How Did Canada Manage to Avoid the Foreclosure Crisis?by Tim Manni
Remember when we last discussed the American dream of homeownership and how that dream has turned into a nightmare for so many? (If not, here’s the link) That post discussed how maybe it’s about time that we recalibrate what it means to achieve (at least part of) “the American dream.” Maybe more of us should stay renters as opposed to owners.
Part of that ‘recalibration’ starts with us looking to our neighbors to the north. Why hasn’t Canada experienced the same housing troubles we have? What makes their mortgage and real estate markets different from ours, and what can we learn from their system moving forward?
We recently published a full-length article on HSH.com that helps explain how Canada avoided the foreclosure crisis:
The Case of the Missing Meltdown
Canada and the U.S. have a lot in common. Both countries are wealthy, stable, technologically advanced democracies with highly developed financial systems. However, as many point out — including the Wall Street Journal, which also recently asked why Canada avoided a mortgage crisis — Canada has no Fannie Mae and no Freddie Mac. There is no mortgage interest tax deduction. There are no 30-year fixed-rate home loans that can be freely refinanced and prepaid. Mortgage lending is far more conservative, and Canadian mortgage lenders have a lot more recourse than American ones.
If Canadian homeowners default, their other assets and income are on the line, not just the property. Strategic defaulting is not an attractive option. There is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts — so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years — an incentive to pay the debt down faster.
While these provisions aren’t so friendly for consumers, they have ensured that Canadian banks have (so far) survived the international financial crisis without requiring the taxpayer bailout. Furthermore, Canadian neighborhoods and individual homeowners have not been destroyed en masse by property bubbles burgeoning and bursting. Canada didn’t completely sidestep the recession, but home loan default rates are much lower than in the U.S., where one in 10 mortgages are in trouble.
Be sure to continue reading “How Canada Avoided the Foreclosure Crisis.”