Canada’s bank regulator is casting a wary eye on uninsured mortgages of more than 25 years as policy makers in Ottawa continue to fret about the housing market and high consumer-debt levels.
It is not clear what, if any, actions the Office of the Superintendent of Financial Institutions may take. The regulator is talking to lenders about the issue, and assessing the risks, in deciding whether it needs to crack down.
“We are working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness,” OSFI spokesman Brock Kruger said in an e-mail to the Globe.
Amid fears that Canada’s housing market was floating into bubble territory, Finance Minister Jim Flaherty has been taking steps to stem the growth of consumer debt and house prices.
The tool he’s been using is mortgage-insurance rules, which he has tightened four times since the financial crisis. The most recent changes were last July and included cutting the maximum length of insured mortgages to 25 years from 30.
Mortgage insurance is mandatory in Canada when the borrower has a down payment of less than 20 per cent.
During his time in office, Mr. Flaherty has ensured that he is the one setting the country’s mortgage-insurance rules. He’s used that power to try to steer the housing market toward a soft landing and to prevent the damage that a housing-market crash could do to the economy.
His ability to preside over the rules stems largely from the fact that the federal government backstops the mortgage insurance that Canada’s three mortgage insurers sell.
And, because a large proportion of borrowers have small down payments – especially first-time buyers – his rule changes have had a large impact. Real-estate players say the July changes are what sparked the sharp decline in home sales that has occurred in most parts of the country since then.
But Mr. Flaherty, who has publicly scolded banks for offering ultralow mortgage rates as he tries to take the steam out of the market, has less power over uninsured mortgages, those where the borrower does have a down payment of at least 20 per cent.
Senior bankers say that both he and OSFI have been worried since late last year that banks are continuing to offer looser lending standards, such as long amortizations, on uninsured mortgages.
Some banks argue that because the borrowers have large down payments, Ottawa should not intervene.
What OSFI is seeking to get a handle on now is how much risk borrowers in this category pose to the banks.
While data are not available, one banker said that as much as 40 per cent of the uninsured mortgages that the industry is selling have amortizations greater than 25 years.
The banks don’t disclose the lengths of mortgages they are currently selling, but 48 per cent of all outstanding mortgages, both insured and uninsured, in the portfolios of the country’s six largest banks have remaining amortization periods of longer than 25 years, National Bank analyst Peter Routledge said.
OSFI is responsible for ensuring that Canada’s banks do not take excessive risks that jeopardize their ability to meet their financial obligations.
“Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process,” Mr. Kruger said.