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Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

Gloria Nieto/The Globe and Mail

Canada's banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that's being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they're actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

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Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty's latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

But banks have continued to sell uninsured 30-year mortgages to consumers who have a down payment of at least 20 per cent. The continued resilience of the housing market has economists wondering if Mr. Flaherty has sufficient ammunition left to cool the market again.

OSFI's ability to directly regulate bank lending practices is a tool that has not been used to a great degree. The regulator could, for example, tighten the uninsured portion of the mortgage market, a move that The Globe and Mail reported in May it was considering.

Sources within the financial sector say that both the finance department and OSFI have been asking banks a variety of questions in recent months, in an effort to get a handle on the impact of last year's rule changes. A spokesperson for OSFI said the regulator has not yet reached any decisions about whether it will be altering rules for lenders.

Any changes would come in the form of revisions to OSFI's guideline B-20, a set of mortgage underwriting principles that the regulator first issued last year. The principles outline, among other things, how much due diligence banks must conduct on potential borrowers, when they should conduct appraisals and what paperwork they should have. It also places limits on the size of home-equity lines of credit.

Ms. Dickson said earlier this year that the regulator welcomed the slowdown in the growth of household credit that ensued after the guidelines were issued and the mortgage insurance rules were tightened.

The Canadian Association of Accredited Mortgage Professionals estimates that mortgage credit growth is now about 5 per cent, having peaked at about 13 per cent at the start of 2008. The association estimates that it will fall to between 2.5 and 3 per cent next year. Still, the group expects the total amount of residential mortgage credit to grow to between $1.24-trillion and $1.25-trillion by the end of 2014, having more than doubled in 10 years.

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Mortgage rates, which sank to new lows over the past two years, have been slowly rising this summer, which could restrain the market without the need for further regulatory intervention. As of May, the average mortgage rate that homeowners were paying was 3.52 per cent, but posted rates have increased by more than 60 basis points since then.

For now, sales of existing homes are edging back toward the levels they were at before Mr. Flaherty tightened the mortgage insurance rules last summer, driven by rebounding markets in Vancouver and Toronto. Vancouver saw a 40.4-per-cent year-over-year gain in sales of existing homes over the Multiple Listing Service in July, while Toronto posted a 16 per cent increase.

"That deafening silence you hear is the sound of the Canadian housing bears gone quiet," Bank of Montreal economist Robert Kavcic wrote in a research note Friday. "Not only has the resale market absorbed last year's round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot."

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