Home Finance: Is The Canadian Way Better?

[Madeline]

They have a different economy, but still....only less than 1% of all Canadian mortgages are in default and no Canadian bank failed during this recession.....or during the Great Depression. The key seems to be higher underwriting standards, and yet the rate of home ownership is about the same as in the US.

A few key features are:

* The typical loan requires 20% down and lasts for 25 years.

* There is no mortgage interest deduction, which is thought to encourage Canadians to pay down their mortgage debt faster.

* These loans are recourse. If the debtor hands the keys to bank, he still owes.

* There is no secondary mortgage market. No Fannie Mae or Freddie Mac will take a loan off a bank's books.

Here's the entire article:

Few foreclosures, no bank failures: Canada offers lessons | cleveland.com

What say you? Should we borrow these ideas?

 

[uscitizen]

We pretty much had it that way in America 30 years ago.

But the financial industry wanted more profit....

 

[boedicca]

The banking industry always wants more profit.

(And so do you if you ever want a raise.)

What changed in the last 30 years is government promoting home ownership via taxpayers taking the risk for subprime loans (loans without proper documentation and no or low down payments).

Fannie Mae, Freddie Mac, the Federal Reserve, and the Federal Government enabled the mortgage bubble and burst.

 

[uscitizen]

The banking industry always wants more profit.

(And so do you if you ever want a raise.)

What changed in the last 30 years is government promoting home ownership via taxpayers taking the risk for subprime loans (loans without proper documentation and no or low down payments).

Fannie Mae, Freddie Mac, the Federal Reserve, and the Federal Government enabled the mortgage bubble and burst.

Yep, but I do not lobby the government like the finiancial industry does.
Who do you think lobbied for Fannie and Freddie to be created?

 

[Madeline]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

 

[boedicca]

And who encouraged and rewarded the lobbying?

If the government is going to interfere in the private sector, the private sector is going to respond by trying to influence how the interference is implemented.

You are focusing on symptoms instead of the root cause.

 

[Madeline]

And who encouraged and rewarded the lobbying?

If the government is going to interfere in the private sector, the private sector is going to respond by trying to influence how the interference is implemented.

You are focusing on symptoms instead of the root cause.

Okay, what is the root cause IYO, then?

 

[boedicca]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

How about we get the government out of Fannie Mae and Freddie Mac, get rid of the Federal Reserve as a branch of government, reform the tax code to a flat tax (get rid of the mortgage deduction and all other forms of social engineering in the tax code), and stop bailing out banks?

Canada has also dramatically cut government spending and reduced its debt. We should emulate them in these areas as well.

 

[Madeline]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

How about we get the government out of Fannie Mae and Freddie Mac, get rid of the Federal Reserve as a branch of government, reform the tax code to a flat tax (get rid of the mortgage deduction and all other forms of social engineering in the tax code), and stop bailing out banks?

Canada has also dramatically cut government spending and reduced its debt. We should emulate them in these areas as well.

I am always amused by people who want to get rid of the Federal Reserve. How would modern banking work without it, boedicca?

 

[boedicca]

And who encouraged and rewarded the lobbying?

If the government is going to interfere in the private sector, the private sector is going to respond by trying to influence how the interference is implemented.

You are focusing on symptoms instead of the root cause.

Okay, what is the root cause IYO, then?

Big Government.

 

[boedicca]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

How about we get the government out of Fannie Mae and Freddie Mac, get rid of the Federal Reserve as a branch of government, reform the tax code to a flat tax (get rid of the mortgage deduction and all other forms of social engineering in the tax code), and stop bailing out banks?

Canada has also dramatically cut government spending and reduced its debt. We should emulate them in these areas as well.

I am always amused by people who want to get rid of the Federal Reserve. How would modern banking work without it, boedicca?

I said get rid of it as a branch of government. Why on earth should the Federal Government be funding the staff of what is supposed to be a private banking organization? The head of the Fed should not be a government appointee.

 

[Madeline]

I don't really see the link between the Federal Reserve and our meltdown in the home finance arena. It's easier to see the connection between underwriting standards, using recourse loans and eliminating the mortgage interest deduction. For me, anyway.

Are you opposed to such ideas?

 

[Sherry]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

Some in charge of making the rules considered higher underwriting standards to be discriminatory.

 

[boedicca]

I don't really see the link between the Federal Reserve and our meltdown in the home finance arena. It's easier to see the connection between underwriting standards, using recourse loans and eliminating the mortgage interest deduction. For me, anyway.

Are you opposed to such ideas?

The Federal Reserve Bank of Boston issued a white paper which encouraged getting rid of proper lending standards in 1998.

Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards in order to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled “Closing the Gap: A Guide to Equal Opportunity Lending”.

Quoting from a study which declared that “underwriting guidelines…may be unintentionally racially biased,” the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades. It told banks they should consider junking the industry’s traditional debt-to-income ratio, which lenders used to determine whether an applicant’s income was sufficient to cover housing costs plus loan payments. It instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to “consider extenuating circumstances” that might still make the borrower creditworthy. When applicants didn’t have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying....

RealClearMarkets - Articles - The Long Road to Slack Lending Standards


The price the banking system extracted for complying with this is the backstop of FM/FM assuming risk.

The mortgage deduction alone would not have caused this problem.

 

[PoliticalChic]

So should we be mimicing Canada? And if so, which ideas should we borrow?

I'd like to see higher underwriting standards and elimination of the mortgage interest deduction, for starters.

The aspects that you mention:
* The typical loan requires 20% down and lasts for 25 years.

* There is no mortgage interest deduction, which is thought to encourage Canadians to pay down their mortgage debt faster.

* These loans are recourse. If the debtor hands the keys to bank, he still owes.

* There is no secondary mortgage market. No Fannie Mae or Freddie Mac will take a loan off a bank's books.

 

[PoliticalChic]

Should the tax code be used for other than encouraging growth of the economy? It is interesting to note that the tax deduction for home mortgages is thought by some to encourage home ownership…but does it? Compare home ownership to nations where mortgage interest is not deductible:

a. “…the homeownership rate in Australia, Canada, Ireland, Spain, and the United Kingdom matched or exceeded that in the United States. Whereas the U.S. had a homeownership rate of 68.8 percent that year, it was 68.4 percent in Canada, 69.8 percent in Australia, and 70 percent in England.” See Statistics Canada, “Changing Patterns in Canadian Homeownership and Shelter Costs, 2006 Census,” 2006, at http://www12.statcan.gc.ca/english/census06/analysis/shelter/pdf/97-554-XIE2006001.pdf (August 6, 2010); Parliament of Australia, Parliamentary Library, “Home Ownership in Australia—Data and Trends,” February 11, 2009, at http://www.aph.gov.au/library/pubs/rp/2008-09/09rp21.pdf (August 6, 2010); Department for Communities and Local Government (U.K.), Housing in England 2005/06, October 2007, at http://www.communities.gov.uk/documents/housing/pdf/HousinginEngland0506.pdf (August 6, 2010).

Since 1938 Democrat philosophy and policy has been to use the power of government to support home ownership, in many cases for those who are not in a financial position for same.

Fanny and Freddie, CRA, HUD law suits, obstruction of reform by Dodd and Frank are all Democrat strategies, and obviate free market protocols.

 

[Toro]

There is an equivalent of Freddie and Fannie in Canada called the Canadian Home Mortgage Corp. or CMHC. CMHC acts like the GSEs in that they guarantee mortgages but they don't take them on their balance sheet.

The Canadian mortgage market has tended to be more inflexible. You don't get as many options in Canada.

Since the financial crisis, 90% of all mortgages underwritten in Canada have been guaranteed by CMHC compared to 40% before the crisis.

All mortgages reset. In the US, you can take out a 30 year loan with an interest rate that is fixed for 30 years. There is no such thing in Canada. You can lock in a rate for 3, 5 or 7 years, but you can't lock in for the life of the loan. So if rates go up to 10%, your mortgage will eventually too.

Banking in Canada is dominated by a few large banks. There are only six large banks of any size in Canada, and only five outside of Quebec. It is difficult to start a bank in Canada. All tier 1 banks are chartered by the federal government.

Also, mortgage "innovation" has increased credit in Canada. 40 year loans can now be had and banks started offering subprime loans with little down, the latter has been clamped down upon.

The Canadian banking system is stronger than the American system but that doesn't mean there won't be problems in the future. Housing prices are nuts in parts of Canada. There hasn't been a dramatic decline. That's coming. The Canadian system will be able to absorb it better but there will be problems.

 

[william the wie]

The Canadian and even more so the Australian housing market is an extension of the Chinese real estate market. When the Chinese market blows up a lot more Canadians will buy American housing. (This also happens both ways along the Mexican border as well.)

 

[Toro]

The Canadian and even more so the Australian housing market is an extension of the Chinese real estate market. When the Chinese market blows up a lot more Canadians will buy American housing. (This also happens both ways along the Mexican border as well.)

You don't know how true that is.

Chinese millionaires have been pouring money into the Vancouver real estate market, pushing up prices to insane levels. Vancouver is the most expensive real estate market in the English speaking world, with an average house going for 9x income. Nowhere outside of China is real estate more expensive. But its cheap compared to Shanghai or Hong Kong, which is trading at 13x-15x income.

I thought that when China became richer, there would be less inflow into Vancouver, but the exact opposite has happened.

 

[syrenn]

They have a different economy, but still....only less than 1% of all Canadian mortgages are in default and no Canadian bank failed during this recession.....or during the Great Depression. The key seems to be higher underwriting standards, and yet the rate of home ownership is about the same as in the US.

A few key features are:

* The typical loan requires 20% down and lasts for 25 years.

* There is no mortgage interest deduction, which is thought to encourage Canadians to pay down their mortgage debt faster.

* These loans are recourse. If the debtor hands the keys to bank, he still owes.

* There is no secondary mortgage market. No Fannie Mae or Freddie Mac will take a loan off a bank's books.

Here's the entire article:

Few foreclosures, no bank failures: Canada offers lessons | cleveland.com

What say you? Should we borrow these ideas?

How about you make it even simpler then that.

Do it the old fashioned way. Put a down down payment on the home and don't allow anyone to buy a home that they cannot afford the loan?