Today marked what was to be a big day in the world of financing…….until it wasn’t. Today was the day OFSI was to release the highly anticipated changes and updates to B-20 guidelines for financing.
You would be forgiven for not knowing, as the announcement ended up being, well, no announcement really. A quick description of the report might be ” no news is good news”.
Whether you were aware of the announcement or not, I highly suggest you take a virtual, web based trip over to the OFSI website, and read the announcement for yourself. There is some really good nuggets in there. The link is:
OFSI was looking for a way to help control risk on lenders balance sheets. Remember, OFSI doesn’t work for you, or the general public. OFSI’s job is to protect the financial system. Generally, it is accepted that protecting the financial system is good for the public, or as my dad would have said ” what is good for the goose, is good for the gander”. However, sometimes protecting the financial system means you have to rein down fire and brimstone on the consumer.
Limiting a total loan to income, or a total debt load to income ratio would have helped to rein in what consumers were able to spend on purchasing a home. However, this would have meant that homes would be out of reach – moreso than they are even now, for a lot of Canadians. Again, OFSI really doesn’t bother with what is good for the average Canadian, only what is good for the average participant in the banking system.
If OFSI would have implemented an LTI or TDI ratio, it means that the already slow real estate market would become even slower. Slower markets, and a sales to listing ratio that is the lowest since 2008 isn’t exactly a great thing for the financial system. The entire financial system is highly dependant on the velocity of money – money moving around in short, to function. If you start to slow down the speed or velocity of money, it can create a lot of unintended consequences. OFSI knows this. They also know that a lot of the worries that existed when they launched the consultation back in Jan 2023 – the market has taken care of in some fashion. House prices are down, bidding wars have dried up, used car prices are down, and the amount of new credit being issued is down substantially. This means a lot of the heavy lifting on limiting LTI or TDI’s was done by the market, and the BOC with higher interest rates.
However, there was a reference that was in the press release multiple times that has me a little worried:
“A key concern raised was the disproportionate impact that new, industry-wide measures could have on smaller institutions with unique business models”.
OFSI seems concerned that smaller lenders could suffer problems with something should new measures be put in place. With the problems we saw in the United States in February and March of this year ( which I do not think we have seen the last of ), it is a little concerning to see this statement. Does this mean that some of the smaller players in the industry are weaker than OFSI would like? Does it mean that tighter credit could sink some smaller players, or ” smaller institutions with unique business models”? I am not sure exactly what to read into it, but it doesn’t sound exactly good. Remember that OFSI audits all financial players, and they have a much better idea of what bank balance sheets look like, what risks are on the banks books, and they have their finger on the pulse of the financial system. OFSI will know things that we just won’t know, or won’t see.
At the end of the day, I feel OFSI did the right thing. The last thing we needed in a fairly beaten up market is more uncertainty, more rules to make it harder to our clients to purchase, and more government intervention. Canadian banks are some of the best capitalized institutions in the world, and are generally seen as a safe haven. This doesn’t mean they won’t experience some turbulence if the housing market continues to deteriorate, just that they will be the ‘ cleanest dirty shirt in the laundry ‘
While we didn’t see these proposals unveiled this time around, we may have just postponed the inevitable. If interest rates start to drop ,and we see any sort of return to the craziness of 2021 in housing markets, I think that OFSI will not hesitate to bring in an LTI or TDI requirement for lending. This would allow the BOC to drop interest rates if needed, without allowing housing to be bid up again like we saw in the past. An LTI or TDI would actually be what could save the system from the rinse and repeat cycle of lower rates begetting higher house prices, and vice versa.
I suggest you bookmark the OFSI webpage, check it often, and see what they are up to. What OFSI does – or in cases like today – doesn’t do, could have more impact on your ability to help clients than the BOC, the Federal Government, or any of your lenders.
Ryan Sims insights, thoughts, and analysis 
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