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<DIV><FONT size=2>A lesson we are not willing to learn:</FONT></DIV><FONT
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<DIV><BR>Wayne A. Fox<BR>1009 Karen Lane<BR>PO Box 9421<BR>Moscow, ID
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<H5 style="FLOAT: right" class=details>January 16, 2011</H5></DIV>
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<H1>Canada mortgages, banks untouched by U.S. pitfalls</H1>
<DIV class="details nested grid-8"><SPAN>Kevin G. Hall<BR>McClatchy
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<P>TORONTO – Maybe Canada has something to teach the U.S. about
housing finance.</P>
<P>One in four U.S. homes is thought to be worth less than the mortgage being
paid on it. One in every 492 U.S. homes received a foreclosure notice in
November. For the fourth year running, analysts are speculating on where the
bottom is for U.S. real estate.</P>
<P>No such worries up here in Canada – yet its system of mortgage finance gets
little attention in the U.S.</P>
<P>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.
Less than 1 percent of all Canadian mortgages are in arrears.</P>
<P>That’s notable given that the recent U.S. economic turmoil was triggered by a
meltdown in mortgage finance, forcing an unprecedented government rescue of Wall
Street investment banks and the collapse of more than 300 smaller banks as the
housing sector went bust.</P>
<P>How did Canada avoid all that?</P>
<P>“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,” said Terry Campbell, vice
president of policy for the Canadian Bankers Association in Ottawa.</P>
<P>There’s a certain amount of apples to oranges when comparing the mortgage
finance systems. Canada’s population last year was estimated at 34.3 million,
while the U.S. population now exceeds 307 million. The U.S. economy is the
world’s biggest; Canada ranks ninth.</P>
<P>Canadian banks were recently named the best in the world by the World
Economic Forum, but they’re a much smaller universe of lenders – 71 that are
federally regulated, compared with more than 8,000 U.S. lenders insured by the
Federal Deposit Insurance Corp.</P>
<P>Even so, there’s plenty to learn from Canada’s conservative regulatory
regime. It requires more rigorous loan underwriting standards and much bigger
set-asides by banks for potential losses during market downturns.</P>
<P>Canada also lacks a big tax write-off for the interest that borrowers pay on
their mortgages. They get a capital gains tax exemption on any profits on the
sale of their primary residence, and that’s it. Yet the rate of home ownership
in Canada is equal to or greater than the U.S. rate, and the lack of
mortgage-interest deductions leads Canadians to swiftly pay down their
mortgage debt.</P>
<P>“I’m not aware of any disparagement of the Canadian model or dismissal of the
Canadian model. There are some interesting features to it,” said Stuart Gabriel,
a finance professor in the Anderson School of Management at the University of
California, Los Angeles. “They’ve insisted all along on the more rigorous
mortgage underwriting, and because of that never found themselves originating
subprime and no-doc mortgages … some very basic items such as stringency of
underwriting seem to go a long way.”</P>
<P>Canada doesn’t have an equivalent to Fannie Mae or Freddie Mac, which
purchase mortgages from banks and pool them into bonds. The argument for Fannie
and Freddie is that they take loans off a bank’s books, freeing them to
lend more.</P>
<P>Canada has no such secondary market for mortgages, yet it hasn’t hurt the
ability of its banks to lend or significantly raised the cost
for borrowers.</P>
<P>Canadian mortgages aren’t nonrecourse loans; homeowners can’t simply walk
away from their mortgages. Even if they lose their home, they still owe their
mortgage debt.</P>
<P>“You mail your keys into the bank here and guess what, you are not off the
hook,” said Gregory Klump, the chief economist in Ottawa for the Canadian Real
Estate Association.</P>
<P>Lessons from Canada could prove useful. Fannie Mae and Freddie Mac have been
in government conservatorship since the summer of 2008. The Obama administration
must unveil its roadmap for how and when they’re to be moved out of
government control.</P>
<P>By July, the administration must establish the new Consumer Financial
Protection Bureau, whose chief functions will include policing mortgage lending
and defining suitable mortgages.</P>
<P>The issue of mortgage-interest deductions probably will come up this year
when Congress debates deficit reduction. A blue-ribbon National Commission on
Fiscal Responsibility and Reform late last year recommended a serious scaling
back of the U.S. mortgage-interest deduction as a means of raising more revenue
and lowering deficits and debt.</P>
<P>In some ways, the U.S. is already adopting big parts of the
Canadian model.</P>
<P>“I think the U.S. system may be eliminating certain types of loans. … I think
we’re seeing greater emphasis on down payments,” said Jay Brinkmann, chief
economist for the Mortgage Bankers Association.</P>
<P>Lenders, he said, are shying away from second mortgages. And there are
greater demands for private mortgage insurance, even on
refinanced mortgages.</P></DIV></DIV></DIV></DIV></FONT></DIV></BODY></HTML>