Canada’s Regulator Tightens Capital Requirements for Mortgage Insurers

Canada’s financial services regulator released new draft capital requirements for federally regulated mortgage insurers to better reflect growing risks in the country’s housing markets.

The Office of the Superintendent of Financial Institutions said Friday the new requirements, which will come into force Jan. 1, are aimed at allowing insurers to better withstand “severe but plausible losses.” The new measures include provisions that trigger supplementary capital requirements for regions with high home prices relative to incomes, it said.

“When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside,” Jeremy Rudin, head of the agency, said in a statement. “Ultimately this will continue to provide a level of protection to both policyholders and unsecured creditors.”

OSFI is strengthening its oversight as Canadians continue to tap banks for mortgage loans amid low interest rates and escalating property prices, including efforts to ensure lenders and insurers have proper controls in place. The regulator is inviting comments on the draft requirements until Oct. 21.

According to the draft rules, a scaling factor would be used to determine when supplementary capital requirements should be imposed. Based of OSFI’s methodology, had the the draft rules been in place for the second quarter, Vancouver, Toronto, Calgary and Edmonton would have faced supplemental capital requirements.

The new approach will incorporate new drivers of risk “such as borrower creditworthiness, remaining amortization, and outstanding loan balance,” OSFI said in a letter distributed to mortgage insurers.

Capital requirements for insurers were last updated almost 15 years ago, the regulator said. State-owned Canada Mortgage and Housing Corp. is the country’s biggest mortgage insurer. It competes with private-sector companies Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co.