Canada’s top bank regulator is ratcheting up its scrutiny of mortgage underwriting standards at the country’s banks.
The Office of the Superintendent of Financial Institutions warned on Thursday low interest rates, record levels of household debt and the sharp rise in house prices in cities such as Vancouver and Toronto could generate significant loan losses for lenders if the economy deteriorates.
The regulator called on banks to be more vigilant about who they’re lending to, saying it expects lenders to verify that their mortgage operations are well supported by prudent underwriting, as well as sound risk management and internal controls.
Superintendent Jeremy Rudin said in a statement that OSFI wants “sound mortgage underwriting procedures” that adapt to today’s circumstances in the housing market.
“With rapid price increases in some areas and current exceptionally low interest rates, the risks are getting larger,” Rudin said.
The regulator says it has identified several areas that it will be watching closely, including the verification of a borrower’s income.
It is also looking at non-conforming loans, debt service ratios, property appraisals and risk management.
“We are comfortable with our underwriting processes. The standards we have in place enable us to respond to developments in the market and to provide the best possible advice to our customers,” Roth said in an emailed statement to BNN.
The average selling price for homes in the Greater Toronto Area jumped 16.8 per cent to $746,546 in June, according to data released Wednesday by the Toronto Real Estate Board. For detached homes in Canada’s largest city, the average price rose 19.6 per cent to $1,259,486.
Earlier this week, the Real Estate Board of Greater Vancouver said the benchmark price for all properties sold in June jumped 32.1 per cent to $917,800. The benchmark for detached properties in that city surged 38.7 per cent to $1,561,500.
Canadian Finance Minister Bill Morneau announced in June that the Liberal government would set up a working group of federal, provincial and municipal officials to recommend policy changes aimed at preventing a housing bubble.
The finance ministry on Thursday welcomed OSFI’s move and said it was consistent with Morneau’s actions to address risks in the Canadian housing market.
The regulator also said it was moving ahead with initiatives announced in December last year aimed at strengthening the measurement of capital by the major banks to better position them to withstand potential losses.
The warning is in the air…
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