Banking regulator warns lenders not to become complacent about mortgages

Canada's banking regulator warned lenders Monday not to become complacent about the way they underwrite mortgages, reminding them that low interest rates and rising property values aren't guaranteed.

Jeremy Rudin of the Office of the Superintendent of Financial Institutions said prudent lending practices have never been more important because of the current economic environment.

``When house prices have been rising for several years and interest rates have remained at all-time lows, complacency can set in,'' the superintendent said in the text of a prepared speech for a meeting of mortgage professionals in Vancouver.

``Lenders might be led to believe that weak underwriting standards will be mitigated by ever-rising collateral values.''

Rudin's speech touched on advice the regulator issued earlier this year on the industry's practices, including verifying borrower income levels, managing higher-risk loans and ensuring adequate debt service ratios. He said the sound underwriting of mortgages relies on having reliable information about the borrower and the property that's being purchased.

He mentioned the Bank of Canada's concerns about increases in household borrowing and mortgage debt, in particular. Last summer, 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.

``A pronounced or prolonged economic downturn could well involve a meaningful housing price correction. This could translate into significant losses for lenders and insurers,'' said Rudin.

The superintendent's office supervises lenders that account for nearly 80 per cent of all Canadian mortgages.

He said too much emphasis should not be placed on collateral.

``Why? Because the value of the debt is fixed, but the value of the collateral is not,'' Rudin said.

``House prices in most Canadian markets have never been higher, supported by mortgage rates that have never been lower. In these circumstances, prudent lenders put less reliance on collateral values, not more.''

Earlier this month, the TD Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) increased their fixed mortgage rates, the latest sign that Canada's big banks are hiking the costs of borrowing for homeowners.

MBN

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