OTTAWA - Bank of Canada governor Mark Carney is concerned about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

Carney told a Commons committee Wednesday that the central bank is watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

"We have concerns with the increased prevalence of very long amortization and higher value mortgage products," he said.

"They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices."

And Carney conceded that stand five-year mortgage rates for Canadian home buyers had not decreased in line with his bank's 150-basis point cut in the overnight interest rate to three per cent from 4.5 per cent in early December.

"The costs for the banks have increased and yet there still remains an operating band (for other loans), except for five-year mortgages," he said. "Its difficult to provide a full explanations" beyond the global problems in the security markets.

Still, the governor stressed that the Canadian housing market is not following the path of the U.S., which went through several years of skyrocketing growth before bursting last summer and collapsing.

Although housing prices have risen aggressively in Canada, Carney said the country has the lowest housing affordability measure among 20 industrialized countries surveyed by the International Monetary Fund, alongside Austria.

"The structure of our housing finance is entirely different than that of the United States," he said, and the risk of a housing slump could impact the wider financial system "is not possible in our system, to the U.S. magnitude."

In his first meeting with the Commons finance committee since taking over as governor in February, Carney asked the MPs to support legislation that would widen his powers to expand the assets the central bank can accept in order to lend chartered banks money in times of financial stress.

Carney said currently the central bank cannot accept standard assets as corporate or municipal bonds as collateral in making term loans, adding that these are "big chunks" of the financial market.

"We have tremendous flexibility in the overnight market...and we have flexibility (when markets are under) severe and unusual stress," he explained.

"What we don't have is the modern flexibility in the intervening period. What we are asking for is the first step of what our international peers did in response to this crisis."

Carney also gave the committee a general overview of the Canadian economy, repeating much of what he said last week when he cut interest rates for the second time since taking over as governor.

He made it clear that Canada's economy is undergoing a rough patch that will see its growth rate flatten to 0.3 per cent in the second quarter of the year, largely because of what he called a "deeper and more protracted slowdown in the United States."

The bank governor did not comment on the Statistics Canada report Wednesday that showed Canada's gross domestic product actually contracted in February by 0.2 per cent, saying he hoped the bank's forecast had a lifespan of more than a week. The bank forecast last week that Canada would record a 1.4 per cent growth rate this year.

He conceded that the manufacturing sector will be particularly hard hit.

But there are substantial strengths in the economy, added senior deputy governor Paul Jenkins, including record employment levels and high commodity prices in the resource sector that are feeding the domestic economy.

On the financial crisis, Carney said he was encouraged by the adoption of international banking standards to increase disclosure, but said the global markets are not out of the woods yet.

The central bank rolled over a $2-billion term liquidity injection to lenders on Tuesday because the credit markets "remain somewhat strained," he said.