Remarks by Superintendent Julie Dickson to the Canadian Association of Accredited Mortgage Professionals (CAAMP) 2013 Mortgage Forum, Toronto, Ontario, November 25, 2013


All of us have a responsibility and an interest in ensuring that prudent lending is occurring. Borrowers do not want to over-extend themselves, brokers want to act in the best interests of borrowers, and banks want to facilitate this relationship while not putting depositors at risk. We all have a role to play in maintaining Canada’s sound financial system.

Shared Interests in Prudent Mortgage Lending

I am happy to be here today as I think it is important for all of us to take advantage of occasions like this to explain “what makes us tick.” And I am especially happy to be speaking first at this conference. Lacking in military experience, and having never been to outer space, I would not want to follow Colonel Chris Hadfield or General Colin Powell.

In recent years, the Canadian Association of Accredited Mortgage Professionals (CAAMP) has placed an increasingly strong focus on government relations, and undertaken and published important research on the mortgage market in Canada. Both of these undertakings have been useful in explaining CAAMP’s perspective to a broad audience. 

In this spirit, I hope that my speaking to you today will help convey OSFI’s perspective on a range of issues.  

Without question, your organization and mine share many of the same goals. CAAMP’s 2013 annual report reaffirms your commitment to upholding excellence in the Canadian mortgage industry and maintaining quality mortgage industry standards. We support and share these commitments. You have also placed an emphasis on educating consumers, and ensuring their interests are met. Footnote 1

OSFI also cares about consumers, as they hold their life savings at the banks and financial institutions we are mandated to supervise and regulate. Banks are at the centre of transactions where consumers pay for goods and services, and of course they provide funding to consumers for important services like mortgages. Prudent lending and investment by banks are therefore critical if banks are to stay strong, benefit consumers and promote economic growth. 

Mortgage underwriting is important because it has been shown that if the real estate market in a country sees a sharp disturbance, many consumers, or perhaps even the country itself, will suffer as a result. Historically, serious financial crises have often been associated with real estate lending. Canada has not avoided significant real estate corrections in the past, such as during 1981 and 1991. We all want to avoid a repeat of those times, and an open dialogue between regulators and mortgage professionals is needed to ensure lending practices promote stability.
This conference comes at a time when interest in housing is at a high level. Everyone wants to know whether markets are balanced or in a bubble, whether rules will be changed, what will happen when interest rates rise, and what could cause the market to fall. This is understandable, given that housing touches all Canadians: those with houses, those who want to buy a house, those who work in industries that are supported by strong housing markets (such as hardware stores, renovation companies, and mortgage brokers). Even those who have no direct interest understand that housing markets can have profound implications for the economy, which affects everyone. 

Today, I will cover OSFI’s perspectives on the residential mortgage market.

Your conference will hear many views on the state of the housing market. OSFI does not issue independent studies of the market or make predictions about where the market is going. But we follow very closely all the studies and views of market participants like CAAMP, and of our federal agency sisters, such as the Bank of Canada and the Department of Finance, and others. No doubt you are aware that there are a range of opinions out there. 

Today, we can read articles about the market being in a “soft landing,”Footnote 2 or more ominously, “teetering precariously.”Footnote 3 Over the past months, a range of observers have expressed a variety of views. The Organization for Economic Cooperation and Development (OECD) found Canada’s housing prices to be overvalued on the basis of two gauges: price-to-income, and price-to-rent.Footnote 4 Both The EconomistFootnote 5 and the International Monetary Fund (IMF) concurred, with the IMF also noting that residential investment as a share of GDP was at a two-decade high, and that house completions had outpaced household formation for the past decade and a half. Furthermore, the household debt-to-income ratio in Canada has surged over the last decade, making the economy vulnerable to adverse shocks.Footnote 6

The IMF even went so far as to suggest in discussions with the Canadian government earlier this year that a tighter macro regime might be needed to cool the housing market.Footnote 7

While not all observers agreed with the extent of the OECD and IMF comments, the continued strength of housing prices across many Canadian cities in the second half of 2013 is undeniable.

As a bank regulator, OSFI does study the market — but we do not volunteer opinions on whether a bubble exists. This is primarily because history has shown it is difficult to determine whether a bubble in any market exists, what the size of that bubble might be, or the consequences of it bursting. The ‘’ bubble, for example, was easy to identify in hindsight, but few saw it coming. Usually only a few people accurately predict bubbles; most do not — and if someone was able to predict a bubble accurately in the past, this, unfortunately, is no guarantee of future performance.

Because bubbles are so difficult to identify, by taking a position one way or the other, OSFI could either provide positive reinforcement to banks to lend more (which could make a bubble bigger) or create an unnecessary slowdown in lending by banks. OSFI’s role is more about prevention, and ensuring that banks are prepared for the unexpected.

Although some believe that bank regulators can employ macro-prudential tools to slow down (or increase) real estate lending, our focus has been more on traditionally prudent mortgage lending practices. OSFI’s Guideline B-20 should be seen in this light.

Prudent lending practices should not change over time. There are long-held principles governing prudent lending. Guideline B-20 grew out of a document issued by global regulators, based on such time-honoured principles. To this, we added a few elements relevant to the Canadian environment, such as setting a maximum loan-to-value (LTV) ratio for home equity lines of credit (HELOCs). CAAMP and others provided valuable feedback on B-20 during the consultation process, which was appreciated. 

Some basics covered in Guideline B-20 include:  

  • having a sound appraisal process for underlying mortgage properties, including, in general, conducting an on-site inspection of the property (based on risk);
  • paying attention to LTV ratios, as past experience suggests they are highly correlated with credit risk;
  • adequately assessing the borrower’s capacity to service a mortgage, and contemplating current and future conditions when qualifying a borrower. 

Banks and federal trust companies are very focused on Guideline B-20 and prudent mortgage underwriting today. The quality, accuracy and depth of information provided by mortgage brokers are also important and can significantly influence mortgage underwriting decisions made by financial institutions. The role you play in this regard is extremely important.

While innovation is welcome, only very carefully should banks step away from traditional prudential practices.  

The basics are not rocket science. But time and again, it is by ignoring the basics that banks get into trouble. Indeed, while many observers have suggested the global financial crisis was caused by complex products and banks going beyond traditional lending, in fact major problems within traditional lending were a source of the problem — namely, unsound mortgage underwriting.

And, while the global financial crisis was unique, one does not have to do much research to conclude that real estate is often at the heart of past crises — made even worse if weak mortgage underwriting practice had been matched by equally poor practices in other loan products, compounded through securitization. 

Beyond Guideline B-20, a major OSFI focus has been on stress testing and thinking about worst-case scenarios. Many bank regulators around the world are doing the same thing. OSFI asks banks to run stress tests that provide expected results for a number of “what if” questions, including the likely impacts of overvalued markets, or a serious economic decline in Canada, as has occurred in some other countries. OSFI and the Bank of Canada also conduct macro stress tests to explore the possible implications of severe adverse economic scenarios — including episodes of significant housing price corrections. Such tests always cover a range of possibilities, given, as I noted previously, that different opinions always exist on where the market is, and where it is headed.   

Although such stress tests are useful to spark discussion about risks, banks should not rely on stress test results alone in managing their risks. Even when test results look comforting, banks need to recognize the assumptions that go into such tests. In particular, it is difficult to gauge the impact of second round effects. Also, as I told Euroweek in September, if you extend stress tests from two or three years out to five years, the results can look very different due to changes in interest rates or inflation.Footnote 8

Consumers must be considered here because, while banks may be able to withstand shocks, consumers may not. Banks have to set aside reserves for unexpected losses and are typically far better situated to deal with shocks than consumers — who may be highly indebted and therefore particularly vulnerable to significant increases in interest rates or unemployment.

Some might suggest that all is well in the mortgage market because delinquencies are low and credit scores of borrowers are high. However, delinquency rates and credit scores are lagging indicators that can deteriorate rapidly if economic conditions worsen.

So OSFI encourages financial institutions to pay considerable attention to the quality of borrowers, both in the current environment and potential future environments.

OSFI is often asked if we are comfortable with the capital being held by banks, particularly related to real estate lending. I noted in a speech in May that we were comfortable. However, we continue to monitor this closely.Footnote 9  

Canada is not unique in asking whether we have a housing market that is in balance or overheated. Many countries are asking similar questions, given the impact of low mortgage rates and the incentive to borrow. There may also be a search for yield in several countries based on the expectation that property prices will keep going up.

Every mortgage market in the world has unique features, and so there is no perfect, one-size-fits-all approach. In Canada, uninsured mortgages would tend to be of higher quality than the average loan portfolio in other countries (because uninsured loans in Canada have maximum loan-to-value ratios of 80 per cent). OSFI now examines the commercial activities of the Canada Mortgage and Housing Corporation (CMHC), which plays a huge role in our domestic mortgage market. And unlike the situation in the United States, in Canada there is no ability to deduct mortgage interest. Finally, in Canada, mortgage loans tend to be full recourse loans, meaning that consumers cannot eliminate their mortgage debt by handing the bank the keys to the house.

Before the summer, OSFI had looked at whether any changes to Guideline B-20 were necessary. We decided that no changes were needed at that time. However, we continue to closely monitor real estate lending, including seeking additional information to better understand what major financial institutions are doing. Any future changes to our guidelines would involve public consultations with CAAMP and other stakeholders. (And I can note here that CAAMP feedback was important in drafting the final version of Guideline B-20.)

OSFI is also working on Guideline B-21, which pertains to mortgage insurers and how they interact with mortgage lenders. Guideline B-21 will include some best practices that we have seen. We expect to issue the draft for public consultation by the end of March 2014.

OSFI believes Guideline B-20 has made a positive difference in terms of helping to ensure long-term stability in the housing market, which is essential in uncertain times. Guideline B-21 will close the loop.

Nevertheless, this is a market that continues to bear very close watching.

All of us have a responsibility and an interest in ensuring that prudent lending is occurring. Borrowers do not want to over-extend themselves, brokers want to act in the best interests of borrowers, and banks want to facilitate this relationship while not putting depositors at risk. We all have a role to play in maintaining Canada’s sound financial system.

Thank you for having invited me to speak with you today.


Footnote 1

See CAAMP 2012-13 Annual Report. Available online at:

Return to footnote 1 referrer

Footnote 2

See “Fitch: 'Soft Landing' Likely for Overvalued Canadian Housing Market” Reuters, November 19, 2013. Available online at:

Return to footnote 2 referrer

Footnote 3

See “Canada’s housing market teeters precariously” Financial Times, November 10, 2013. Available online at:

Return to footnote 3 referrer

Footnote 4

OECD Economic Outlook, Volume 2013 Issue 1, pg. 24. See also the table online at:

Return to footnote 4 referrer

Footnote 5

“Moody Mark, sunny Stephen” in The Economist, 29 September 2013 online edition. Link:

Return to footnote 5 referrer

Footnote 6

“Canada 2012 Article IV Consultation,” International Monetary Fund, February 2013.

Return to footnote 6 referrer

Footnote 7

Ibid. Pg. 19-20.

Return to footnote 7 referrer

Footnote 8

Julie Dickson’s interview with Euroweek is available online at:

Return to footnote 8 referrer

Footnote 9

See the remarks by Superintendent Julie Dickson to the 2013 Financial Services Invitational Forum, Cambridge, May 2, 2013. Online at:

Return to footnote 9 referrer