OSFI: Loans deferred by banks no longer to be treated as performing

Despite the economic threat of the fresh wave of COVID-19 infections, the Office of the Superintendent of Financial Institutions said late last week that it will not be reinstating the special treatment of loans deferred by banks.

The OSFI treated loans and insurance policies with deferred payments as performing assets from March to the beginning of October, Reuters reported.

“Now, we’re six months in, and banks and insurance companies … are in a much better position to go back to the loan-by-loan assessment that would be normal in these circumstances and have a lot more information from borrowers,” said Superintendent of Financial Institutions Jeremy Rudin. “If we get into a situation where blanket decisions again are required, of course we’d have to consider making further changes or perhaps reversing our previous decision. But that’s not the situation in which we find ourselves.”

Mortgage deferrals accounted for 13.5% of Canadian banks’ overall loan volume during the second quarter. The highest share of 16% was seen at the end of Q1.

The end of banks’ payment deferral programs – upon which millions of Canadians depended on during the height of the pandemic’s economic devastation – is posing the risk of mortgage arrears going as high as 0.53% in Q2 2021, data from the central bank and Ryerson University showed.

This considerably outstrips the pre-pandemic level of 0.25%, and the overall arrears rate might even double to a level higher than that seen during the Great Financial Crisis if deferrals aren’t reintroduced, according to veteran markets observers Murtaza Haider and Stephen Moranis.

“Mortgage deferrals and other support measures have flattened the arrears curve,” Haider and Moranis wrote in their recent contribution for The Financial Post. “As the economic engine restarts, most full-time workers, who are more likely to be homeowners, are expected to be able to meet their financial obligations, including meeting housing and shelter costs… Realizing now that the labour market recovery will take slightly longer, a prudent approach would be to try matching the expiry of deferrals and emergency benefits with the labour market recovery.”