Banking regulator sees potential risks in high home prices, debt loads

Stricter regulations aimed at tightening mortgage lending to take some of the risk out of the market will be finalized by the end of the month, the federal financial regulator said Tuesday.

Final changes to the Office of the Superintendent of Financial Institutions' (OSFI) residential mortgage lending guidelines, also known as B-20, will come into force two or three months afterward, its head, Jeremy Rudin said during a speech to the Economic Club of Canada in Toronto.

The superintendent said the "broad thrust" of the changes will be similar to what it proposed in July — the draft of which included a new stress test for all uninsured mortgages, as well as prohibitions on co-lending arrangements that are designed or appear to be designed to circumvent regulator requirements.

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"We clearly see the potential risks caused by high household indebtedness across Canada, and by high real estate prices in some markets," Rudin said. "We are not waiting to see those risks crystallize in rising arrears and defaults before we act."

The stress test, if implemented, would mean that homebuyers who have a down payment of 20 per cent or more and do not require mortgage insurance will still have to prove they can continue to make their payments if interest rates rise.

Rudin's comments Tuesday come after the Bank of Canada hiked interest rates twice this summer, once in July and once last month, after unexpectedly strong economic numbers.

The superintendent told reporters after his speech that these changes are aimed at reinforcing sound underwriting amid the "evolution of house prices," particularly in major markets. He added that "complacency in the lending community can set in" and there can be an "over reliance" on collateral when a borrower's ability to carry a mortgage is key.

"Nobody can say with any certainty what's going to happen in the housing markets, or what's going to happen to housing prices," Rudin told reporters. "But we do know this. Housing prices are still near their all-time highs and mortgage rates are still near their all-time lows. And while sound underwriting is always important, it's never been more important than it is now."

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He added OSFI's crackdown on co-lending, or bundled mortgages — in which federally regulated lenders pair up with unregulated providers to finance a property — is aimed at making sure financial institutions adhere to rules that limit how much they can lend.

"We think that the system as a whole needs to have a certain integrity," Rudin said.

Rudin acknowledged that the changes to rules followed by federally regulated lenders could potentially push would-be home buyers towards riskier financing options, such as shadow banking.

Still, he said the institutions that fall under OSFI's purview handle about 80 per cent of Canada's mortgage lending.

"We recognize, as I said, that some of the activity might migrate outside the federal sphere," he said. "And although not an intended nor positive consequence, it doesn't relieve us from the responsibility to act on our mandate."

The stricter lending rules by the banking regulator comes after the Ontario government moved to cool down the hot housing market with a host of measures in April. Those actions included a foreign buyers tax, similar to one previously handed down in Vancouver with a similar goal.

However, the latest figures from the Greater Vancouver Real Estate Board released Tuesday show that September home sales were up compared with a year ago and the MLS Home Price Index composite benchmark price was $1,037,300 in September, up 10.9 per cent compared with a year ago.