Canada watchdog gets tough on mortgages, urges better income checks

By Matt Scuffham

TORONTO (Reuters) - Canada's banking regulator is tightening oversight of mortgage lending, citing concerns about record household debt and a sharp jump in house prices, and says income verification for borrowers outside Canada has become a particular challenge.

In the latest sign of the concerns of Canadian authorities about soaring home prices in markets like Vancouver and Toronto, the Office of the Superintendent of Financial Institutions (OSFI) said on Thursday that price gains, debt levels and persistently low interest rates had all helped increase threats to the stability of financial institutions.

Foreign buying has been cited as factor driving prices in the two largest markets, Toronto and Vancouver. OSFI's concerns include the quality of credit checks on borrowers with income from abroad, Superintendent Jeremy Rudin said in an interview.

Income verification checks should not be viewed by banks as being less important in a period of rising prices, he warned.

"Borrowers who rely on income from sources outside of Canada pose a particular challenge in this regard," he said.

"We’re reinforcing our expectation that lenders will do good diligence and that, to the extent that there is uncertainty about the income, that this be treated cautiously and that compensating controls be in place before the loan is granted."

Canada's housing market boomed after the 2007-09 financial crisis, fueled by record low borrowing costs. Last month, the Bank of Canada warned that the pace of home price increases in Toronto and Vancouver is unlikely to continue with growing potential for a downturn.

"With rapid price increases in some areas and current exceptionally low interest rates, the risks are getting larger," Rudin said in a statement. "OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area."

OSFI said that, in light of the current environment, it had enhanced its supervisory oversight of mortgage lending and identified a number of issues that required close attention from lenders.

It said it would scrutinize lenders' practices for income verification, higher risk loans, debt service ratios, loan-to-value ratios and risk appetite.

Canadian Finance Minister Bill Morneau announced in June that the Liberal government would set up a working group of federal, provincial and municipal officials to recommend policy changes aimed at preventing a housing bubble.

The finance ministry on Thursday welcomed OSFI's move and said it was consistent with Morneau's actions to address risks in the Canadian housing market.

(Reporting by Matt Scuffham; Editing by Jeffrey Benkoe and Chris Reese)