(Updates with banking group quote in sixth paragraph)
Feb. 2 (Bloomberg) -- Finance Minister Jim Flaherty said he’s concerned about the loosening of standards by some Canadian financial institutions on mortgages that don’t require borrowers to verify income, and that steps are being taken to “correct” the practice.
Flaherty said Canada’s banking regulator looked at the practice, and he learned “what their assessment showed with respect to a few financial institutions, which is a matter of concern, and that is being corrected,” speaking in a conference call with reporters today from Tel Aviv.
Banks and other lenders are becoming “increasingly liberal” with such mortgages and similar home-equity credit lines, the Office of the Superintendent of Financial Institutions, Canada’s banking regulator, said in documents obtained by Bloomberg News under freedom of information law.
OFSI, which examined the issue in an August 2011 analysis, compared the mortgages to “non-prime loans in the U.S. retail lending market.”
The head of the Canadian Bankers Association, an industry group, said he wasn’t aware of any steps being taken to restrict mortgage loans that don’t require income to be verified.
“Those would be confidential discussions between regulators and individual financial institutions and the CBA would not be involved,” association president Terry Campbell said in an e-mailed statement. “However, we do know that banks are prudent lenders and carefully manage risk in their mortgage portfolios.”
Canada’s housing market has surged since the 2009 recession as near-record low mortgage rates fueled prices and home purchases, unlike the U.S., where sales and values have fallen since 2007. Bank of Canada Governor Mark Carney has said record consumer debts are the greatest domestic threat to the country’s financial institutions, even as the central bank has held the benchmark rate at 1 percent since September 2010.
Canada’s banking system has been rated the soundest in the world for four straight years by the World Economic Forum, and none of the country’s lenders needed public injections of capital during the credit crisis, unlike U.S. banks, which suffered losses on securities backed by subprime mortgages.
U.S. non-prime mortgages - which include both subprime and “alt-A mortgages” - accounted for slightly more than a third of originations at the peak of the market in 2006, according to Inside Mortgage Finance, a Bethesda, Maryland-based company that tracks residential mortgages. Loans that required little or no documentation of income accounted for 46 percent of all U.S. subprime mortgages that year, according to a Credit Suisse Group AG report.
While there is no common definition of subprime mortgages in Canada, the proportion of such loans has probably fallen from about 5 percent of the market since the financial crisis, said Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto.
A spokeswoman for OSFI, Leonie Roux, declined to comment on Flaherty’s remarks.
Flaherty also said Canada Mortgage & Housing Corp. remains below the legal limit on the amount of mortgage insurance it can offer. The federal housing agency said this week it is rationing mortgage insurance due to “unexpected” requests by lenders for large amounts of insurance on mortgages with low loan-to-value ratios.
Federally regulated financial institutions must obtain insurance on mortgages to borrowers who have a downpayment of less than 20 percent of the property’s value.
“We monitor CMHC as part of the general monitoring of the financial scene in Canada, and right now they’re still below their lending limit,” Flaherty said.
CMHC had C$541 billion ($539 billion) of insurance in force as of Sept. 30, the agency said. The organization’s legislated limit is C$600 billion.
CMHC spokesman Charles Sauriol declined to comment on Flaherty’s remarks.
--Editors: Paul Badertscher, Gail DeGeorge
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