TheStar.com - Mortgages - How Canada avoids U.S. problemsHow Canada avoids U.S. problems
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Our mortgage insurance provides more protection on high-risk loans
Apr 30, 2007 04:30 AM
PAUL BRENT
SPECIAL TO THE STAR
The meltdown of the U.S. subprime mortgage market has many Canadians wondering if the carnage will make its way north.
While U.S. mortgage defaults continue to soar and subprime lenders succumb to years worth of dubious loans, Canada's mortgage market appears immune to the fallout. It appears Canadian conservativism has insulated us from the excesses of our American cousins.
"The (mortgage) market here is much healthier, the lenders are more prudent in terms of their approval process and Canadians are just more conservative in terms of their products," said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.
"Canadians lock in for longer terms, two-thirds of all mortgages in Canada are for fixed periods, the most common of which is five years."
Subprime mortgages in Canada can be defined generally as those offered when home purchasers do not fit the banks' prime mortgage customer profile. They may include self-employed people or those with insufficient credit history.
Murphy's association, which took the unusual step of issuing a press release to assure the public that Canada is not headed for the same fate as in the U.S., said there are many factors which have made the Canadian mortgage scene "a picture of health."
He said the overall arrears rate on mortgages in Canada remains "at or near record lows" of less than 0.5 per cent.
Canada's market, with the exception of pockets, primarily in Alberta, has not experienced the rapid home-price appreciation or speculative investing that has been endemic in the U.S.
Moreover, this country continues to enjoy strong employment growth, along with comparatively low interest rates and high consumer confidence, the mortgage group said.
"People are talking about (the subprime issue) only because of the attention in the U.S.," Murphy said. "I don't think we have that concern because it is a much smaller percentage of the market and the default rate is lower."
Numbers tell the tale of the two countries. In the U.S., subprime mortgages account for 20 per cent of the market, while here they make up less than 5 per cent, Murphy said.
As a result, the subprime default rate is approximately 2.1 per cent in Canada versus a U.S. default rate for subprime mortgages of 6.8 per cent, according to Xceed Mortgage Corp., a Toronto-based subprime lender which recently reported buoyant profits.
And while the U.S. subprime meltdown is ugly, it pales in comparison with past financial debacles, said Jeffrey Rubin, chief economist at CIBC World Markets.
In an April report, Rubin said losses in the $650 billion (U.S.) subprime market could total more than $100 billion, but are "unlikely to come even close to the savings and loan crisis of the late 1980s, or the dot.com bubble collapse."
The subprime or alternative financing market is growing in Canada, with a number of new lenders entering that space over the past few years. That's a healthy development, said the CAAMP's Murphy.
"These products like interest-only products or longer amortizations of 40 years, they are not best for everybody, but there are segments of the population that somebody should look at."
Subprime mortgage loans have proved popular with self-employed people with up and down incomes and for new immigrants with Canadian credit histories who are able to qualify for subprime products, which charge a higher interest rate than conventional mortgage loans.
One of those lenders is Home Capital Group Inc. of Toronto, whose stock has prospered because of a strong real estate market and a low loan default rate.
Even though it has approximately $4 billion (Canadian) of outstanding loans to subprime customers, its losses from defaults are a tiny fraction of 1 per cent, or about $200,000, said Gerald Soloway, Home Capital's chief executive.
He credits the low rate to a proprietary underwriting system and a Canadian market that insists borrowers put some money down when buying a home.
Mortgage defaults are going to be higher in the U.S. because of excesses such as the offer of artificially low "teaser" interest rates early in the mortgage term, mortgages for 100 per cent or more of the price of the home and aggressive U.S. lenders who covered closing costs to help borrowers move into a new house.
Different tax policies between the two countries also have a role to play, observers said. By allowing home owners to deduct mortgage interest payments from their taxes, the U.S. government has created an incentive for Americans to spend as much as possible on a home.
But the structure provides little incentive to pay those mortgages off.
It is not a coincidence that a 30-year amortization period is the norm in the U.S., compared to roughly 25 years in Canada.
By not allowing people to deduct mortgage interest payments in Canada, the government in effect prompts homeowners to pay off their mortgages as quickly as possible, given that payments are in after-tax dollars.
Another difference is that in Canada, "the vast majority" of low down payment mortgages are insured, said Peter Vukanovich, president of Genworth Financial Canada. A unit of U.S.-based Genworth Financial Inc., the company insures mortgages for lenders whose clients have down payments of less than 25 per cent.
"Our company and other companies are looking at these loans as almost like a second set of eyes," he said.
"I look at it as though I'm insuring that the market stays stable."
Vukanovich chalks up the U.S. mortgage problems to "going too far too fast. [In Canada] we have been able to avoid at least some of these
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