Federal regulator tightens oversight of mortgage lending

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VANCOUVER (NEWS 1130) – Worries about the white-hot real estate markets in Vancouver and Toronto are prompting the federal banking regulator to increase its scrutiny of mortgage lending.

The Office of the Superintendent of Financial Institutions has told banks that it is “reinforcing its expectation that federally regulated financial institutions engage in prudent underwriting of residential mortgage loans.”

OSFI adds that “with Canadian household debt levels at all-time highs, persistently low interest-rates, and rapid house price increases in some areas, the prudential risks and vulnerabilities for financial institutions have increased.”

“OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area,” says superintendent Jeremy Rudin in a statement.

The regulator says that in addition to increasing its oversight it has “identified a number of issues that warrant close attention by mortgage lenders” — income verification, non-conforming loans, debt service ratios, appraisals, loan-to-value calculations, and institutional risk appetite.

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.

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