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Mortgage rules expected to tighten if sales upsurge continues

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Possible actions to tighten mortgage lending practices could be necessary to curb excess lending, but regulators must take care to ensure that any moves do not cause the real estate market to collapse, says real estate lawyer Lisa Laredo.

The Globe and Mail reports that the Office of the Superintendent of Financial Institutions has been considering a tightening of mortgage rules for lenders for months. The housing market, it says, is beginning to pick up after a year-long slump that began when Federal Finance Minister Jim Flaherty tightened the mortgage insurance rules in the summer of 2012.

“The lending practices of banks need to be tightly regulated and always watched carefully because, in good times, they tend to adopt loose underwriting and lending practices. This tendency is increased when the government is prepared to take on the risk of the banks’ lending practices,” says Laredo.

“When you add to this mix the increased willingness of the public to borrow as a result of historically low interest rates, you have a great deal of money chasing available homes in the real estate market. The result is price inflation and the possibility of an unsustainable market bubble,” she adds.

Even with interest rates moving upward, Laredo says she would expect some action – either an increase to the required down payment for insured mortgages or a tightening of underwriting standards – if the recent upsurge in sales continues for several months.

While she says it is impossible to predict what might happen in the case of further regulation of lending practices, one possible effect, says Laredo, might be that those who cannot afford likely interest rate increases or to meet the increased deposit requirements will be forced out of the market.

“If so, you can expect more price stability in the housing market. You might also expect less new construction in the Toronto new condominium apartment market,” she adds.

While from a personal and short-term perspective Laredo says less real estate business in her practice is undesirable, she adds: “If more regulation prevents a major near-term collapse in the market, the long-term benefits will outweigh the short-term negative consequences of more regulation.”

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