Canada Regulator Warns Banks Over Condo Appraisal Risks
Canada's regulator warned banks that blanket condo appraisals could breach federal rules. Falling prices mean loans may exceed 80 percent of property values.
The federal banking regulator in Canada has alerted senior bank executives that the common practice of using blanket appraisals for condominium mortgages may violate national lending regulations. Documents from an October meeting, reviewed by Reuters, reveal that the Office of the Superintendent of Financial Institutions (OSFI) is closely monitoring mortgage approval processes as the housing market faces increased volatility.
The housing sector in the region has seen significant price corrections, with overall values dropping 2.7% last year amid trade uncertainties involving the United States and a reduction in immigration levels. Pre-construction properties have been hit particularly hard, with price declines between 10% and 30% creating a risk that buyers might default or walk away from units that are now valued significantly lower than their initial purchase price.
Blanket appraisals involve a lender valuing a property based on the price at the time of the purchase agreement rather than the market value at the time the deal closes. While this method is efficient during market upswings, OSFI warned that it presents substantial risks when property values soften, as outdated appraisals can lead to higher losses for financial institutions.
"We noted that failure to follow this expectation 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 stated in the meeting minutes.
Federal law under the Bank Act prohibits banks from issuing uninsured mortgages that exceed 80% of a property’s market value at the time of closing. When these standards are not met, the regulator typically enters private discussions with lenders to determine necessary remediation steps.
The regulatory pressure has prompted changes at major financial institutions. Royal Bank of Canada, the country's largest lender, recently modified its marketing for pre-construction mortgages. The bank previously stated on its website that once a buyer was approved, they would remain approved until the closing date. Following the regulator's concerns, that language was removed.
"At RBC, we offer mortgage approvals based on the closing date provided by the builder," the bank's website now states.
In response to inquiries, the bank stated it maintains a close working relationship with regulators to ensure all expectations are satisfied. Additionally, the Canadian Bankers Association noted it is engaged in ongoing dialogue with OSFI regarding the use of blanket appraisals to ensure that any potential financial impacts are properly managed.
