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O Canada, you sensible land!

By Jay MacDonald · Bankrate.com
Monday, May 9, 2011
Posted: 9 am ET

What's the best way out of our bubble-bust-bubble mortgage muddle that has resulted in a record 2.87 million American foreclosures last year alone? The answer may lie due north.

O Canada, you have no doubt watched our housing-driven Great Recession with the stern if sympathetic eye of a schoolmaster who well knows the fate of all undisciplined schoolboys.

During our financial meltdown, not a single Canadian bank failed. Less than 1 percent of Canadian mortgages are in arrears. And this in a land that doesn't even afford its homeowners the courtesy of a tax break on their mortgage interest!

I was gob-smacked by a recent McClatchy report out of Toronto with the headline, "Canada's mortgage system works." Of course, compared to our system, falling as it does somewhere between a faulty pachinko game and three-card Monte, most of the developed world could make the same claim.

Canada owes its housing stability in large part to a conservative regulatory environment that holds its 71 federally regulated lenders to stricter underwriting standards and larger reserve requirements for potential losses than does its U.S. counterpart.

There is no Canadian equivalent of Fannie Mae and Freddy Mac, which purchase mortgages from banks and bundle them into bonds. Did I mention that Fannie and Freddy have been in government conservatorship since mid-2008?

As far as tax incentives go, Canadian homeowners are allowed an exemption on capital gain from the sale of their primary residence, period. Yet their homeownership rate is equal to or greater than ours here in Sud Moosejaw.

Stuart Gabriel, a finance professor at UCLA, sees it this way:

"They've insisted all along on the more rigorous mortgage underwriting, and because of that never found themselves originating subprime and no-doc mortgages … some very basic items such as stringency of underwriting seem to go a long way."

Indeed. Now I'll grant you, corralling a total of 71 lenders for 34 million citizens may be a tad easier than wrangling 8,000-plus FDIC-insured lenders serving 310 million. But it's still ironic that Canada's conservative mortgage system is unfazed while our "free market" version – and I use those quotation marks intentionally – has resulted in the largest financial meltdown since the big one.

O Canada, please send some of your common sense our way as we attempt to dismantle our house of cards and start over. Hopefully with two-by-fours.

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18 Comments
Shawn Christie
July 06, 2011 at 3:25 am

I don't normally take the time to comment;however, I felt the need to after reading Ted's inaccurate post.

Kevin is absolutely correct that CMHC is not at all similar to a Fannie or Freddie. To shed some light Canadian banks will only lend 75% of the value of a property under normal procedure which means borrowers will have to put down a 25% downpayment. This is is termed a "conventional" mortgage and borrowers still have to qualify on other fronts to be approved such as affordability, credit history, etc.

The maximum a Canadian bank can lend is to 95% (requiring a 5% downpayment) and when they do this the lending criteria is tightened to ensure all of the other factors such as affordability, job stability, etc are met comfortably. Since this lower down payment would create more risk to the bank the Canadian banks are required to insure these types of mortages (ones with less than 25% down) against default. The main provider of this insurance is a company called CMHC and the borrower pays an insurance premium towards this based on the size of their downpayment. If a borrower puts 20% down then they only pay a small premium because there is less risk and less to cover if they default. If the borrower only puts down 5% the premium is high and this serves to somewhat discourage these riskier mortgages. Either way the Canadian banks are covered by this insurance in the event of a default and if a default occurs the risks for these riskier mortgage types are downloaded to the insurers such as CMHC.

Canadian banks offer fixed rates or variable rates. If a variable rate is chosen the lender will also calculate the repayment affordability based on a higher rate to help ensure the borrower will be able to afford the new payments as and when rates rise.

I have never seem an amortisation above 25 years.

Overall the system has proven effective because it is conservative. The future will depend on how deep the downturn is but regardless of the
Is the Canadian banks should be a better position relative to international counterparts.

Source: Though I have been living in London, England for the past 6 years I have over 10 years of front line banking experience and was previously very thoroughly trained and qualified to approve loans and mortgages with BMO Bank of Montreal. It is possible that the recent economic situation may have led to even tighter restrictions around insured mortgages so the information
provided there may be stale. I have also worked for Barclays in London and been a VP with Citi Private Bank.

dijit44
July 05, 2011 at 2:35 pm

It was not, "conservative," regulation, far from it.
The banks operate under rules created by Liberal governments.
The current Conservative party in power is led, in fact, by a psuedo-economist who, half a decade before the financial collapse triggered by U.S. profligacy, lamented the fact of those regulations and wanted power, to, ("get his hands on it,") in order to re-create our financial structure in the American model, the better to drag us out of our, "second rate," status as a, "third tier socialist country."
As a two-term minority government leader, he did not have the power, pre-collapse, to institute the regulatory changes he envisioned. He just had to go along with the safeguards in place (while Canadian banks, too, posted record profits).
Because that worked out for him and us, he now has a majority government - virtually unfettered power in parliament - so we can only hope, now, that he doesn't free-market-mania us into collapsing in the coming second crash, which will also be triggered by still unregulated U.S. financial institutions.

GBS
June 29, 2011 at 11:37 pm

Ted, I don't know where you get your information, but it's very wrong. I've held 3 mortgages in Canada in the last 15 years - 2 in Vancouver, one in Toronto. I'm currently 5 years into a 10 year fixed rate on a 20 year amortization, which I've pushed down to just 8 more years by exercising pre-payment & payment increase options. I can tell you that a variety of fixed and variable are offered on all sorts of terms and I've never seen a 40 year amortization offered on residential property. In each case I've had a range of options from a number of banks, and have made decisions based on what was best for me at the time - with no pressure or selling me to take this or that loan.

Stan
June 16, 2011 at 7:09 pm

Thank you for the quotes around "free-market". Somehow the US press places the blame for the crisis on the free market when in fact our cousins up north have a freer housing market than we do.

Bad loans were encouraged, if not dictated, but government regulations. With the majority of loans only underwritten if they met Fannie Mae or Freddie Mac guidelines. Simple regulations like better reserve requirements and letting banks be accountable for their mistakes would have prevented this mess.

Kevin
June 01, 2011 at 1:40 pm

Ted, CMHC is NOT the equivalent to Fannie or Freddie. You should look up the purposes of F&F and CMHC. And Vancouver is only a tiny part of Canada. Foreign buyers from Asia are a large part of why Vancouver is expensive. Not to mention that it's one of the beautiful cities in the world. "Experts" have been predicting a RE collapse in Canada for years, but even when the US cratered, Canada kept going strong. Maybe it'll happen - who knows - but I think we're in a better/stronger position and it won't be so bad.

Ted
May 12, 2011 at 12:26 am

CMHC is Canada's equivalent to Fannie and Freddie. The majority of Canadian mortgages are insured by taxpayers via CMHC. Canadian mortgages are almost exclusively adjustable rate, with most terms 5 years or less and - until quite recently - amortized up to 40 years.
Consequently some canadian real estate markets, most notably Vancuver, are among the most unaffordable markets in the world. Vancouver SFH are going for 10-11 times avg annual incomes.
Banks in Canada look stable because risk has been transferred to taxpayers fueling a housing bubble of epic proportions. We expect a RE collapse at which point we will not look nearly so sensible.

Matthew
May 11, 2011 at 9:21 pm

From what I interpret here I think alot of people are being mislead. Our banking system hasn't changed much over the course of the past 20 years. And little of that has been regulated by the government, Conservative or Liberal. We have "The Bank of Canada" which oversees the banks. But, if you look a little deeper you will see that the cost to bank with the big 4 banks in Canada has risen incredibly. So, most of the stability comes from the customer who may or may not have been given a mortgage. Why foreclose on a property when you can still draw interest and make money?
All the governments steal, provide kick-backs or waste money. Don't mix that up with the banks who are for-profit and stick to that script like lint on denim.