortgages that are written with a variable rate, and the proportion of mortgages that were granted to borrowers for investment or income purposes. Detailed responses can be found in Annex 2.

OSFI collects information from federally regulated lenders and mortgages insurers on real estate secured lending and mortgage insurance. Information contained in the annexes may not fully cover mortgage loans underwritten by provincially regulated lenders and other lenders not overseen by OSFI (e.g., other private lenders).

OSFI and its partner agencies in the federal government continue to monitor the stability of the Canadian financial system, and what other measures may help support Canadians. During the Committee meeting, the Superintendent answered a question about “shadow banking”, specifically addressing the participation of non-bank financial intermediaries in the housing finance system.

Non-banking financial intermediation (occasionally referred to as “shadow banking”) refers to institutions and activities in the housing finance system and beyond. Upon reading the transcript, the Superintendent thought it would be useful to the committee to provide more context on the issue.

At the end of 2019, the non-bank financial intermediation sector had approximately C$1.7 trillion in assets under management according to a 2021 study by the Bank of Canada, or 10.9 percent of the Canadian financial system. Growing in line with the broader Canadian financial system, this sector includes many important financial intermediation activities including the management of investment funds, repo and securities lending, private-label securitizations, and non-bank lending.

Since 2015-2016, OSFI has deepened its understanding of this sector and adapted its practices as a result. Interconnectedness of non-bank financial intermediaries with OSFI’s federally-regulated financial institutions remains the principal risk from OSFI’s perspective with respect to this sector. We have adapted to this risk in a number of ways.

Our first and most important adaptation is to focus our daily supervisory activities on the risk at an institution level. More specifically, we dedicate relatively more time and attention to those institutions with greater interconnectivity to non-bank financial intermediaries. We have built our capabilities in this regard via our work with partner agencies - for example, our peers on the Financial Institutions Supervisory Committee (FISC), the Heads of Regulatory Agencies, the Basel Committee on Banking Supervision, and the Financial Stability Board. Finally, we have also adapted our capital and liquidity guidelines to ensure federally regulated financial institutions have margins of safety to absorb volatility that could emerge from the non-bank financial intermediation sector. Going forward, we will focus on developing our research capabilities for systemic risk associated with this sector and our agility in adapting our supervisory approaches to the findings of that research.

Thank you for inviting OSFI to appear before the Committee. We are happy to respond to any further requests that the Committee members may have.

Sincerely,

Tracie Noftle
Senior Director
Communications and Corporate Affairs
Office of the Superintendent of Financial Institutions

ANNEX 1: Loan to Income and Debt Service ratios by Province and Municipalities/Regions

The following tables provide the average loan to income values (LTI) and debt service ratios (i.e., Total Debt Service ratio (TDS) and Gross Debt Service ratio (GDS)), for mortgage loans underwritten by federally regulated lenders in 2021, by province and municipality/region.

For the Committee’s ease of reference, CMHC outlines definitions for TDS and GDS on its website: Calculating GDS/TDS. The LTI ratio value below is defined as the value of the mortgage loan in the transactions divided by the borrower(s)’ income. The tables are organized in descending order of average LTI.

ANNEX 2: Uninsured vs Insured mortgage originations, mortgage loans with 5% down, the proportion that are written at a variable rate and the proportion that were granted for investment/rental income.

Uninsured vs Insured Mortgage Originations

In 2021, federally regulated lenders originated $430.9 billion in insured and uninsured mortgage loans.

• Of this amount, $380.1 billion (88.2% of the total) was uninsured and $50.7 billion (11.8%) was insured by federal mortgage insurers (CMHC, Sagen MI Canada, or Canada Guaranty).
• The proportion of total mortgage loans originated that are insured has decreased since 2016 (when 21.4% of total mortgage loans originated were insured).^{Footnote 2}

How many mortgage loans in 2021 have been underwritten at a 5% down payment? At a 10% down payment?

The data provided by federally regulated lenders indicates that in 2021, approximately $21.4 billion were underwritten at a down payment that is 5% (or less, when including the mortgage insurance premium). This represents 4.97% of the total mortgage loans underwritten by federally regulated lenders in 2021. To provide a slightly broader range, there was $41.1 billion underwritten with a down payment of 10% or less (including those with 5% or less), which represents 9.54% of the total mortgage loans originated in 2021.

By way of background, all federal mortgage insurers publish quarterly financial supplements that detail insured mortgage loans by loan to value (LTV) bands - at origination and updated values for insurance in force. For ease of reference, the public information for all three mortgage insurers can be found on their websites:

• CMHC: Mortgage Loan Insurance Business Supplement (For Q3 2021, see worksheets 7 to 9).
• Sagen MI Canada: Mortgage Loan Insurance Business Supplemental (For Q3 2021, see slides 6 and 8).
• Canada Guaranty MI: Mortgage Loan Insurance Business Supplemental (For Q3 2021, see slides 1 and 4).

What proportions of mortgages with a down payment of 5% / 10% are fixed vs variable rate? How about for investors?

• Of the $21.4 billion underwritten at a down payment of 5% (or less, when including the mortgage insurance premium in the loan amount), $15.9 billion had a fixed rate (74.3% of the total) and $5.5 billion had a variable rate (25.7% of the total).
• Of the $41.1 billion underwritten at a down payment of 10% or less, $27.6 billion had a fixed rate (67.3% of the total) and $13.4 had a variable rate (32.7% of the total).
• Housing investors that obtain a mortgage loans from a federally regulated lender require a minimum 20% down payment.^{Footnote 3}
• In 2021, 65% of mortgages granted to borrowers for investment/rental income purposes were variable rate mortgages; 35% were fixed rate mortgages.