Bob Finnigan is the 2007 GTHBA-UDI president, and is also principal and executive vice-president of Heathwood Homes and The Heron Group.
Housing problems in United States not headed to Canada
September 8, 2007
"Oh Canada, Get a load of this boom!" What a great headline, especially since I found it on the front page of the real estate section of the Chicago Tribune (August 5, 2007).
Americans are quite envious of our housing market here as they suffer the effects of the sub-prime mortgage meltdown. I'm often asked if the same thing could happen here and I'm happy to say the answer is no according to Peter Vukanovich, CA, President of Genworth Financial Canada, which, next to CMHC is the largest mortgage insurer in Canada.
Vukanovich says there are many important differences in lending practices and regulatory systems in the two countries. "As a direct result, the Canadian mortgage market is far more stable than its U.S. counterpart."
The Genworth head explains that sub-prime mortgages typically have higher interest rates and fees than "prime" mortgages and often include features such as "teaser" rates that offer the homebuyer very low payments for a short period of time, or the option to make interest-only payments. As well, whereas Canadian lenders are very strict about debt ratios, income verification and credit checks, the American lenders are not nearly as diligent.
Vukanovich notes that here in Canada, most loans are made for five-year term terms with fixed monthly payments that will not jump quickly to unaffordable levels. Also, mortgage interest is not tax deductible here, so we have an incentive to pay off our mortgages as quickly as possible.
Another important difference in Canada is that mortgage default insurance is currently required under federal financial services law for those making less than a 20 per cent down payment. As a result, 95% of the loans made in Canada are considered "prime" lending quality versus a much smaller number in the United States.
By acting as a lender's "second set of eyes" mortgage insurers ensure that mortgage underwriting standards are prudently and consistently applied to about half the market - approximately 450,000 mortgages in 2006.
Mortgage default insurance works by transferring the homeowner's risk of default from the lender to the mortgage insurer. It also benefits Canadian home buyers by allowing them to obtain loans at lower interest rates than would otherwise be charged if lenders retained the risk of default.
"While Canadian mortgage default insurers have expanded underwriting guidelines over time to include an increased number of borrowers with diverse credit profiles (self-employed, separated/divorced), we have done it differently than our American neighbors," says Vukanovich. "If Canada had a U.S.-style system, at least one-third of all Canadians who currently have low-cost insured prime mortgages would pay higher interest rates and additional fees."
"All told, Canadians can take comfort in knowing that our mortgage default insurance system is one of the most efficient, safest and stable in the world. It is also one of the main reasons why Canada will not experience their mortgage lending problems we're now hearing so much about from the U.S. media." Vukanovich concludes.
The whole U.S. house of [credit] cards assumed rising housing markets and stable or declining interest rates. Unfortunately, the U.S. has seen the opposite trends. We're very fortunate to be avoiding that fiasco here in Canada, although we are certainly feeling the side effects on the stock market side.
For years there were just two mortgage insurance companies in Canada, however we are starting to see some new players in the game. I think competition is great, but we must ensure that responsible lending standards prevail.
The bottom line is that our lending practices are solid and our housing market remains strong and insulated from the woes of our neighbours to the south.
