Why Canada Doesn't Have a Foreclosure Problem

canadaWhy are Canada's homeowners less likely to face foreclosure? Fewer than 1 percent of Canadian mortgages are in arrears, compared to the 2.9 million homeowners that received foreclosure notices in the U.S. in 2010.

You might think it's because there are a lot fewer Canadians, and you'd be right on that score. Canada's population is just 34.3 million, while the U.S. population now exceeds 307 million. But foreclosure rates are as high as 20 percent in the hardest hit states, so population alone does not explain the difference.

Canada avoided the housing bubble that both the U.S. and the U.K. faced. That's thanks to the more conservative banking practices in Canada. Canada has stricter underwriting standards, and the banks must set aside more money toward potential losses if the market takes a downward turn. Also, Canada has no secondary market for mortgages, like Fannie Mae and Freddie Mac, which means banks can't sell off their risky mortgages, so they don't make them in the first place.


Not only are the banks more conservative about lending, but private mortgage insurers have more control over mortgage approval. Any Canadian who puts less than 20 percent down on the house must pay the full cost of mortgage insurance upfront; and the mortgage insurance company has the authority to approve or reject the property appraisal. This gives banks and buyers a strong incentive to get realistic property appraisals.

When people apply for a mortgage in Canada, there are some significant differences to the type of mortgage they'll get. Most Canadian mortgages are for 25 years, and the interest rate readjusts to the current interest rate every five years. This encourages Canadians to pay off their mortgage faster. There are also substantial prepayment penalties that discourage refinancing, especially to tap equity.

Another big difference is that Canadians don't get a tax deduction for mortgage interest, so they don't have an incentive to keep paying on a mortgage. The U.S. tax incentive for mortgages may soon be reduced as part of the deficit reduction efforts to be considered in this Congress.

If you have a mortgage in Canada, you can't just walk away. Canada has full recourse on mortgages, which means you must pay off the mortgage even if the bank forecloses on your home. If the bank forecloses and the house is Find Local Homes for Sale Browse through photos of millions of home listings on AOL Real Estate See Homes for Sale Search Foreclosures for Sale worth less than the mortgage, the bank can sue for a deficiency judgment. The bank can then attach a lien to other assets and garnish future wages. Some states in the U.S. are full-recourse states, but others, such as California, are not.

Canada does not encourage homeownership for low-income households. Instead the Canadian government provides public funding for low-income rental housing. So you won't find subprime lending in Canada.

In reality the Canadian system is not that different than the home financing rules that used to be in place before the speculative housing market that led to the U.S. housing bubble. Prior to the boom years, banks required information to prove income and held to strict income standards. Banks also held appraisers to higher scrutiny. That's what Canadian banks continued to do, while the U.S. and U.K. lowered their underwriting standards.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.


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bmtlabs

Why can't the banks extend the mortgages to 40 or 50 years so the people can stay in their homes with less payments each month. The banks will get their money and the home owner will stay. Things will turn around in 10 years or so.

March 23 2011 at 7:47 PM Report abuse rate up rate down Reply
MICHAEL

There are some good ideas here, some of which should be applied to our mortgage practices. ESPECIALY the limiting of mortages for lower income,and the lack of ability to walk away. HOWEVER , the idea of putting more 'power' in the grip of banks, insurance companies, attorneys', and government would be a big problem. Recent history(including and especialy the 3 year long current situation) shows that those very entities simply can not be trusted. GREED is uncontrolable in the US, and has become the driveing force behind ALL financial transactions - thanks to BANKS, INSURANCE CO.'S, POLITICAL CORRUPTION !
Changes are definitely seriously needed ,but we can't 'give away the farm to save the'... fertilizer ! !

March 23 2011 at 6:11 PM Report abuse rate up rate down Reply
Nicole Skinner

As a Canadian i can say that i'm proud of our system not perfect,we pay so much in taxes but we enjoy our lifestyles.I feel safe walking late in our capital but i can't honestly say the same walking late in Washington D.C. I love the U.S. and it's sad to see that some people want a better lifestyle without the prices attach to it.

January 25 2011 at 11:14 AM Report abuse rate up rate down Reply
Meghan

I agree with "LasVegasX"!!! I will be packing my bags also and moving up to Canada if things continue like this in the US. Canada is a much more fiscally conservative country. They have to be due to not having much economic growth. They know that they have to adjust thier ways in order to compensate. Unlike this country, the worse our economic situation becomes, the more the government spends!!! What kind of sense does that make?

January 22 2011 at 1:32 PM Report abuse rate up rate down Reply
Meghan

First off to "compassion", Regan did not cause the housing crisis in this country. Clinton caused it by allowing banks to lower their standards of lending practices. If you are going to blame someone get your economics right. Secondly, the current administration running this country should look to our neighbors to the north and take some tips from them. Banks should severely tighten up their lending practices if they want to stay afloat for much longer.

January 22 2011 at 1:25 PM Report abuse rate up rate down Reply
LasVegasX

Wow. I always sat back a listened to American people, I'm American by the way, say things like; Canadians hate Americans and Canada is a crappy country, and even some people said that Canada isn't a 'real' country. If you ask me, they seem to have their priorities straight. I wonder if they have pharmacy technicians up there, because if things keep going the way they are going down here, I might just get a visa up there and work until I try for citizenship.

January 21 2011 at 7:21 PM Report abuse rate up rate down Reply
John Doe

THE PERSON WHO WROTE THIS ARTICLE IS A COMPLETE IDIDOT! CANADA HAS A MUCH WORSE SITUATION THAN WE WILL HAVE. THE ISSUE IS THAT CANADA HAS MANY HELOC LOANS ATTACHED TO THERE PRIMARY MORTGAGES AND A LOT OF FIRST MORTGAGE HELOC'S. WE IN THE USA HAD ARM'S AND OPTION ARMS'S WITH 2-3-5 YEARS ON RECAST WITH 57% THAT WHERE IN INTEREST ONLY FOR THE INITIAL TERMS. THE DISASTER WAS INITIAL AND DEVISATING FOR US. CANADIANS ARE IN A MUCH WORSE SITUATION 74% OF ALL HOMEOWNERS HAVE A HELOC ON THERE PROPERTY THAT ARE IN 10 YEAR DRAW PERIOD IN INTERESTS ONLY PAYMENTS AND THEN 15 YEARS IN PAYING ALL THERE DRAWS BACK! SO THEY HAVE HAD THE FUN OF BUYING A LOT OF STUFF AND CASH SINCE 2001-2003 WHEN THESE BECAME VERY POPULAR TO 2011- 2013 WHEN THEY ALL MUST BE PAID BACK. CANADA HAS A BLEEK JOB DEAL LIKE THE USA. CANADA HAS LITTLE TO NO GROWTH LIKE THE USA. CANADA WILL SERIOUSLY GO INTO DEFAULT INTO THESE HELOCS BY 2014, 3 YEARS FROM TODAY THEY WILL BE IN A MUCH WORSE SITUATION THAN THE USA! ALMOST ALL HELOC'S DONE BY BANKS 87% ARE IN DEFAULT IN THE USA AND IT WAS ONLY 13% OF ALL LOANS WRITTEN FROM 2003 TO 2008. SO WHAT WILL HAPPEN IF 74% OF ALL YOUR HOME LOANS WHERE WRITTEN IN HELOC'S "5 TIMES MORE THAN THE USA" COME ALL UP AND DUE WITHIN THE NEXT THREE YEARS? YOU THINK THE USA IS IN BAD LUCK, CANADA IS REALLY IN A LOT MORE TROUBLE VERY SOON!!! THIS EDITOR IS A COMPLETE IDIOT TO EVEN SAY THAT CANADA ESCAPED ANYTHING RELATED TO THE MORTGAGE INDUSTRY....

January 21 2011 at 5:55 PM Report abuse rate up rate down Reply
3 replies to John Doe's comment
Bill

I noticed that the article didn't mention what percentage of Canadians are homeowners. I'd wager that it's significantly less than the US.

There's no doubt that our system desperately needs to be tightened up. But I think the Canadians have gone too far in the other direction. Saving 20% of a home's cost for a down payment prevents investing that money in a 401K or a rainy day fund. It imposes a severe burden on people trying to enter the housing marker for the first time. The inability of lower-income Canadians to purchase houses keeps them enslaved to the government as a perpetual landlord, preventing them from building assets of their own.

These are just some of the disadvantages of Canada's paternalistic treatment of its citizens. Here's another: dare to say a word something politically correct and you're likely to go to jail for committing a "hate crime." Read or sell a book or magazine they don't like and the police will be knocking on your door.

Canada's health care system is a bloated mess. I've talked to Canadians who needed medicines readily available in the US, but unavailable up there because they weren't on the government's list of approved drugs. Another thing the media rarely mentions is that many Canadians buy private health coverage in addition to the government plan because it simply isn't very good.

Add to all of this their high tax rates and Canada looks less like a paradise and more like a second world nation. We don't need to become more like them. We need to fix what's broken in our system and regain our position as the best country in the world.

January 21 2011 at 4:56 PM Report abuse rate up rate down Reply
Jerome Crosson

Can you say - Rep. Barney Frank (D) and (former) Sen. Chris Dodd (D)? They were the House and Senate Chairpersons who waved through the easier, careless regulations which allowed sub prime mortgage loans to be approved. And allowed Fannie Mae and Freddie Mac to purchase risky loans from the originators. Canada is fortunate that their approval process was not allowed to slide into one driven by greed. Let's see how many years it takes for this country to recover from the mess. Ans let's also see hjow many more 'stimulus dollars' will be directed to outrageous Wall Street Bonuses ! Finally, let's see if anyone goes to prison - my guess is that no one will be held accountable.

January 21 2011 at 4:48 PM Report abuse rate up rate down Reply
DWTTHB

Hmmmm. Canada has great healhcare too...That Country is doing something right. And they also have stringent gun controls too. The US needs to step up

January 21 2011 at 4:09 PM Report abuse rate up rate down Reply