* Draft guidelines seek to improve lending practices
* Bank regulator says high household debt a vulnerability
* Release comes as banks offer record low mortgage rates
* RBC mortgage head says competitive pressures prompt low rates
By Louise Egan
OTTAWA, March 19 (Reuters) - Canada’s banking regulator wants lenders to be more t ransparent about their mortgage businesses as it seeks to m inimize the risk to the economy from record-high levels of household debt.
Draft guidelines from the regulator released on Monday called for increased disclosure by banks o f their exposure to certain mortgage products and markets, and enhanced risk-management practices. It also demanded that banks treat home equity lines of credit (HELOCs) the same way as mortgages.
The Office of the Superintendent of Financial Institutions has been reviewing bank’s residential mortgage portfolios for over a year and the draft guidelines reflect some of its findings.
“Although financial-institution mortgage portfolios in Canada continue to perform well, a number of vulnerabilities in the financial system exist, including high household indebtedness,” said Mark Zelmer, assistant superintendent at OSFI’s regulation sector.
“OSFI is acting in an effort to prevent these vulnerabilities from evolving into problems for the financial system,” he said.
Canada’s housing sector avoided the subprime mortgage bust that drove the United States into recession. But a post-crisis property boom fueled by ultra-low lending rates has some economists and policymakers worried that a bubble is forming.
The guidelines released on Monday build on “Principles for Sound Residential Mortgage Underwriting” released last October by the Financial Stability Board, the global body set up by the Group of 20 wealthy and developing nations to monitor worldwide financial regulation.
The type of details OSFI wants banks to disclose to the public include the amount and percentage of total residential mortgage loans and HELOCS that are insured versus uninsured. It also wants the percentages that fall within the various amortization ranges to be made public as well as the average loan-to-value ratio for certain mortgages and their geographical breakdown.
OSFI also wants bank boards of directors to approve on an annual basis a policy that explicitly sets limits on the level of risk the bank is willing to accept with its residential mortgage business.
OSFI’s guidelines apply to all federally regulated financial institutions that are involved in residential mortgages and, in some cases, mortgage default insurance in Canada and abroad.
Parties have until May 1 to comment on the draft.
Canada’s household debt-to-income ratio soared to a record high of 151.9 percent last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but was still near record high at 150.6 percent.
Toronto-Dominion Bank, the country’s second-largest lender, earlier this month estimated housing to be over-valued by 10 to 15 percent.
Finance Minister Jim Flaherty has intervened three times since 2008 to tighten mortgage rules, and a Reuters poll last month showed market players widely expect another move in that direction this year.
While policymakers might like to see mortgage growth slow down, they’re getting little help from the banks, which recently cut rates on their cheapest mortgages to record lows, the second time this year they have got into a price war in the increasingly competitive mortgage space.
Bank of Montreal led the way on the rate cuts both times, offering five-year mortgages at 2.99 percent, with its competitors quick to follow suit to protect their market share.
“The recent offer was in response to competitive dynamics in the market,” said Marcia Moffat, head of home equity financing at Royal Bank of Canada, the country’s largest bank, which unveiled its own 2.99 percent rate on four-year loans the day after the BMO deal was announced.
While some worry the cheap debt is inviting ever larger bids on homes that will become unaffordable when rates rise, Moffat said the low rates are also helping some people get out of debt sooner.
“Many clients who are coming up for renewal are keeping the dollar amount steady and paying down their principal faster because of the lower rates, as opposed to upsizing and taking on additional debt,” she said in an interview.