Regulator Warns Banks on Mortgages, Hikes Scrutiny of Home Loans

This article appeared on the and was written on September 27th, 2011 by John Greenwood.

Canada’s financial regulator is hiking its scrutiny of residential mortgages held by banks, a tacit acknowledgement of the heightened dangers around surging consumer debt.

The Office of the Superintendent of Financial Institutions is “stepping in to increase the monitoring” of home loans and lines of credit secured by real estate, said the head of the organization.

While recent moves by the federal government to tighten the rules around home loans have helped reduce the growth of mortgage lending, Julie Dickson told reporters in Toronto on Monday that the issue remains a significant concern.

The comments come a week after the ratings agency Moody’s Investors Service warned in a report that record household loans pose a threat to the Canadian banking system.

Indeed it was only the latest in a series of admonitions delivered by observers going back as far as 2006 when then-Bank of Canada governor David Dodge tore a strip off the Canada Mortgage and Housing Corp. for bringing in what he felt were excessively loose mortgage lending rules.

Dickson said she is delivering an “early warning” to the banks about problems that could emerge down the road, and that she is working on the issue in parallel with current Bank of Canada governor Mark Carney and federal Finance Minister Jim Flaherty.

The Canadian banks have enjoyed surging profits since the financial crisis, partly on the back of their consumer lending operations which have enjoyed consistent revenue growth largely because of the ongoing low-interest rate environment.

The biggest single asset on bank balance sheets are their residential mortgages, about half of which are insured by the Canada Mortgage and Housing Corp.

However, the worry is that the other half is not protected and in the event of a serious housing market correction, lenders could wind up with losses.

Banks “need to keep an eye on” their uninsured mortgages, Dickson said.

In another speech Monday to business leaders, Dickson said the Financial Stability Board, an international body created by the G20 to promote financial stability, is also working at developing principles for safe mortgage lending.