PARALLEL UNIVERSE: Why has Canada avoided the foreclosure crisis that afflicts the U.S.?

By David M. Kinchen
“God has a special providence for fools, drunks, and the United States of America.” -- attributed to German political leader Otto von Bismarck (1815-1898)

The recently concluded year produced record home foreclosures in the U.S., according to a Jan. 13 report  from RealtyTrac, an Irvine, CA. based firm. (see accompanying story).

Foreclosure filings  were reported  on a record 2,871,891 U.S. properties in  2010, an increase of nearly 2 percent from 2009 and an increase of 23 percent  from 2008,  according to the RealtyTrac  report. A  total of 3,825,637 filings were reported, because multiple filings are often recorded on the same property.

With one in 45 houses in the U.S. facing some kind of foreclosure action and about 10.8 million houses  --- 22.5 percent of those with mortgages -- "underwater" (worth less than the debt owed on them), one has to wonder what kind of "special providence" we really have in the U.S. The Dec. 13, 2010  "underwater" report came from CoreLogic Inc., located a few miles from RealtyTrac in Santa Ana (Orange County) CA.

The number of "underwater" homes has actually declined because of the continuing foreclosure crisis, which is especially severe in California, according to Mark Fleming, CoreLogic’s chief economist.

Aside from a seemingly permanent housing bubble in Vancouver, B.C. (also known as "Hongcouver" because of its appeal to Asian buyers), Canada seems to have avoided the excesses of the U.S. housing market, at least judging by my search for stories about foreclosures in the nation of 35 million people (smaller than California's population of 37 million).

Kevin G. Hall of McClatchy Newspapers reported from Toronto that there is no foreclosure crisis in Canada, due in large part to stricter underwriting standards that make it more difficult to get a mortgage than in the States. Foreclosures are present, but not in the huge numbers found in states like California, Arizona, Nevada, Florida and Michigan. Hall said that "not a single Canadian bank failed during the Great Depression, and not a single one failed during the recent U.S. crisis now dubbed the Great Recession. Fewer than 1 percent of all Canadian mortgages are in arrears."

"This sounds very simple, but one of our CEOs has said we are in the business of making loans to people who will pay them back,"  Terry Campbell, vice president of policy for the Canadian Bankers Association in Ottawa, told Hall. Canadian stricter mortgage loan underwriting standards typically require down payments of 20 percent on loans usually of 25-year duration, with the interest rate fixed for the first five years and variable thereafter.


Add to this the fact that, according to writer Gina Pogol, "If Canadian homeowners default, their other assets and income are on the line, not just the property." No "jingle mail" with the house's keys in the lenders mail slot in the Great White North!


Hall made the same point in his story: "Canadian mortgages aren't non-recourse loans, meaning homeowners can't simply walk away from their mortgages. Even if they lose their home, they still owe their mortgage debt."


Pogol, writing in,  noted that "there is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts -- so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years -- an incentive to pay the debt down faster."


Despite the lack of a mortgage interest income tax deduction in Canada, the nation's homeownership rate is as high or higher than the rate in the States, about 68 percent. On top of this -- a point that appealed to me -- there's no need to prop up with my tax dollars (and yours) ailing government sponsored enterprises (GSE)  like Fannie Mae and Freddy Mac that are neither fish nor fowl (private or government)  because agencies like that are not present in Canada.


Hall added that Canadian banks were recently named the best in the world by the World Economic Forum. He noted that "they're a much smaller universe of lenders — 71 that are federally regulated, compared with more than 8,000-plus U.S. lenders insured by the Federal Deposit Insurance Corp."


Despite a strong "Not Invented Here" attitude in America, I think when the housing depression is finally past us that we'll adopt the good features of Canadian home lending. We should be able to pick and choose good ideas from whatever source, especially if they come from thrifty Canadians.


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