Evidence of mortgage fraud amid surging home prices and household debt has prompted S&P Global Ratings to lower a key risk metric for Canadian banks.
The credit ratings agency dropped its economic risk assessment by one notch due to evidence of residential-mortgage fraud at smaller Canadian banks, which could compound existing risks from the country’s hot housing market, according to a statement Friday. S&P lowered the Canadian banks’ economic risk level to 3 out of 10, with a higher number representing great risk, revising the trend to stable. That puts Canada in line with the U.S., but lower than the U.K. and Australia.
High housing prices and debt loads increase incentives for fraudulent activity such as overstating a borrower’s income to meet qualifying criteria. Additionally, a growing share of mortgages is being originated by brokers who don’t bear the credit risk for the loans like lenders, according to the statement.
“Given this, we expect more evidence of fraud” in Canadian residential mortgages could arise, S&P said. The rating company pointed to a January report from Equifax Canada whose data suggested a 52 percent rise in suspected fraudulent mortgage applications since 2013.
Home Capital Group Inc. saw retail investors rush to pull their deposits last year after a regulator said former executives at the mortgage lender failed to properly disclose that brokers had been falsifying mortgage applications. Laurentian Bank of Canada said in December that it found customer misrepresentations on some mortgage loans it sold to another firm.
S&P did not change its A- credit profile for the Canadian banks, or any individual bank ratings or outlooks. The change increases the risk weights it applies to calculate risk-adjusted capital ratios that determine credit ratings, and is expected to result in the ratios declining by less than 50 basis points for the majority of the big six banks.