TORONTO – Expectations are muted as Canadian banks get set to report first quarter earnings starting Tuesday, with results likely to come under pressure on a number of fronts, from slowing consumer loan growth and choppy capital markets to stricter regulations.

But the main concern is the banks’ exposure to ballooning consumer debt and the drumbeat of warnings from Bank of Canada Governor Mark Carney on down about the dangers of over leverage and the risk that has created for the whole economy.

Given the still-steady housing market, it’s probably not a problem in the first quarter or possibly even the current year, but nevertheless investors will be closely scrutinizing results when they come out this week for signs of where things are headed.

The good news is that lenders have mostly laid off the risk by ensuring their mortgage portfolios — the biggest single asset on bank balance sheets — through the Canada Mortgage and Housing Corp.

But they are not entirely protected. There remains significant potential for collateral damage in terms of falling credit card and other borrowing that could result from a housing correction.

Consumer borrowing has been a key source of strength for the sector for the past decade, so any decline — especially when other earnings drivers such as capital markets are showing signs of weakness — would be bad news for the sectors.

Another theme likely to get plenty of attention is expense reduction. In the face of shrinking revenue, players’ natural response is to cut overhead, and they’ve been doing that for the past several months, with Bank of Montreal revealing last week it laid off 60 employees from its capital markets business.

BMO kicks off the season on Tuesday, followed by Royal Bank of Canada and Toronto-Dominion Bank on Thursday. National Bank of Canada comes out Friday, with Bank of Nova Scotia on March 6 and Canadian Imperial Bank of Commerce wrapping things up on March 8.

UBS analyst Peter Rozenberg is calling for a 0.5% drop in earnings for the group compared to the first quarter of 2011 because of moderating loan growth and lower profit margins.

John Aiken, an analyst at Barclays Capital, expressed a similarly bearish view, pointing to “slowing consumer spending” which he said will likely have “a significant impact on the banks’ ability to grow revenues.”

As players increasingly focus on retail banking for profit growth, they’ve been forced to compete harder than ever for customers, resulting in falling net interest margins (NIM), the difference between lenders’ cost of funding and the interest they charge customers.

Mr. Aiken warns this phenomenon of declining NIMs is a major concern.

In the first quarter of last year the banks had an average NIM on their domestic retail operations of about 3.5%, but that is expected to come in at just over 2.5%, a drop of nearly a full percentage point, he said.

“Given a prospect of continuing low interest rates and the now full-bore effort to de-leverage both banks and their retail customers that have provided the bulk of recent revenue and earnings growth, revenue advances will in our view be a key leading indicator of future shareholder value potential,” said Stonecap Securities Inc. analyst Brad Smith.

While there doesn’t seem much to look forward to here, it’s also true that we’ve been here before.

Or at least, the picture we see today looks a lot like the one we were presented with going into the first quarter of last year, with analysts warning of tumbling capital markets profits and a possible housing correction.

But instead it was actually a pretty good year, with at least two players — RBC and TD — putting out record adjusted earnings as Canadian households continued to borrow even while they socked savings into bank mutual funds.

Indeed, Moody’s Investor Services predicted on Friday that household spending will remain “a key support to Canadian growth” in 2012 with sales remaining “on an upward trend.”

“A sudden, unexpected drop in house prices could prompt a drop in consumer leverage and in consumers’ ability to spend,” Moody’s said, adding that it does not believe such a correction is in the cards for 2012.

“Our baseline forecast does not assume a sharp correction in house prices,” the rating agency said.

Financial Post

OTTAWA — Years of rising consumer debt are coming home to roost, forcing Canadians to rethink traditional plans to retire by age 65.

Most Canadians now expect to work past 66, as only 30% think they will be able to fully retire by that age, according to a poll conducted for Sun Life Financial Inc.

Debt appears to play a big role in that equation, with 47% of those surveyed saying they are worried about the debt they’ll be dealing with as retirees.

And while many Baby Boomers have said they will work into their retirement years simply because they want to, the majority of those polled — 61% — said they will do it because they have to.

In some cases, people said they will have to work longer simply to be able to pay for basic living expenses.

“Canadian retirement expectations are changing,” said Kevin Dougherty, president of Sun Life Financial Canada. “These results are not surprising given the current economic volatility, increasing consumer debt loads, rising health-care costs, longer life expectancy and lack of planning.”
At the same time, the federal government is looking to reform the retirement income system, including possibly pushing back the qualifying age for Old Age Security from 65 to 67.

Despite economists’ objections that the system is sustainable, Human Resources Minister Diane Finley insisted this week that inaction threatens future pension benefits and that reforms will be announced in the coming spring federal budget.

In the meantime, Canadians’ debt continues to climb.

The most frequently quoted measure of consumer debt — debt to personal disposable income — soared to a new record high of 152.98% in the third quarter. That means Canadians carry $1.53 in debt for every dollar they bring home, a fact that has drawn repeated warnings from Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.

While the larger part of that debt exists in the form of mortgages, average consumer debt excluding mortgages has also been rising steadily for six and a half years, climbing from $18,958 in the first quarter of 2007 to $25,960 in the fourth quarter of 2012, a new record, according to a report from credit-data firm TransUnion.

That report shows consumer debt including credit cards, lines of credit, auto loans and consumer loans rose 1.4% in the fourth quarter — a seasonal pattern that accompanies the Christmas shopping period — after either declining or remaining stable in the previous three quarters.

The one silver lining in TransUnion’s report is that on an annual basis, the rise in consumer debt slowed to a pace of less than 1% in 2011, a level not seen since the company first began tracking the data in the first quarter of 2004.

“The continued deceleration in the annual growth of total debt is the bigger story,” said Thomas Higgins, TransUnion’s vice-president of analytics and decision services.

“We had witnessed a stabilization of total debt for the last three quarters, and the first and second quarters of 2012 should be quite revealing as we may see the first year-over-year decline in total debt since at least 2004.”

To cope with increasingly challenged retirement plans, Canadians surveyed by Ipsos Reid for Sun Life now say they expect retirement to be something they enter gradually, rather than simply giving up their careers all at once.

“Interest in phased retirement has been growing,” said Ian Markham of Towers Watson, a human resources consulting firm, in the statement released with the poll results.

Of those surveyed, 43% said they’ll start to phase in their retirement between the ages of 60 and 65, working either part-time or freelance before they fully give up work.

Twenty-one percent said they hoped to start retirement between the ages of 50 and 59. But there were 8% who only expected to start pulling back from work between the ages of 66 and 70.

Ipsos Reid conducted the online poll between Nov. 29 and Dec. 12, and involved 3,701 working Canadians between the ages of 30 and 65. Ipsos weighted the results to make them reflect Canadian demographics. A survey with an unweighted sample of this size and a 100% response rate would have an estimated margin of error of 1.6 percentage points, 19 times out of 20, according to the poll.

Postmedia News

A one-month pop in gasoline prices propelled Canada’s annual inflation rate up two notches to 2.5 per cent in January, reversing a recent trend toward moderating consumer price increases.

Pump prices climbed 2.8 per cent last month, partly due to political instability in the Middle East, contributing to upward pressure on both the monthly and annual indexes tracked by the Statistics Canada.

The agency said consumer prices overall were half a point higher in January on a seasonally adjusted basis than they were in December, almost totally reversing last month’s sharp 0.6-per-cent decline — both movements coming mostly from fluctuations in the price of gasoline.

As well, underlying core inflation — which excludes volatile items such as some fresh food and gas — rose to 2.1 per cent, one tick higher than the Bank of Canada’s target.

Analysts had expected the monthly and annual measures to rise, but not as sharply as occurred.

Besides the climb in gas prices during January, economists were expecting the one-point increase in the Quebec sales tax that went into effect on Jan. 1 to provide a small boost.

Another key contributor to inflation remains food, which in January cost 4.2 per cent more than a year ago, although food prices continue to moderate.

Excluding those two items, inflation would be a tepid 1.6 per cent, the agency said.

That is likely to give the Bank of Canada comfort that inflation remains well in control despite the persistent above-target readings. The central bank forecasts inflation to fall to about 1.5 per cent by mid-year.

Overall, seven of the eight major price components that Statistics Canada tracks registered increases in January, the lone exception being recreation, education and reading.

Transportation rose 3.7 per cent on an annual basis, shelter costs increased by 2.1 per cent, household operations were higher as were clothing and footwear, and alcoholic beverages and tobacco. The rising cost of food was punctuated by a 9.9-per-cent annual increase in bread, 8.3 per cent in fresh vegetables and a 6.5-per-cent hike in meat prices.

Not all items cost more in January, however. Furniture cost 3.6 per cent less last month than a year ago and video equipment dropped 9.7 per cent. Mortgage interest costs and travel tours were also slightly less expensive.

Most of the inflation occurred in Ontario and Quebec, at about half a point each, with the other provinces seeing relatively flat pricing.

Regionally, annual inflation was highest New Brunswick at 3.2 per cent last month and lowest in British Columbia, at 1.7 per cent.

The hot housing market that powered the country’s post-recession recovery is slowing to a crawl.

The Canadian Real Estate Association said sales dropped and prices moderated in January, with the weakness spread among more than half of the country’s cities. Sales in Vancouver and Toronto slowed to a crawl, with few houses available to would-be buyers.

The low number of listings means there could be a rush of sellers trying to capitalize on the spring market, keeping a lid on the bidding wars that have driven prices sharply higher in some of the country’s largest markets.

“There is really a lack of product,” said Phil Soper, president of Brookfield Residential Real Estate Services, which operates Royal LePage. “We expect that to pick up considerably, and by the end of March Break you’ll really be able to gauge the Canadian market’s health. Or lack of health.”

Canada’s sizzling property market has made headlines around the world, and so far defied some predictions that it’s a debt-fuelled bubble bound to pop. Forecasts for home prices for the next several years vary wildly – with economists and analysts predicting everything from a 25 per cent drop to modest gains.

The latest figures suggest a levelling off. Home sales across the country were down 4.5 per cent in January from December, the sharpest monthly decline since July, 2010.

Average prices were 2 per cent higher than a year ago at $348,178, the smallest year-over-year increase in the past year.

It’s not the first sign that the much-talked-about slowdown may have arrived.

The Teranet-National Bank index, an alternative measure of price gains that lags CREA by several months, showed prices dipped 0.2 per cent in November, marking the first drop since the fall of 2010.

In Toronto, the bidding wars have largely given way to a market where houses sit longer and sell for closer to their asking price, said Richard Silver, president of the Toronto Real Estate Board. But hot neighbourhoods continue to fetch top dollar, especially considering the lack of listings.

Matthew Slutsky, chief executive officer of real estate site BuzzBuzzHome.com, has been trying to buy a house in one downtown neighbourhood for months. Along with his wife Carlie Brand, he’s been popping letters in mailboxes imploring their owners to consider a sale.

“I really hope it’s the calm before the storm and more listings pop up,” he said. “Right now it feels like we are auditioning for a house, and I don’t know if I want to wait and see what happens in the spring.”

There’s been a sense of unease surrounding Canada’s housing market for more than a year. The federal government tightened its mortgage qualification requirements to try to prevent buyers from taking on too much debt in a low-interest-rate environment, and the Bank of Canada has issued a steady stream of warnings about high levels of household debt.

The fear is that rates will rise as the economy improves, and many people who could afford their house when interest rates were low may find those same houses unaffordable as rates rise. Financial turmoil in Europe also has many market watchers concerned, with any default in Greece expected to have ripple effects around the world.

Lenders such as Gerry Soloway, CEO of Home Capital Corp., have cautiously tightened their lending standards in recent months as the economy wobbled. But he doesn’t see prices crashing any time soon, even if things slow down considerably.

“I just don’t see the catalyst for a big price drop,” he said.

It’s a theory echoed by Ross McCredie, CEO of Sotheby’s International Realty Canada, who recently had 16 buyers check out a $2.5-million home in Toronto.

“We are finding if the home is priced right and a quality home, it is moving fairly quick,” he said. “Too many people who are listing are expecting prices well above the market. We are spending a lot of time with our agents to ensure we are only taking on listings at the right price.”

Give people enough line of credit and they’ll hang themselves with debt.

The bad boy of borrowing products – that’s the line of credit. Recently, the federal government asked the banks to stop blithely handing out home-equity credit lines to people. In his new book The Wealthy Barber Returns, David Chilton writes that credit lines can be an excellent financial tool for disciplined people. “The other 71.9 per cent of Canadians, however, should be careful. Very careful.”

Here are some tips for managing a line of credit from Stephanie Holmes-Winton, who as president of The Money Finder trains financial advisers to address their clients’ debt problems:

1. If you’re bad with debt, a line of credit won’t save you

Ms. Holmes-Winton says she used to advise people with high credit card debts to switch to a credit line where the interest rate is vastly lower. What she found was that these people simply went and ran up the credit line balances.

“I might as well have been blindfolding these people, spinning them in a circle, handing them a Skilsaw and then wondering why they cut their finger off,” Ms. Holmes-Winton said.

2. Your LOC is not an ATM

Ms. Holmes-Winton has come across people who take out $100 here and there from their credit lines to help them make it through the week. That’s called living beyond your means. You end up with an amorphous mass of debt racked up for purchases that brought only a moment’s satisfaction.

3. Beware the LOC-dependent lifestyle

Having a permanent balance on your LOC is an admission that you can’t afford your current level of spending. Even if the payments are affordable, they’re burning up money that could be used for savings or other more productive purposes. “What I don’t want people to do is get in the habit of paying $10,000 down on their line of credit, and then racking it back up again by $10,000,” Ms. Holmes-Winton said.

She sometimes suggests people take advantage of the comparatively low cost of a credit line to pay off debt at much higher interest rates (credit cards are the classic example). She says that 10 years is the maximum timeframe for getting this line of credit debt paid off. Smaller purchases, say $5,000 or less, should be paid back in 24 months or less, while 48 months is realistic for purchases in the $10,000 range.

4. Turn your LOC into a loan

Home-equity lines of credit often allow you to divide your borrowing into different chunks, or sub-accounts, Ms. Holmes-Winton said. To impose some discipline in repaying a line of credit debt, ask your lender to set up automatic monthly payments to a sub-account that combines both principal and interest. Set the payments so you’ll have your debt paid down over a set period of time.

5. Plan for higher interest rates

Credit lines are priced off the prime rate, which today is 3 per cent. As recently as 2006-07, the prime sat around 6 per cent. That’s the background for Ms. Holmes-Winton’s suggestion that people estimate whether they can afford to carry the current balance on their LOC at double today’s rates.

6. Don’t buy a car with your line of credit

People with small credit lines may find that the cost of buying a car uses up too much of their borrowing room, Ms. Holmes-Winton said. Also, adding the car to a bunch of other debts on the credit line can slow the repayment process. “It’s very easy for the lines to get blurry. We end up paying for these cars for 12 or 15 years and we can’t even tell when we’ve fully paid for them.”

7. LOCs can be a lifesaver

Ideally, you won’t buy things until you’ve saved enough money to pay cash, Ms. Holmes-Winton said. “That works with maybe a new sofa or redoing your bathroom for aesthetic reasons, but it’s not the same reality as if you have a leak in your bathroom that you must fix.”

In money emergencies like this, a LOC is the smart way to borrow. If you can handle it, that is.

___________________

Home equity vs. unsecured lines of credit

Canada’s housing market has two good years ahead of it yet, Canada Mortgage and Housing Corp. said Monday, with low interest rates and a “moderately” expanding economy keeping price corrections at bay.

The Crown corporation – which insures Canadian mortgages – has had a consistently rosier view of the market than many private sector forecasters.

Canadian banks have recently issued reports probing the consequences of cheap money, and trying to predict whether there is a bubble in prices that will eventually pop and cause prices to crash. They are particularly concerned about Vancouver and Toronto, where some have predicted price corrections of up to 10 per cent because of overbuilding in the condo market.

But CMHC said Monday Canadian markets would “remain steady in 2012 and 2013.

“With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” said Mathieu Laberge, deputy chief economist.

Also in the forecast: “Housing starts will be in the range of 164,000 to 212,700 units in 2012, with a point forecast of 190,000 units. In 2013, housing starts will be in the range of 168,900 to 219,300 units, with a point forecast of 193,800 units.

Existing home sales will be in the range of 406,000 to 504,500 units in 2012, with a point forecast of 457,300 units. In 2013, MLS sales are expected to move up in the range of 417,600 to 517,400 units, with a point forecast of 468,200 units.

The average MLS price is forecast to be between $330,000 and $410,000 in 2012 and between $335,000 and $430,000 in 2013. CMHC’s point forecast for the average MLS price is $368,900 for 2012 and $379,000 for 2013. The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013.”

Canada’s mortgage party has come to an abrupt halt.

The bonanza of dirt-cheap mortgages offered by some of the country’s biggest lenders in recent weeks has been shut down sooner than expected, as banks pull their offers in the face of higher funding costs and concerns over dwindling profit margins.

RBC and TD were both offering four-year fixed-rate mortgages with a 30-year-amortization at 2.99 per cent, and had announced plans to keep those rates in place until the end of the month.

The offers were in response to Bank of Montreal (BMO-T58.640.040.07%) offering five-year fixed-rate mortgages over 25 years at 2.99 per cent, which observers said is the lowest in recent memory. Though BMO’s move was a two-week offer that was eventually halted, it led RBC and TD to match the rival bank with extended offers to avoid losing market share.

Hints that an economic recovery is taking hold in the United States are putting upward pressure on rates. A slight increase in bond yields this month has forced RBC and TD to pull their mortgage offers weeks ahead of schedule, an indication of just how slim lending margins are for banks in the current environment. Benchmark five-year Government of Canada bond yields have gone up 17 basis points since the start of February.

“The rates coming down were in response to a very aggressive move by a competitor and a need for us to defend our client base, and to defend our business. We didn’t lead it there, but we felt compelled to follow,” David McKay, group head of Canadian banking at RBC, said in an interview Wednesday.

“When that market attacker corrected and raised their rates, it enabled us to say funding costs are going up, we’re not making enough spread at this rate … and we need to raise pricing because the cost of funds is going up.”

In an improving economy, expectations of inflation taking hold gradually push up bond yields and lending rates. Government of Canada five-year bond yields reached a two-month high of 1.416 per cent on Wednesday.

“Rates can go up and down, depending on conditions. The new rates reflect rising bond yields and the subsequent increase in the cost of funds,” TD spokesman Mohammed Nakhooda said.

In response, TD and RBC both increased their four-year, fixed-rate mortgages to 3.39 per cent, an increase of 40 basis points. BMO has also raised its rates to similar levels.

“We have seen some modest backup in Canadian bond yields in recent weeks, amid growing optimism on the global economic outlook – and in particular an improving U.S. outlook,” said Doug Porter, deputy chief economist at BMO. “In turn, this has put some upward pressure on borrowing costs.”

The banks, which will begin reporting quarterly earnings at the end of the month, aren’t saying whether the deep discounts on mortgages led to a boom in new business. However, anecdotal evidence gathered from inside the mortgage community Wednesday suggested a flurry of activity has taken place since mid-January.

The lower rates came at a time when Ottawa is trying to warn consumers against taking on too much debt, worried that household debt levels across the country are rising too quickly. Sources indicated last week that officials in Ottawa were not happy with the price war the banks were waging on mortgages, since it potentially encouraged people to borrow more.

Frank Techar, head of personal and commercial banking in Canada for BMO. said BMO began offering the 2.99-per-cent rate as a way to promote its 25-year mortgages, rather than 30-year amortizations. “We went to 2.99 per cent to draw attention to the benefits of having a mortgage with a maximum amortization of 25 years,” he said.

 Ah, February, when our thoughts turn to the ones we love, and our need to put some money into our RRSPs.

One of the best ways we can take care of our spouses and families is to take advantage of the long-term profit potential that can come from being invested in a solid real estate market.

Young couples dream of getting into the real estate market, partly because it’s a symbol of commitment and a prosperous future together.

Plus, it’s nice to have a secure roof over your head and a nice home to raise a family in.

 So as you cosy up to your beloved this Valentine’s Day, think of how buying real estate together, or ‘trading up’ to improve your home, is one of the best ways of saying a mutual “I love you.”

Once you’ve paid for the four-course meal, roses, or chocolates, it’s time to think about pulling together some cash for your RRSP investment, because the deadline is looming!

With today’s low interest rates, it might make sense to consolidate your debts and re-mortgage in order to free up some cash to invest in your retirement savings. You may be able to use the tax refund you get to pay down your mortage and it’s always a good idea to save for the future.

Whether you’re investing in real estate for the first time, or re-mortgaging or renovating, Entrust Mortgage Brokers can help you get the best rate. Take advantage of record-low interest rates now.

And hop over to Facebook and ‘like’ our Entrust Mortgage Facebook page before February 11. We’re giving away an Undine’s spa experience for you or your sweetie! Wouldn’t that make the ultimate Valentine’s gift?

Call Steven Brouwer at 1-866-798-2313 or email steve@entrustmortgage.ca Find us on Facebook at Entrust Mortgage.

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.

“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.

On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.

With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”

CMHC gave no indication it would seek an increase in its limit.

“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.

The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.

“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”

Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

http://business.financialpost.com/2012/01/30/cmhc-backing-fewer-loans/

Financial institutions appear to be cracking down on rules for borrowers with self-declared income, a move that comes as Finance Minister Jim Flaherty said he’s concerned about a lack standards in the sector.

Responding to a question about whether the Office of the Superintendent of Financial Institutions was looking into the practice of banks loosening their standards for so-called stated income mortgages, Mr. Flaherty confirmed it is an issue.

“OSFI’s concern arises out of some work that OSFI has done as part of it – the ordinary course of its business to look at some of the — some of the loans being made by financial institutions. I was informed of what their assessment showed with respect to a few financial institutions which is a matter of concern and that is — that is being corrected,” he said.

The Financial Post first reported last month that the government was looking at another round of tough new mortgage rules, among the considerations being a crackdown on how the self-employed qualify.

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the self-employed. A source indicated many financial institutions have looked more at the financial behaviour of the self-employed — about 13% of the market — because income is hard to verify.

Vince Gaetano, principal of Monster Mortgage confirmed that CIBC’s wholesale arm FirstLine Mortgages Inc. is pulling out of the stated-income business. Mr. Gaetano said Street Capital Financial Corporation has followed the CIBC lead and he expects other financial institutions to follow very soon.

“We are hearing rumblings that everybody is going to be tightening up in the next week,” he said. “What’s happening is one person leads and everybody follows.”

What it ultimately means for the self-employed is they will end up back in the arms of non–traditional lenders and that means higher rates for them — something they faced in the housing market about five years ago.

“It’s bit like we are going back in history,” said one economist, who didn’t want to be named. “This is the way it used to be before the market took off.”

For his part, Mr. Gaetano said the federal government should blame itself for loosening standards on the minimum down payment required before consumers have to get mortgage default insurance. The government required 25% down last decade but it has since been lowered to 20%.

“The reason it changed is the banks were pushing their line of credit products. They could only lend up to 75% and they wanted the extra 5% to go to 80% without insurance under the Bank Act,” said Mr. Gaetano.

That drop in the minimum down payment could also be attributed to the banks being forced to buy more portfolio insurance for loans that have more than 20% down.

The banks have been seeking insurance on loans with even high down payments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

Canada Mortgage and Housing Corp. acknowledged to the Financial Post this week it had talked to lenders about reducing its bulk or portfolio insurance as it tries to allocate its resources. The Crown corporation, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government, but it is getting close to its $600-billion limit. Third quarter results showed it was backstopping $541-billion of loans.

Banks have been scrambling to deal with the CMHC change and are said to have contacted private insurance Genworth Financial Canada and Canada Guaranty Mortgage Insurance which together have a $300-billion limit guaranteed by Ottawa for loans they insure.