October 20, 2017 / 4:59 PM / a year ago

CORRECTED-INTERVIEW-Canada's housing agency concerned by growth of unregulated lenders

(Corrects paragraph 2 to show it was Office of the Superintendent of Financial Institutions that said it would introduce stress test, not the Canada Mortgage and Housing Corporation)

NEW YORK, Oct 20 (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 who 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 Corporation, 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.”

Siddall said that 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 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. The risk in that space has gone down. We’ve done our job,” Siddall said.

“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, and added that the agency welcomed moves to cut out so-called “bundled mortgages” where regulated entities team up with private lenders to circumvent lending limits. (Reporting by Matt Scuffham; Editing by Paul Simao)

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