Finance Minister Jim Flaherty said he shares the concern of Canada's top banking regulator that lenders are loosening their mortgage standards too much, but said any problems in the system are being corrected.

On Tuesday, Bloomberg released documents obtained through freedom of information requests that showed the Office of the Superintendent of Financial Institutions (OSFI) has some fears that loosening mortgage standards poses an "emerging risk" to Canada's economy.

In the 152 pages of documents, internal communications reveal that OSFI — the regulator in charge of all federally monitored financial institutions in Canada — worries banks are becoming "increasingly liberal" by handing out loans without requiring borrowers to prove they have sufficient incomes to pay them back. Such loans "have some similarities to non-prime loans in the U.S. retail lending market," the OSFI documents reveal.

Speaking to reporters in Tel Aviv, Israel, on Thursday, Flaherty echoed OSFI's concerns.

"OSFI's concern arises out of some work that OSFI has done as part of the ordinary course of its business to look at some of the loans being made by financial institutions," he said. "I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern."

"That is being corrected," Flaherty said.

CMHC insurance nears limit

The reaction from the finance minister came at the end of a busy week in which multiple stories cast some doubt on the sustainability of Canada's booming housing market.

On Tuesday, it emerged that the Canada Mortgage and Housing Corporation has committed to back $541 billion in mortgages — within striking distance of the agency's $600-billion limit.

The CMHC is the Crown corporation that ultimately backstops Canada's housing industry by insuring mortgages. Buyers are legally obligated to pay for CMHC insurance if they put down 20 per cent or less of the purchase price as a down payment. Approximately 40 per cent of Canadian homes are covered by CMHC insurance.

The limit was at $450 billion as recently as 2008, but Ottawa moved to raise it as a result of the financial crisis.

As that gap closes, it gets harder for Canadians to get new mortgages. Theoretically, at a certain point CMHC would have to deny new borrowers unless Ottawa moved to raise the limit — something which would prove difficult in a political environment where policymakers have repeatedly encouraged Canadians to get their debt levels under control.

Mortgage-backed securities

Part of the reason the CMHC is running out of wiggle room is that in recent years, Canada's big banks have moved en masse to purchase CMHC insurance for their mortgages even where the borrowers have more than 20 per cent in equity.

"CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance," CMHC spokesman Charles Sauriol told CBC News this week. That's giving lenders "the ability to purchase insurance on pools of previously uninsured low ratio mortgages," he said.

They're doing that so that they can take the mortgages on their balance sheets and sell them to other investors through a process known as securitization.

The sale of such mortgage-backed securities was prevalent in the lead-up to America's housing crisis in 2007, but it's a practice that has been rare in Canada to this point.

Many experts have pointed to the securitization of mortgages — particularly subprime loans to borrowers who couldn't meet traditional standards — as a key catalyst in America's housing crash as the relationship between the lender and the home-owning borrower became increasingly blurred.

OSFI's concerns stem from a fear that Canadians might be getting mortgages they won't be able to afford, if and when rates go up from their current lows. That, in turn, would hurt the greater economy and Ottawa's coffers as the taxpayers are ultimately responsible for funding any CMHC payouts for mortgages that default.

"We monitor CMHC as part of the general monitoring of the financial scene in Canada," Flaherty said. "Right now they're still below their lending limit."

• Vancouver: 1 In 5 Homes Above $1 Million
• Toronto: Percentage Of Million-Dollar Homes Doubles
• Calgary: Explosion of Million-Dollar Homes