The Office of the Superintendent of Financial Institutions (OFSI) once again warned mortgage lenders to remain strict in the way they underwrite mortgages as a way of preventing crises for financial institutions if low interest rates rise and property values drop.

At a meeting of mortgage professionals in Vancouver, the superintendent himself, Jeremy Rudin, said that 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,” Rudin said. “Lenders might be led to believe that weak underwriting standards will be mitigated by ever-rising collateral values.”

He said that OSFI is drawing on experience from the 2008 financial crisis by keeping an eye on the small percentage of lenders that fall outside the regulatory framework while also maintaining strong standards for those covered by the superintendent's office to ensure economic stability. The superintendent's office supervises lenders that account for nearly 80 per cent of all Canadian mortgages.

“We get out in front of issues before they become widespread,” he said.

In his speech, Rudin also touched on advice 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.

He also said that 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 and Royal Bank of Canada increased their fixed mortgage rates, the latest sign that Canada's big banks are hiking the costs of borrowing for homeowners.
Related stories: Lenders cautioned to exercise prudent mortgage risk management

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