In the Canadian financial system, mortgage fraud is considered especially tolerable. For Canada’s banks, there’s a dedicated regulator who investigates violations of the Bank Act known as the Office of the Superintendent of Financial Institutions (OSFI). These are their stories. Dun dun.
Just kidding. But OSFI, Canada’s banking watchdog, isn’t. While the regulator has been reassuring the public that real estate markets are fine, heavily redacted documents reveal its growing frustration with the country’s largest banks over the use of controversial appraisals for mortgages on new homes. Over a series of meetings last year, OSFI went from telling banks it has concerns regarding some mortgage practices, to outright telling banks that they may be violating the law. Why the sudden shift? OSFI is citing widespread market concerns that Canada’s new home market is expected to worsen, potentially exposing loans based on questionable valuations.
How Old Appraisals & New Mortgages Are Creating Systemic Risk
When the speculative bubble popped and values plunged, developers found themselves in a sticky situation. Lenders provide up to 80% of the appraised value, but falling prices mean the buyer is still on the hook for the full amount. In cities like Toronto, where prices have dropped more than 20%, the downpayment was effectively gone. To prevent a wave of project failures (and homes from burning down during construction), developers and lenders turned to blanket appraisals.
Blanket appraisals are when multiple homes in a new development are assigned a single value. It’s helpful for a large project as it’s typically done during the preconstruction phase, often years before a buyer takes possession.
While they are a legitimate tool for developers, Canada’s formerly conservative banks have begun using them for buyer mortgages. This often validates the contract price during pre-construction, avoiding that pesky appraisal shortfall problem. This is an obvious issue that the regulator itself addressed mid-2025, expressing concerns regarding the timing. While it’s a legitimate method of valuation, intentionally using stale appraisals to avoid real valuations from appearing on paper, is problematic.
That didn’t stop Canada’s largest banks from doubling down. The documents reveal the regulator didn’t just let it slide behind closed doors.
From Concerned To FAFO Over Bank Act Breaches Within Weeks
The documents reveal on October 17, OSFI held a roundtable with the chief risk officers of Bay Street’s banks. The banking watchdog took a diplomatic approach, presenting the blanket appraisal issue as a shared administrative challenge. They reiterated their concerns regarding stale appraisals, warning it “presents additional burden and risks to the lender.”
Teamwork makes the dream work, right?
The documents reveal that by November 13th, the banking watchdog started to growl during a closed-door meeting with the banks. Roughly 3 weeks after we pointed out that Canada’s banks are increasingly issuing mortgages knowing they’re in negative equity, OSFI flat out told the banks that inflated appraisals “can result in Bank Act breaches.”
“There are no exceptions or materiality thresholds to the Bank Act, so any instance of uninsured mortgage loans exceeding 80% LTV at origination constitutes a serious compliance issue,” warns the regulator.
This was accompanied by OSFI’s formal guidance that valuations must reflect “current price levels at the time of mortgage origination (closing),” not the pre-construction purchase price or stale appraisals.
Banks Aren’t Violating OSFI Guidelines, They’re Violating Bank Laws
OSFI didn’t just tell them that they may be violating the Bank Act, it brought examples for a show-and-tell. While the lender is redacted, they quote the marketing from one bank: “At [XYZ], we offer a firm approval to match the closing date provided by the builder. Once approved, you stay approved until your closing date.”
Not content with the possibility that customers may misread that, the bank boldly clarifies the violation: “You will continue to remain approved during the construction period provided that all financial and other information you provided in your application continues to remain true and accurate and that you continue to meet [XYZ]’s standard lending criteria at the time of closing.”
OSFI’s internal risk analysis identified exactly why banks are doing this—speed over risk. Blanket mortgages “remove red tape and accelerate loans,” suggesting lenders view a collapsed deal as a bigger risk than issuing a loan that exceeds the asset’s actual value.
OSFI lays out the inevitable outcome: “If a lender provides a loan to a construction company based on blanket appraisals, and the buyers are unable to qualify for these elevated appraisals in a market that has experienced unprecedented appreciation, it significantly increases the risk of loan default.”
If the buyer has no equity and defaults, the lender is left with little recourse for loss recovery. The equity that acts as security for the lenders and shareholders doesn’t exist anywhere outside of stale appraisals. Unless there’s a Time Machine in Commerce Court that can take bankers back to the 2021 peak frenzy, they’re holding an asset that would cost them money to dispose of.
When an uninsured mortgage exceeds 80% LTV at close, the lender is breaching the Bank Act. Unlike most regulatory issues like the B-20 mortgage stress tests, this isn’t a guideline that OSFI has discretion to ignore enforcement if they see lenders are offsetting risk more directly. It’s the law.
The Worst Is Yet To Come? OSFI Prepares Banks For New Real Estate Headwinds, Not Recent Correction
OSFI’s timing is revealing. The blanket appraisal issue was known by the regulator, but there’s no documented movement on this problem until October 2025. Minor concerns expressed as an administrative problem, exploding into full-on legal threats just a few weeks later. They mention specific data points, in addition to the public concerns presented by the media.
Among the concerns OSFI analysts list:
- Toronto’s preconstruction market is “expected to continue to experience a significant decline, with an expected supply shock in 2027.”
- The Greater Toronto and Hamilton Area new condo market posted just 533 sales last quarter—the slowest since 1995.
- In Vancouver, newly built, unsold condo units are expected to increase 60% by year’s end. Investor buyer participation has collapsed from 25% to 7%.
OSFI’s transition from July 2025’s “we have concerns” to October’s “let’s solve this together,” and finally November’s FAFO warning, isn’t just recognition that the preconstruction market flipped. It’s a warning that the damage is still yet to come. They just pulled aside Canada’s largest banks, and told them to batten down the hatches because a storm is about to send ships underwater.
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