The following letter was received by email in response to my email (Response to Draft Advisory Capital Treatment of Reverse Mortgages - entry 5/19/09):

From: Office of the Superintendent of Financial Institutions Canada
May 20, 2009
To: Ms PJ Wade
The Catalyst

Dear Ms Wade:
Subject: Capital Treatment of Reverse Mortgages

I am writing to respond to your e-mail of April 6, 2009, in which you raise a number of questions about the impact of OSFI's capital guidance on the development of a reverse mortgage industry in Canada. These responses are made in the context of OSFI's mandate.

OSFI's Mandate
OSFI was created to contribute to public confidence in the Canadian financial system. With respect to financial institutions, OSFI's legislated mandate is to:
    • supervise financial institutions to determine whether they are in sound financial condition and are complying with their          governing law and supervisory requirements
    • promptly advise institutions in the event there are material deficiencies and take or require management and boards to          take necessary corrective measures expeditiously
    • advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to          control and manage risk
    • monitor and evaluate system-wide or sectoral issues that may impact institutions negatively

In carrying out its mandate, OSFI is to strive to protect the rights and interests of depositors, policyholders and creditors of financial institutions, having due regard to the need to allow financial institutions to compete effectively and take reasonable risks.

Reverse Mortgages and OSFI's Mandate
Reverse mortgages are not prohibited by the Bank Act or the Trust and Loan Companies Act. the governing legislation for federally regulated deposit-taking institutions. Accordingly, all deposit taking institutions regulated by OSFI have the power to offer such products.

Federally regulated financial institutions are expected to maintain adequate capital for the risks that they undertake. OSFI was asked to consider what the capital treatment would be for reverse mortgages held by a federally regulated deposit-taking institution, as the Capital Adequacy Requirements (CAR) guideline does not explicitly address reverse mortgages. Assets that are not specifically addressed in the guideline are risk weighted at 100% which is on the higher end of the scale.

The capital treatment we propose is intended for reverse mortgages issued by federally regulated dep osit taking institutions, and is not inconsistent with the treatment set out in the CAR guideline for residential mortgages. Residential mortgages are risk weighted at 35%, provided that they do not exceed a loan-to-value ratio of 80% and provided that they are not past due.

Reverse mortgages differ from residential mortgages in that the balance owing on a reverse mortgage will increase over time as interest accrues and is capitalized. Reverse mortgage lenders cap the amount that will have to be repaid at the lesser of the proceeds realized on the sale of the home and the amount of the loan outstanding at that time — they look to the value of the property for repayment and have no recourse to the borrower or to the borrower's estate. A conventional mortgage gives the lender recourse to the borrower for the amount owed on the mortgage, so the lender can look to both the property and the borrower for repayment.

The rules proposed for reverse mortgages will allow reverse mortgages with a loan-to-value ratio of less than 60% to be treated the same way as conventional residential mortgages provided that the risk-management criteria set out in the advisory are met. The rules are intended to protect the rights and interests of depositors and creditors of federally regulated deposit-taking institutions, as set out in OSFI's legislated mandate.