How did those Canadians manage to dodge the mortgage meltdown? Do they know something we don't know? IN The American, Mark J. Perry takes a look at the reasons why Canada isn't in the middle of a housing/banking crisis.
And another thing. How come the Canadians have a bigger share of people owning their own homes? Even without Fannie and Freddie, mortgage interest deductions, and the ruthless regulations of the Community Reinvestment Act? Without even Sen. Chris Dodd and Rep. Barney Frank? How do they do it?
Here's what makes Canada different.
- No "non-recourse" mortgages. That means that if the bank forecloses, it can go after you for the balance of the mortgage.
- Short fixed-rate terms. No 30-year fixed mortgages. Rates are negotiated every five years. That avoids meltdowns like the S&L crisis in the late 1980s.
- Mortgage insurance more common. About half of mortgages carry insurance (see 1, above) and the mortgage insurer can challenge the appraisal. Nice bit of check-and-balance there.
- No income tax deductibility for mortgages. That means that people don't use their houses as ATMs.
- Higher pre-payment penalties, typically three months' interest.
- No Community Reinvestment Act forcing banks to loan to unqualified customers.
- Better diversification of banks. Canada has fewer banks and they are all national in scope.
- Banks keep most of their mortgages (about 68 percent) so they need to keep their mortgage portfolios in good shape.
So there you are, congresspersons. No subsidies, no bullying. Convenient checks and balances. And the bottom line is that more Canadians own their own homes than Americans. So all the hullaballoo since the 1930s about helping homeowners is a bunch of baloney. Canada hasn't "helped" homeowners, yet a bigger share of Canadians own their own homes.
Maybe the best thing to do with housing is to leave it alone.