Federal banking regulator steps up supervision of mortgage underwriting

OTTAWA — The federal banking regulator served notice to the Canadian mortgage lending industry on Thursday that they’ve got their eye on them.

The Office of the Superintendent of Financial Institutions Canada sent a letter to all federally regulated financial institutions telling them it’s stepping up scrutiny of mortgage lending amid concerns about rising home prices and the consequences for lenders if the economy weakens.

The regulator said low interest rates, record levels of household debt and the sharp rise in house prices in some cities such as Vancouver and Toronto could generate significant loan losses for banks and other lenders if the economy deteriorates.

“With rapid price increases in some areas and current exceptionally low interest rates, the risks are getting larger,” superintendent Jeremy Rudin said in a statement.

“OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area.”

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The regulator identified several areas that it said it will be watching closely, including the verification of a borrower’s income, debt service ratios and the reliability of property appraisals.

OSFI did not make any regulatory changes, but said it will be putting a “greater emphasis” on confirming that mortgage lenders and insurers have sound controls and practices to mitigate risk. It also said it will be reviewing its guidelines that set out its expectations for prudent home mortgage underwriting.

The Canadian Bankers Association said it understands the regulator’s concern, but added that the banks exercise careful judgment before handing out mortgages.

“They only lend to clients who demonstrate the willingness and ability to repay their loans,” the association said in a statement.

“This is demonstrated by the banks’ mortgage in arrears numbers (no payments in 90 days or more) which are extremely low at 0.28 per cent of outstanding mortgages.”

The letter from OSFI follows an announcement by the regulator late last year that it was working to update the regulatory capital requirements for loans secured by residential real estate. The regulator hopes to begin to implement those changes in November.

Last month, the Bank of Canada raised concerns about the housing market and noted that vulnerabilities due to the continued rise of household debt and greater imbalances in regional housing markets were higher than they were six months ago.

The central bank said the severity of the risks associated with a sharp correction in real estate prices in Vancouver and Toronto as well as from household financial stress have risen.

The federal government announced a working group last month that is expected to meet throughout the summer to review factors that affect housing supply and demand, affordability and stability of the market.

A spokesman for Finance Minister Bill Morneau welcomed the move by the federal regulator.

“The independent actions of OSFI are consistent with the minister’s own actions to address pockets of risk in Canada’s housing market,” said Daniel Lauzon, Morneau’s director of communications.

Craig Wong, The Canadian Press