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.