Rising mortgage stress remains manageable | Finance and Investment

“Over the past 18 months, there has been a rapid and unprecedented increase in the proportion of negatively amortizing mortgages in Canada,” reports DBRS.

Along with the increase in negative amortization mortgages, there is also a growing risk of “negative equity” mortgages – where loan-to-value ratios exceed 100% – and an increase in default risk.

In response to these challenges, the Office of the Superintendent of Financial Institutions (OSFI) has increased capital requirements for mortgage insurers.

“Data on negative equity mortgages is not publicly available, but such mortgages exist and will lead to higher capital requirements,” points out DBRS.

That said, the report states that DBRS expects the impact on mortgage insurers’ capital ratios to be modest, and that they will be able to withstand the weak housing market.

“We expect underwriting profitability to weaken somewhat, but to be manageable from a credit quality perspective, given that mortgage insurers have strong capital reserves and underwriting criteria credit conservatives,” summarizes the report.

However, this outlook depends on the resilience of the Canadian labor market, as “the unemployment rate is closely linked to mortgage delinquency rates.”