Friday, December 5, 2008

Subprime crisis in USA not affecting Canada to the same extent

Here's a little information of note ... makes you feel better that the other shoe isn't about to drop here in Canada when thinking about the subprime mess south of the border.

Information provided by an economist from Canada Mortgage and Housing Corporation told a gathering of mortgage professionals in Belleville, Ontario recently that approximately 20% of all mortgage loans in the United States are classified as "subprime" but at the same time, only 5% of the loans in Canada were in this category.

To put a number on the problem, in 2006 there were 800,000 of these subprime mortgages in default in the USA. In 2007, that number rose to 1.5 million and again in 2008 estimates are that another 1.5 million of these loans are in default. Numbers in Canada are nowhere near there so our banking system is quite a lot safer than that of our neighbours to the south and the risk of banks defaulting due to their clients not paying their debts is quite low.

A final note on defaults in the USA ... according to Lou Dobbs (CNN Dec 4/08) there are currently 2,250,000 foreclosures in the USA (yes that's OVER 2 million).

Other problems affecting the US mortgage market are the so called "ninja" loans that were made in the hey-day of the market run-up ...

o Income, No Job or Assets.

A person could get a mortgage without a job, without having to prove they had any income or assets such as downpayment to obtain financing. I recall seeing commercials on the television for 120% advances - you own a house worth $100,000 and get a $120,000 mortgage. Not a bad deal but who didn't see that eventually there would be a problem ? The same scenario in Canada at the time required at least 10% equity in the property so the maximum loan was $90,000. It had people complaining that it was "so hard" to get that equity, and "unfair" but now we see that the lenders were correct after all in requiring that a homeowner had some of their own skin in the game.

Additionally, there were mortgage products created which encouraged consumers to refinance rather than ever pay off their debts and some loans had limited or in some cases no ability to prepay - here we have a standard 20/20 prepayment where without penalty, a homeowner can pay off up to 20% of the amount borrowed with no penalty to do so and/or increase their instalment payment by 20% ... doing either/both measures can significantly cut down on interest costs and of course paydown the mortgage faster.

With the deductibility feature of a portion of mortgage interest, its not a wonder that Americans are unlikely to payoff their mortgage debt and are encouraged to get into the spiral of taking out equity to pay off other debts or buy goods. Of course here in Canada we can not deduct our mortgage interest payments from our income when it comes to tax time - although there are certain circumstances which allows this on rental properties or where the mortgage funds were used for investment - so again we were safe from this dangerous behavior.

Are we completely out of the woods ? That's not what we're saying here ... just that it isn't as bad as it could be and we are suffering a lot less of the downside than our neighbours south of the 49th are.

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