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TD Says Banks Tightening Lending Amid Housing Concern

Toronto-Dominion Bank Chief Executive Officer Edmund Clark said Canada’s banks are tightening lending standards in response to a “genuine concern” about the country’s housing boom and rising consumer debt levels.

“Household debt numbers are coming up to U.S. levels, so that is causing us a concern,” Clark, 64, said yesterday in an interview on Bloomberg Television.

Canada’s banks are in talks with the federal government about ways to curb mortgage lending to ensure the country avoids a U.S.-style housing correction, he said. The banks have responded by restricting some lending and raising prices on higher-risk borrowers, Clark said.

“We are trying to have a national dialogue that changes people’s behavior and a number of banks like us have said ‘ok, if we think people’s debt loads are getting high let’s start to crank up the pricing a little,” Clark said from Bloomberg’s headquarters in New York.

Canada’s housing market has surged since the 2009 recession as near-record low mortgage rates fueled prices and home purchases, unlike the U.S., where sales and values have fallen since 2007. Bank of Canada Governor Mark Carney has said record consumer debts are the greatest domestic threat to the country’s financial institutions, even as the central bank has held the benchmark rate at 1 percent since September 2010.

Not the U.S.

Canada’s situation is different from what happened in the U.S. that led to a housing correction, according to Clark. Canadian household debt rose to a record 153 percent of disposable income in the third quarter of 2011 as borrowing increased, Statistics Canada said Dec. 13. That compares with 146 percent in the U.S.

“There’s nothing going on in Canada like what happened in the United States because the banks own the mortgages, we put them on our own balance sheet,” Clark said. “But it doesn’t mean we couldn’t have a problem where we grew too fast the household debt and housing prices rose.”

The Canadian government prefers that banks “tweak” their own lending standards rather than it imposing “major tightening” of mortgage-lending rules, Clark said.

“They’re worried that the Canadian economy is slowing down right now and that’s taking out a bazooka,” Clark said. “We have seen the banks in a series of small moves say ok, ‘why we don’t tweak here and tweak there and see if we can tighten the rules.’”

Mortgage Special Ends

Toronto-Dominion Bank joined Royal Bank of Canada this week in ending a promotional 2.99 percent four-year mortgage rate, three weeks before it was set to expire. The new rate is 3.39 percent. The two banks announced the special four-year rate on Jan. 13, following Bank of Montreal’s move to lower its five-year mortgage rate to a record low for the lender.

Clark said banks are tightening lending on loans for condominiums, as high-rise construction in Toronto and Vancouver has boomed.

“Banks are leaning against it in the condo market right now and leaning against it in the unsecured lending market and just a general leaning against borrowing,” said Clark. He said the changes may lead to a “successful soft landing” for the housing market.

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