NEWS FROM "THE HOUSE TEAM"

Housing problems in United States not headed to Canada

Provided by Genworth Financial Canada

Media reports from the United States are increasingly warning about severe problems in their housing market, and reporting a sharp rise in the number of homeowners defaulting on socalled “sub-prime” and “exotic” mortgages. I’m therefore often asked, “Can it happen in Canada?”

I’m happy to say that my answer is “no” because there are many important differences in lending practices and regulatory systems in the two countries. As a direct result, the Canadian mortgage market is far more stable than its U.S. counterpart.

In the United States, sub-prime mortgage loans are commonly made to individuals with a history of credit problems or who lack documentation for their credit or income. These mortgages typically have higher interest rates and fees than “prime” mortgages. Exotic mortgages often include features such as “teaser” rates that offer the homebuyer very low payments for a short period of time, or the option to make interestonly payments.

These loans are designed for sophisticated buyers. They offer benefits, but also carry risks that need to be carefully considered by homebuyers. These risks include a sudden increase in interest rates or a depreciation in housing prices that can trigger mortgage default. In the United States, lenders are now learning that many of these sub-prime mortgage loans were made to borrowers who should have chosen safer options.

Here in Canada, our experience is very different on several fronts. For example, most loans are made for five-year terms with fixed monthly payments that will not jump quickly to unaffordable levels or create situations where the mortgage balance significantly exceeds the value of the home. Also, mortgage interest is not tax deductible thereby encouraging homebuyers to pay off their mortgage as quickly as possible.

Another important difference in Canada is that mortgage default insurance is currently required under federal financial services law for those making less than a 20 per cent down payment on a property. As a result, 95% of the loans made in Canada are considered of “prime” lending quality versus a much smaller number in the United States. By acting as a lender’s “second set of eyes” mortgage insurers ensure that mortgage underwriting standards are prudently and consistently applied to about half the market – approximately 450,000 mortgages in 2006.

Mortgage default insurance works by transferring the homeowner’s risk of default from the lender to the mortgage insurer. It also benefits Canadian homebuyers by allowing them to obtain loans at lower interest rates than would otherwise be charged if lenders retained the risk of default. Mortgage default insurers in Canada
have responsibly expanded access to low down payment housing financing in all regions of the country. In recent years, we’ve seen new programs to help certain segments of the population, for example the self-employed and new Canadians, get into homes and build wealth sooner. While Canadian mortgage default insurers have expanded underwriting guidelines over time to include an increased number of borrowers with marginal credit profiles, we have done it differently than our American neighbours.

If Canada had a U.S. style system, at least one-third of all Canadians who currently have low-cost insured prime mortgages would pay higher interest rates and additional fees. All told, Canadians can take comfort in knowing that our mortgage default insurance system is one of the most efficient, safe and stable in the world. It is also one of the main reasons why Canada will not experience the mortgage lending problems we’re now hearing so much about from the U.S. media. Peter Vukanovich, CA, is President of Genworth Financial Canada and is Past President (2004-05) of the Canadian Institute
of Mortgage Brokers and Lenders.

Additional information is available from Genworth Financial Canada (formerly GE Mortgage Insurance Canada) at www.genworth.ca.