MNI BRIEF: Canada Bank Czar Says Mortgage Defaults Risk Rising

Canada's top federal banking regulator said Thursday the risk of mortgage defaults has climbed amid higher interest rates and an economic slowdown, and he began preparing for a potential recession last year as the central bank hiked borrowing costs.

“In recent years household debt has increased substantially. This threatens lenders with increasing probably of defaults," from mortgage borrowers, OSFI chief Peter Routledge told the Senate banking committee. Lenders overseen by OSFI underwrite 80% of Canadian mortgages and the agency has "been working to address this risk by setting clear expectations for mortgage underwriting.” (See: MNI INTERVIEW: BOC Can Wait On Rate Hike- UofT Researcher) “Our stress testing indicates that large banks in particular will manage their way through higher incidence of defaults.”

Routledge also criticized fixed-payment, variable-rate mortgages that have pushed some borrowers into "trigger rates" where they are no longer paying down any principal on the loan. “We would like less of that product” because it’s more “dangerous” for borrowers who can end up in negative amortization, he said.

While delinquencies are around historic lows that's partly because record housing prices allow some families in difficulty to sell their homes and, “we see delinquencies rising over the next year as households adapt to higher interest rates and higher cost of living."