Canada’s Mortgage Market: Is it Safe?
Canada’s Mortgage Market: Is it Safe? |  |
| Canada’s Mortgage Market: Is it Safe? Posted: 08 Sep 2010 04:15 AM PDT
When compared to America's mortgage market, the answer to this question is an emphatic yes. And the main reason is that the Canadian government has made a concerted effort to ensure that the troubles plaguing American lending institutions do not affect their market. Despite an ongoing recession that has affected the global marketplace and the real estate industry in particular, Canada's mortgage lenders and home buyers continue to remain strong. Although they have taken a hard-line where loans are concerned, enacting measures that America would be hard-pressed to implement at this point, the proof seems to be in the pudding. Canada has clearly found a strategy that works and the rest of the world is being forced to sit up and take notice.
One of the main differences between the Canadian and American systems involves the government directly. Whereas the U.S. government encourages citizens to buy homes by offering tax incentives (the interest paid on a home each year is tax deductible), the Canadian government provides no such encouragement. You still have to pay the same amount of taxes on your earnings whether you own a home or not, ensuring that people who can't really afford a mortgage aren't finding a way to purchase a home simply for the tax break. Further, lenders have much stricter regulations regarding who can get loans and the types of loans offered. For example, less than 5% of mortgage loans in Canada are subprime, and homeowners who owe 80% or more of the value of their property must purchase mortgage insurance through a government agency. That way, it they default, the government steps in to either work out a payment plan to keep owners in their homes, or they simply sell the house and cover any overage to ensure that lenders suffer no loss. And 30-year-fixed rates on loans are simply not done. Although this type of loan is popular in the United States because it protects buyers from fluctuations in interest rates (that could drastically inflate their monthly payments), Canadian lenders generally stick to a five year agreement that must be renewed or refinanced when it expires. In this way, homeowners assume more risk and lenders less. Finally, Canadian lenders have several avenues of recourse that American lenders rarely enjoy. In the U.S., loans are widely variable. Some allow certain types of recourse while others can leave lenders holding the bag while homeowners simply walk away with assets that should be used to pay off their debt. And there are severe restrictions on which assets banks can attempt to collect, as well as the circumstances that allow for collection. In Canada, on the other hand, mortgage lenders can claim cars, savings, other properties, etc. as a means of paying the balance of a home loan that goes into default and collections. The long and short of it is this: the Canadian mortgage market is vastly different than that found in the United States. While it certainly places a greater burden on homeowners to live up to their obligations to pay off a loan, it cannot necessarily be called "better" or "worse" than other systems. However, one thing is certain. The mortgage lending market in Canada is stable and will most likely continue the trend in years to come. About the Author: Leon Harris writes for a Canadian personal finance blog with an emphasis on careers, real estate, politics, and banking. |
| Book Review: The Skinny on The Housing Crisis Posted: 07 Sep 2010 10:00 AM PDT
In Vietnam we had to endure taunts and insults, and no one said, "Welcome home" despite never having served in Vietnam. That quote is about as dependable as this one: This book performs an extraordinary public service. The Skinny On The Housing Crisis was released 16 months ago, and is as dated as a gallon of milk from that time. I've already assailed the childish format of the The Skinny on series, so I won't repeat it here. This book – along with the five other volumes in the series – chronicles the adventures of a stick-figure couple looking to learn about the financial world. As it's an illustrated book, Randel uses frame numbers (two to a page) rather than page numbers. The first 15 or so frames of The Skinny On The Housing Crisis are almost identical to their counterparts in Randel's equally unreadable The Skinny on Real Estate Investing. Apparently his stick-figure couple watches a lot of late-night infomercials and enjoys repeating conversations. The book is loaded with punctuation mistakes. As a reviewer, this is annoying. As a reader, it'd break the sale for me if I were thinking about forking over the $13 Randel expects. The Skinny On The Housing Crisis won the Robert Bruss Real Estate Book of the Year award, leaving open the question of whether Paris Hilton's Confessions of an Heiress was eligible. If it was, it should have beaten The Skinny On The Housing Crisis. By frame 34, we learn that you shouldn't use a mortgage lender who works in the same office as a realtor. Randel seems convinced that mortgage brokers are even less ethical than attorneys (Randel's day job.) One sequence shows a mortgage broker granting a stated income loan to a filthy applicant who claims he clears $300,000 annually. So people shopping for houses told bald-faced lies to brokers, and therefore brokers carry the moral obligation for believing them. As Homer Simpson once helpfully explained to Marge, "It takes two to lie – one to lie, and one to listen." Randel's inability to stay on point is so profound that at several times I checked the frame numbers to confirm that the publisher didn't bind the pages in the wrong order. Randel does use several panels to explain the concept of second mortgages, which means you should read this before you read its companion volume, The Skinny on Real Estate Investing. In that book he references second mortgages without describing them. This book is ostensibly intended for rookie audiences, yet Randel insists on introducing unfamiliar terms without defining them. "Mortgage brokerage fee", for instance. And there it is again, page 68: Randel introduces concepts like "private mortgage insurance" and "loan-to-value (ratio)", without saying what they are. One sentence later, it's as if those terms never existed. Here's a free one for any aspiring non-fiction writer: assume your reader isn't as familiar with industry jargon as you are. Randel's refusal to do this makes for what will be a frustrating read if you attempt to slog through The Skinny On The Housing Crisis. Which you shouldn't, because buying this book is an investment with a negative return. Randel assumes the average realtor is only slightly less dishonest than the average mortgage broker, and that there's no code of realtor ethics, and that a realtor can't lose her license for violating it. Appraisers are untrustworthy, too: according to Randel they'll appraise a house for more than its worth, because the mortgage broker who recommends the appraiser wants the house to hit a "target value". This makes no sense. Won't a cheaper house sell faster? So the mortgage broker gets a slightly smaller cut. But he also gets it without working as long, and doesn't have to worry about ethics violations. The stick-figure couple buys a house before getting an appraisal, which is insane. There's no excuse for Randel not pointing out the absurdity of this, and imploring readers to get the appraisal first. Randel explains that during the real estate crisis, unethical buyers would apply for a loan worth more than the price of a house, give the seller slightly more than his asking price, and pocket the difference. He doesn't cite any real examples, and besides, this criminal scheme seems like the kind of thing that'd be easy for a lender to figure out. Anyhow, at this point in the book the stick-figure couple's realtor keeps encouraging them to raise their already fair offer. Incredibly, a publisher allowed Randel to get away with sentences like If you are shopping for a loan today, you should check with both mortgage brokers and with banks in order to get a good read on market rates. Also, if you want to know what the weather's like, you should go outside and look at the sky. Randel continues with more unfounded allegations. For instance, people raised their credit scores by becoming "authorized users" of their friends' credit card accounts. Would you let your friend have unrestricted access to your credit card? Randel dismisses Fannie Mae and Freddie Mac with 1½ sentences. In a book about the housing crisis. This is like writing a book about World War II and not spending more than 12 words on—you know, the guy. German. Bad facial hair. Murdered lots of Jews. This isn't a book so much as it's a crappily organized middle school research project. Randel borrows from Robert Kiyosaki, Stephen Dubner and Steven Leavitt, and the guy who wrote Confessions of a Subprime Lender. (Another tip for aspiring writers. Titling your book "Confessions of" anything is very original.) Randel even cribs an entire definition from Wikipedia, without taking a few seconds to rewrite it and make it his own. On almost every page, there's a quote from or a recommendation for another book. Randel should have put these on the cover, and saved people the trouble of opening his weak offering. While I'm dispensing advice, some more for Randel: 1) It's not an "ATM machine". Nor is it "NFL league", "FAA administration", or "DIY yourself". Randel does seem to be one of the few writers who understands the difference between i.e. and e.g. Here's the worthwhile information in Randel's book: -You can find home price estimates at Zillow. (He doesn't mention this, but you can find exact sale prices at your county assessor's website.) If Randel was selling this as a history book, fine. Is it really important to know that subprime borrowing led to people occupying houses they couldn't afford in 2006? If you've ever read a news story in the recent past, presumably you know this already. |
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