Canadian Mortgage finance system supports home ownership

Canadian mortgage finance system supports homeownership

I recently returned from a BILD-organized housing study tour of Denver, Colorado and while the participating builders and designers took plenty of inspiration and ideas from the many great communities we visited, the thing that stuck in my mind the most was how many times I heard the "F-word" while in the U.S.

No, I don't mean the four letter word. The F-word I kept hearing was "foreclosure."

On our first morning in Denver, the cover story on the front page of USA Today was "Mortgage crisis robbing seniors of golden years" and it spoke of the growing number of seniors facing or experiencing foreclosure on their properties.

The next morning's Wall Street Journal had two full pages of Foreclosure Notices for Denver which in many cases showed outstanding balances that were even higher than the original principal amounts if not equal or just slightly less, reflecting the likelihood that these homeowners had taken out interest-only mortgages, one of the sub-prime mortgage products which has caused so much grief for U.S. homeowners.

That same day, CNN reported that there were more than one million foreclosures in the U.S. so far this year as a lead into a story on a Foreclosure Prevention Summit taking place in Baltimore. The summit was apparently quite successful in assisting many homeowners to avert foreclosure which is great, but the very fact of the summit is disturbing.

Thankfully, foreclosures, which occur when a mortgagee defaults on their payments to the point where the mortgagor sells their home out from under them, are a rarity in Canada thanks to cultural, regulatory and market differences.

Culturally, we strive to pay off our mortgages as quickly as possible and our banks compete on features such as weekly or bi-weekly payments with further options to increase regular payments or make lump-sum payments. Americans aren't nearly as inclined to pay off their mortgages quickly which probably has a lot to do with the fact that they have mortgage interest deductibility there.

From a regulatory standpoint, Canadian homebuyers borrowing more than 80 per cent of the purchase price of the home are subject to minimum down-payment (5 per cent), maximum amortization periods (35 years) and compulsory mortgage insurance requirements. Moreover, the lending standards, which include minimum credit scores, maximum debt ratios and loan documentation standards are both strict and strictly adhered to.

As for market differences, the problem that many U.S. homeowners are experiencing is the double whammy of depreciation exacerbated by the fact that they weren't building equity in their homes. The trouble with banking on appreciation is self-evident. If lending rates go up or house prices go down, or worse yet, both happen simultaneously, you end up with a home worth less than your mortgage, and that's exactly what happened in the U.S.

Here in Canada, our prices never went up as far or as fast and being conservative, pay-down kind of people, we are not suffering from the same woes as in the U.S., and that's a very good thing.

Lest I leave you with a completely negative impression of Denver, it is a beautiful City to visit and one of the healthier U.S. housing markets, relatively speaking. We chose Denver for the variety of outstanding low- and high-rise developments on the market there and enjoyed tremendous cooperation from their builders' association as well as the individual builders who welcomed us with open arms to their communities.

That said, I'm grateful that we enjoy very high rates of homeownership here in Canada thanks to a very sound mortgage finance system.