By Nivedita Balu
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.
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 But in a market where prices are falling, the outdated appraisal increases risks for banks as they could face higher losses on loan defaults.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.
"We noted that failure to follow this expectation (of the 80% loan-to-value requirement) could result in uninsured mortgage loans exceeding 80% of the market value of the property at origination and constituting a potential breach of the Bank Act," OSFI said, according to documents from the quarterly roundtable meeting with the chief risk officers of Canada's big banks.
The documents did not specify which banks attended.
HOUSING BOOM TO HOUSING BUST
Unsold condos in big cities like Toronto and Vancouver have led to thousands of unoccupied units in downtown towers, following a rush by commercial builders to meet investor demand between 2018 and 2022.
In the October meeting, OSFI said that the blanket appraisal model works well "when property values are increasing but is definitely more challenging when the property market softens."
In a November meeting, OSFI pointed to language used in marketing by large banks, saying the timing of blanket appraisals was a problem. Condo prices by then had slumped roughly 10% to 20% from their peak in 2022.
OSFI showed a lender's marketing around mortgages using blanket appraisals, without naming the lender. The marketing said: "We offer a firm approval to match the closing date provided by the builder. Once approved, you stay approved until your closing date." That statement appeared on Royal Bank of Canada's pre-construction mortgage website as of November 18, the Internet Archive website Wayback Machine shows.
RBC, Canada's largest bank, changed its website after the meeting, dropping the promise that buyers will "stay approved until your closing date."
RBC's website now says in part: "At RBC, we offer mortgage approvals based on the closing date provided by the builder."
In response to Reuters' request for comment, RBC said it worked closely with regulators to ensure it met their expectations.
The Canadian Bankers Association, which speaks for the banking sector, said it is in discussions with OSFI about the regulator’s expectations for blanket appraisals used during the pre‑construction stage, to ensure any possible financial implications are taken into account.
(Reporting by Nivedita Balu; Additional reporting by Allison Martell in Toronto; Editing by Caroline Stauffer and Nia Williams)
