By Matt Scuffham
NEW YORK (Reuters) - New rules meant to cut out risky lending by banks in Canada are pushing home purchasers into the arms of unregulated lenders, the head of the nation's housing agency said on Friday, adding that steps could be taken to curb their growth.
The Office of the Superintendent of Financial Institutions, Canada's banking regulator, said this week it will introduce a stress test on all uninsured mortgages to test borrowers' ability to pay back their debt if interest rates rise.
That announcement has sparked concerns that borrowers rejected by banks could turn to unscrupulous private lenders that charge sky-high rates.
"Right now, the level of activity (by unregulated lenders) is relatively low, but we've created an incentive for it to be higher," Evan Siddall, chief executive of the Canada Mortgage and Housing Corp, said in an interview with Reuters ahead of a speech in New York.
"To the extent that we continue to shrink the space, then riskier loans just move outside of our purview and we need to think about what that means," he said.
Siddall said the CMHC was researching how much of Canada's C$1.4 trillion mortgage market was being served by unregulated lenders and investigating whether their activity posed a systemic threat to the broader market.
"There are two factors involved - one is the level of activity and the other is the risk of contagion," he said. "The first thing we do is just watch. We can move pretty quickly but we're in the middle of watching right now."
Siddall said his main concern about the country's housing markets related to supply issues in Toronto and Vancouver, citing a number of factors including restrictions on open land around Toronto, the slow pace of regulatory approvals, and developers' speculatively owning land without building on it.
"All those factors together are a problem," he said, adding that Canada's forthcoming National Housing Strategy will look to address them.
Siddall echoed comments earlier this week by Canada's top banking regulator that sufficient action had been taken to tighten mortgage lending standards at federally regulated lenders.
Canadian authorities have introduced a range of measures over the past 18 months intended to cool housing markets, including slapping special taxes on foreign buyers in Toronto and Vancouver and adopting tougher tests on borrowers' ability to meet repayments.
"Do I think we need further measures in the federally regulated space? No, I actually don't. Not for now," Siddall said. "The risk in that space has gone down. We've done our job.
"Now we're looking at the result of the consequence of moving that out of the federally regulated space and should we, can we do something about it," he added.
Siddall also said the CMHC was examining if self-employed workers and new immigrants were being discriminated against as a result of the new rules. He said the agency welcomed moves to cut out "bundled mortgages" in which regulated entities team up with private lenders to circumvent lending limits.
(Reporting by Matt Scuffham; Editing by Paul Simao)