In recent weeks, there have been numerous articles in the national media on the state of the Canadian mortgage industry. Issues regarding the impact of longer amortizations and a perceived failure to anticipate the effects of various mortgage products have been at the forefront.

The general public Should Be Aware Of The Following Important Facts:

1.    Arrears and default rates remain low in Canada particularly when compared to the U.S. Canadian mortgage holders have on average over 50% equity in their properties. For all home owners, (those with and those without a mortgage), the equity ratio exceeds 70%;
2.    Longer amortization periods and 100% LTV mortgages do not equate to subprime or alternative mortgages which are based on a borrower’s credit worthiness. Relatively few outstanding mortgages in Canada have 40 year amortization periods ˆ only six percent or just over 300,000 mortgage holders out of 5.25 million;
3.    Mortgage products in Canada are transparent. Mortgagors with a variable rate product know their rate and most have the option to convert to a fixed rate product. In the past year, 40% of mortgage holders took out a variable rate mortgage with the expectation that declining rates will continue to drop. This is in stark contrast to the U.S. where the resetting of option ARM mortgages means millions of mortgage holders have been and will continue to face higher rates;
4.    A rise in default rates in Canada is not apparent. It’s a fact that the economy is slowing; however if borrowers find themselves with financial difficulties, it will most likely be a result of their employment situation rather than their mortgage product;
5.    Differences between the Canadian and U.S. markets remain. The option ARMs that have and continue to be reset to higher rates are not common in Canada. Those who hold variable and even fixed rate products in Canada are now doing so in a declining interest rate environment. A greater percentage of mortgages in Canada are funded by balance sheet lenders than in the U.S. Subprime or alternative lending products were never as common in Canada;
6.    Canada has a rich history of mortgage insurance. Nearly half of all mortgages obtained in any given year are insured with a second approval process for mortgage applications. Underwriting principles and guidelines in Canada, while not perfect, are more thorough than in the U.S.;
7.    Regulation for Canadian mortgage brokers and agents is more stringent than in the U.S. Several provinces have recently updated or are in the process of updating their origination legislation including Ontario, Quebec, Saskatchewan, Manitoba and Nova Scotia. There are now license requirements and in most provinces education and disclosure requirements. This will ultimately lead to enhanced professionalism in our industry and added security for Canadian borrowers.

Canadian Mortgage Market is in much better shape than the US
You have heard about the mortgage and real estate crisis in the US and you are now concerned about recent media reports in Canada.  One of the concerns is that Canadian Consumers have been “over-extending” themselves through mortgage borrowing.   And, it has recently been suggested that the Canadian housing and mortgage markets might fall into a downward spiral like the one currently underway to the US.  Most Canadian economists point to very substantial differences between the Canadian and US situations, which mean that the risks in Canada are considerably lower than they have been in the US.

Canadian Economy is Much stronger than the US
During the past decade the Canadian economy has been much stronger than the US economy.  As per Statistics Canada, US BLS - the employment rate over the past 10 years has been growing regularly and steadily in Canada.   The strong employment rate in the US prior to year 2000 was mostly due to the growth from the housing market – increased construction plus home equity take.out.  There was a self.reinforcing bubble in the housing market.  Employment rate in the US has been declining substantially from 2000 to 2004 and is currently on a declining scale as you know.

Housing Equity is Substantial in Canada
As per ScotiaBank Economics, Canada, US BEA – the average home equity in residential property in Canada today is equal to almost 70%.  In other words, total mortgage debt is only about 30% of the total value of Canadian homes.  On the other hand, the US equity position has seriously eroded over the past decade, even before the current US trouble – to well under 45% home equity.  In very simple terms – US has huge mortgage debt loads compared to Canada.

Low Debt Service Ratios in Canada
Over the past decade, ScotiaBank estimates the Canadian debt service burden in Canada (as a percentage of after-tax income) has not worsen and is still close to 8%.   On the US side, their debt service has gone up to about 14% – meaning the US has much more personal debts than the Canadians.

Very Few Canadians are in Arrears
The most recent data from the Canadian Bankers Association – which covers 7 major banks – shows that less than 0.3% of residential mortgages are in arrears as of June 2008.  The Bank of Canada estimates that only 2% of sub-prime mortgages in Canada may be in arrears or foreclosure at the same period.

Interest Rates Contribute to Sustained Affordability
Both Countries have followed similar paths during the past decade – until late 2006.   In both countries strong demand resulted in rapid growth in the property values.  In the US, however, a strong growth cycle turned into a bubble and like all bubbles, it eventually burst.

Different Lending Industry and Practices in Canada
Mostly our lending industry and practices are structured differently. In particular, most Canadian mortgages remain with the same lender and there is a strong incentive to maintain high credit standards. Only 6% of Canadian mortgages are held by special purpose corporation and non-depositary intermediaries.   In the US, widespread securitization eventually caused a breakdown in the incentive to control risk.  When it became apparent that mortgage originators would not have ultimate accountability for credit quality, credit quality was abandoned.

Thereafter, we all know the story of the sub.prime market leading to lending to very high risks clients.   Canada did not participate to these practices as our lending industry is highly regulated by government rules and regulations.

Linda Renaud, Accredited Mortgage Professional in Kelowna:  (250) 878-6706