Lessons from the North

While 1 in 4 homes in the US is thought to be worth less than the mortgage held the situation is much different for our neighbors to the north – Canada. I recently heard a statistic that put our current housing mess into perspective. In 2010 there where more foreclosure notices sent out in the state of California than where sent out for the entire county in 2005 (as I had heard on a MarketWatch podcast last week). Wow! So how come we are in such a mess and our brothers to the north are not? I think it boils down to entitlement. In the US there has been a prevalent attitude that everyone should has the right to own a home regardless of having money for a down-payment or even having to proof of the ability to pay.

The rate of homeownership in Canada is equal to or greater than that of the US yet Canada has a much more conservative regulatory regime with much stricter underwriting standards. Canada does not have a secondary market for mortgages as we do yet that hasn’t held back Canadian’s banks ability to loan or the cost of lending (which has been the argument for keeping Freddie and Fannie around).

I think one of the biggest differences between the two countries is that Canadian mortgages are non-recourse loans meaning homeowners can’t simply walk away from their mortgages. Even if they lose their homes they don’t loose the debt. There is a sense of accountability in Canada that is missing in this country. Our neighbors also do not have a mortgage interest deduction which is considered a driving force in homeownership in this country. In the US homeownership peaked to 69.1% in 2005 and last year fell to 66.9% where the current percentage of ownership is 68.9% in Canada.

Canadian mortgages are generally held for 25 years at rates that adjust every 5 years. For the past decade this model has worked well but if interest rates continue to raise this may not be an attractive model to follow. Without the interest deduction Canadians are more inclined to get their homes paid off than we are. There are many in the US advocating reform of our current mortgage interest deductions as a way to get us out of our current mess while US lending institutions have already tightened their underwriting requirements. It appears we have begun to take lessons from our neighbors to the north whose banking system has been named the best in the world according to the World Economic Forum.