Canada's banking watchdog warned on Monday that lenders could face significant losses if housing markets turn in the event of an economic downturn and emphasized the need for stringent underwriting practices.

Canada's banks face heightened scrutiny of their mortgage underwriting practices as authorities try to tackle the potential threat of a housing bubble in Vancouver and Toronto, where prices have soared

Citing concerns about record household debt and a sharp jump in house prices, the Office of the Superintendent of Financial Institutions (OSFI) said in July it was tightening oversight of mortgage lending and that it would scrutinize lenders' practices for income verification, higher-risk loans, debt service ratios, loan-to-value ratios and risk appetite.

"Sound underwriting has always been important, but it has never been more important than it is now," Jeremy Rudin, the superintendent of financial institutions, told a conference for mortgage professionals in Vancouver on Monday.

"A pronounced or prolonged economic downturn could well involve a meaningful housing price correction. This could translate into significant losses for lenders and insurers," he said.

Rudin also addressed concerns about the activities of lenders which are not regulated by OSFI and said all players in the industry needed to understand what it was requiring federally regulated institutions to do.

"Everyone involved in mortgage origination in Canada has a role to play in supporting the sound underwriting practices that OSFI requires of federally regulated lenders and mortgage insurers," he said.