Finance Minister Jim Flaherty said he shares the
concern of Canada's top banking regulator that
lenders are loosening their mortgage standards too
much, but said any problems in the system are being
corrected.
On Tuesday, Bloomberg released documents obtained
through freedom of information requests that showed
the Office of the Superintendent of Financial
Institutions (OSFI) has some fears that loosening
mortgage standards poses an "emerging risk" to
Canada's economy.
In the 152 pages of documents, internal
communications reveal that OSFI — the regulator in
charge of all federally monitored financial institutions
in Canada — worries banks are becoming
"increasingly liberal" by handing out loans without
requiring borrowers to prove they have sufficient
incomes to pay them back. Such loans "have some
similarities to non-prime loans in the U.S. retail
lending market," the OSFI documents reveal.
Speaking to reporters in Tel Aviv, Israel, on Thursday,
Flaherty echoed OSFI's concerns.
"OSFI's concern arises out of some work that OSFI has
done as part of the ordinary course of its business to
look at some of the loans being made by financial
institutions," he said. "I was informed of what their
assessment showed with respect to a few financial
institutions, which is a matter of concern."
"That is being corrected," Flaherty said.
CMHC insurance nears limit
The reaction from the finance minister came at the
end of a busy week in which multiple stories cast
some doubt on the sustainability of Canada's
booming housing market.
On Tuesday, it emerged that the Canada Mortgage
and Housing Corporation has committed to back
$541 billion in mortgages — within striking distance
of the agency's $600-billion limit.
'That is being corrected.'
—Finance Minister Jim Flaherty
The CMHC is the Crown corporation that ultimately
backstops Canada's housing industry by insuring
mortgages. Buyers are legally obligated to pay for
CMHC insurance if they put down 20 per cent or less
of the purchase price as a down payment.
Approximately 40 per cent of Canadian homes are
covered by CMHC insurance.
The limit was at $450 billion as recently as 2008, but
Ottawa moved to raise it as a result of the financial
crisis.
As that gap closes, it gets harder for Canadians to get
new mortgages. Theoretically, at a certain point
CMHC would have to deny new borrowers unless
Ottawa moved to raise the limit — something which
would prove difficult in a political environment where
policymakers have repeatedly encouraged Canadians
to get their debt levels under control.
Mortgage-backed securities
Part of the reason the CMHC is running out of wiggle
room is that in recent years, Canada's big banks have
moved en masse to purchase CMHC insurance for
their mortgages even where the borrowers have more
than 20 per cent in equity.
"CMHC has recently received an unexpected level of
requests for large amounts of CMHC portfolio
insurance," CMHC spokesman Charles Sauriol told
CBC News this week. That's giving lenders "the ability
to purchase insurance on pools of previously
uninsured low ratio mortgages," he said.
They're doing that so that they can take the
mortgages on their balance sheets and sell them to
other investors through a process known as
securitization.
The sale of such mortgage-backed securities was
prevalent in the lead-up to America's housing crisis in
2007, but it's a practice that has been rare in Canada
to this point.
Many experts have pointed to the securitization of
mortgages — particularly subprime loans to
borrowers who couldn't meet traditional standards —
as a key catalyst in America's housing crash as the
relationship between the lender and the home-
owning borrower became increasingly blurred.
OSFI's concerns stem from a fear that Canadians
might be getting mortgages they won't be able to
afford, if and when rates go up from their current
lows. That, in turn, would hurt the greater economy
and Ottawa's coffers as the taxpayers are ultimately
responsible for funding any CMHC payouts for
mortgages that default.
"We monitor CMHC as part of the general monitoring
of the financial scene in Canada," Flaherty said. "Right
now they're still below their lending limit."
-my bet is they raise the limit,if they don't the bubble
pops now,
concern of Canada's top banking regulator that
lenders are loosening their mortgage standards too
much, but said any problems in the system are being
corrected.
On Tuesday, Bloomberg released documents obtained
through freedom of information requests that showed
the Office of the Superintendent of Financial
Institutions (OSFI) has some fears that loosening
mortgage standards poses an "emerging risk" to
Canada's economy.
In the 152 pages of documents, internal
communications reveal that OSFI — the regulator in
charge of all federally monitored financial institutions
in Canada — worries banks are becoming
"increasingly liberal" by handing out loans without
requiring borrowers to prove they have sufficient
incomes to pay them back. Such loans "have some
similarities to non-prime loans in the U.S. retail
lending market," the OSFI documents reveal.
Speaking to reporters in Tel Aviv, Israel, on Thursday,
Flaherty echoed OSFI's concerns.
"OSFI's concern arises out of some work that OSFI has
done as part of the ordinary course of its business to
look at some of the loans being made by financial
institutions," he said. "I was informed of what their
assessment showed with respect to a few financial
institutions, which is a matter of concern."
"That is being corrected," Flaherty said.
CMHC insurance nears limit
The reaction from the finance minister came at the
end of a busy week in which multiple stories cast
some doubt on the sustainability of Canada's
booming housing market.
On Tuesday, it emerged that the Canada Mortgage
and Housing Corporation has committed to back
$541 billion in mortgages — within striking distance
of the agency's $600-billion limit.
'That is being corrected.'
—Finance Minister Jim Flaherty
The CMHC is the Crown corporation that ultimately
backstops Canada's housing industry by insuring
mortgages. Buyers are legally obligated to pay for
CMHC insurance if they put down 20 per cent or less
of the purchase price as a down payment.
Approximately 40 per cent of Canadian homes are
covered by CMHC insurance.
The limit was at $450 billion as recently as 2008, but
Ottawa moved to raise it as a result of the financial
crisis.
As that gap closes, it gets harder for Canadians to get
new mortgages. Theoretically, at a certain point
CMHC would have to deny new borrowers unless
Ottawa moved to raise the limit — something which
would prove difficult in a political environment where
policymakers have repeatedly encouraged Canadians
to get their debt levels under control.
Mortgage-backed securities
Part of the reason the CMHC is running out of wiggle
room is that in recent years, Canada's big banks have
moved en masse to purchase CMHC insurance for
their mortgages even where the borrowers have more
than 20 per cent in equity.
"CMHC has recently received an unexpected level of
requests for large amounts of CMHC portfolio
insurance," CMHC spokesman Charles Sauriol told
CBC News this week. That's giving lenders "the ability
to purchase insurance on pools of previously
uninsured low ratio mortgages," he said.
They're doing that so that they can take the
mortgages on their balance sheets and sell them to
other investors through a process known as
securitization.
The sale of such mortgage-backed securities was
prevalent in the lead-up to America's housing crisis in
2007, but it's a practice that has been rare in Canada
to this point.
Many experts have pointed to the securitization of
mortgages — particularly subprime loans to
borrowers who couldn't meet traditional standards —
as a key catalyst in America's housing crash as the
relationship between the lender and the home-
owning borrower became increasingly blurred.
OSFI's concerns stem from a fear that Canadians
might be getting mortgages they won't be able to
afford, if and when rates go up from their current
lows. That, in turn, would hurt the greater economy
and Ottawa's coffers as the taxpayers are ultimately
responsible for funding any CMHC payouts for
mortgages that default.
"We monitor CMHC as part of the general monitoring
of the financial scene in Canada," Flaherty said. "Right
now they're still below their lending limit."
-my bet is they raise the limit,if they don't the bubble
pops now,
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