Canada watchdog lays down warning to mortgage lenders

A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Canada, June 29, 2015. REUTERS/Mark Blinch

VANCOUVER/TORONTO (Reuters) - Canada’s banking regulator on Monday urged everyone in the country’s mortgage industry to support tougher lending rules, warning lenders could face big losses if overheating housing markets turn.

Canada’s banks and other lenders are facing intense scrutiny of their underwriting practices as authorities try to tackle the potential threat of a housing bubble in Vancouver and Toronto, where prices have soared, and a number of measures have been taken to help cool markets.

Speaking to a conference of mortgage professionals in Vancouver, Jeremy Rudin, the superintendent of financial institutions, said a pronounced or prolonged economic downturn could result in a “meaningful housing price correction” and translate into “significant losses” for lenders.

The Office of the Superintendent of Financial Institutions (OSFI) said in July it was tightening oversight of mortgage lending and that it would scrutinize lenders’ practices for income verification, higher-risk loans, debt service ratios, loan-to-value ratios and risk appetite.

“Sound underwriting has always been important, but it has never been more important than it is now. Everyone involved in mortgage origination in Canada has a role to play in supporting the sound underwriting practices that OSFI requires of federally regulated lenders and mortgage insurers,” he said.

Speaking to reporters after his speech, Rudin emphasized the regulator was aware of the potential threat presented by nonregulated entities, which are not subject to the same stringent rules as the country’s biggest lenders. He said the agency was monitoring how regulated lenders might be affected.

“We’re very alive to this in general and we also draw on our experience leading up to the financial crisis where non prudentially regulated lending was definitely having an impact on underwriting standards in the prudentially regulated sphere. We’re very aware of that possibility,” he said.

The government is considering changes to the way mortgages are insured in Canada, with banks potentially taking on a greater share of the risk and relying less on the federal government to backstop loans. Rudin said that could result in higher capital requirements.

“If the government institutes risk-sharing such that federally regulated lenders will be exposed to loss on high-ratio loans, we will need to adjust the capital requirements accordingly,” he said.

Editing by Jonathan Oatis and Matthew Lewis