TORONTO, March 9 (Reuters) – Canada’s banking regulator warned bank executives in a meeting last October that a widespread practice of blanket home appraisals for condominium mortgages could breach a federal mortgage rule, according to meeting minutes seen by Reuters.
Reuters obtained the meeting minutes through an access to information request. They show how the Office of the Superintendent of Financial Institutions, the regulator responsible for the stability of Canada’s financial sector, is scrutinizing some mortgage approval practices more closely amid growing concern over the potentially broad economic impact of a collapse in Canada’s housing market.
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OSFI declined to comment on meetings with banks.
Canada experienced one of the largest housing market price declines among the world’s major economies last year, with prices falling 2.7%, as Canadians put off buying homes due to U.S. trade uncertainty and slower immigration.
Declines ranging from 10% to 30% in pre-construction housing prices have left banks at risk of buyers defaulting on their payments or abandoning condo purchases now valued lower.
Blanket appraisals, in which a lender uses the property value at the time a buyer agrees to the purchase rather than the value at time of closing, are often used by banks to approve loans on multiple units at a time. But in a market where prices are falling, the outdated appraisal increases risks for banks as they could face higher losses on loan defaults.
Canadian banks could face increased scrutiny if they are found to have violated the Bank Act, a federal law that prohibits banks from issuing uninsured mortgages that exceed 80% of a property’s market value at the time of closing.
In the October meeting, OSFI warned the 80% ratio could be breached during blanket appraisals.
When rules are not met, OSFI discusses resolution and remediation activities privately with the lender, the regulator said in a statement, without specifying what remediation involved.
Exclusive: Canada’s banking regulator warns major lenders about appraisal practices as condo prices crash
