Canada's conservative approach to mortgage finance could provide model for U.S

Washington Post:

Canada's conservative approach to mortgage finance could provide model for U.S.

TORONTO -- When he bought a home last week with a 40 percent down payment, lawyer Kevin Fritz didn't see the transaction as particularly relevant to the debate over global financial stability.
But consider: With U.S. home sales and prices still shaky, Fritz bought in a Canadian market that already has rebounded beyond pre-crisis levels. Without the key tax advantages available to U.S. home buyers, he amassed as much as possible for the down payment, and he expects to pay off his 15-year mortgage with the same bank that gave him the loan -- a rarity in the United States, where finance companies typically resell mortgages.

"Canadians are debt-averse," said Fritz, an attitude that's part cultural and part shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. "People here don't leverage."

As President Obama and other Group of 20 leaders gather in Toronto to continue the debate over ways to avoid future financial crises, they have a ready-made example in Canada, where a quaintly old-school approach to mortgage finance helped their host country avoid the worst of the recent turmoil.

"It is a regulatory structure in Canada that created the Canadian mortgage system, and it was a regulatory and political structure in the U.S. that created the U.S. mortgage system," said Ed Clark, chief executive of TD Bank. With the United States now leading a discussion on how to increase the stability of the financial system, he said, "the irony is . . . that one of the primal causes of the crisis was the U.S. mortgage system."

I've been saying for years that we should get rid of all homeowner welfare programs.

[quote="didymus, post:1, topic:203469"]
Washington Post:

I've been saying for years that we should get rid of all homeowner welfare programs.

[/quote]

WE bought our home with $10,000 on a $30,000 home and because we didn't have the $1.000 for closing costs etc. were were denied a mortagage. I had worked for two years putting all of my salary away each week ($90). We borrowed the last $1,000 paying it back with interest. We were 26 and 28 with two kids. Hubby worked two jobs and went to college at night. It is what was called struggling.

[quote="aicirt, post:2, topic:203469"]
WE bought our home with $10,000 on a $30,000 home and because we didn't have the $1.000 for closing costs etc. were were denied a mortagage. I had worked for two years putting all of my salary away each week ($90). We borrowed the last $1,000 paying it back with interest. We were 26 and 28 with two kids. Hubby worked two jobs and went to college at night. It is what was called struggling.

[/quote]

If you're in the U.S., I would say you had an incompetent lender and an incompetent realtor. Both could have made this work better than it did.

[quote="didymus, post:1, topic:203469"]

I've been saying for years that we should get rid of all homeowner welfare programs.

[/quote]

A major problem is that mortgages have become disconnected from the banks which, in decades past, collected on the loans. In years past, local banks had interest in making sure that their loans would be repayable by the persons to whom they loaned.

However, with the advent of mortgage backed securities, local banks had increasingly less interest in securing the worthiness of their loans. After all, the mortgages would be sold to Wall Street companies, and they could worry about collecting on the debts. Which, of course, led to a catastrophic failures.

The situation in the US, where homeowners could write off their mortgage interest on their taxes, was ripe for exploitation.

A good start would be to end the deductibility of mortgage interest, and require at least 20% down payment on every loan.

We have numerous government programs which essentially relieve the lenders of assuming any risk, such as FHA insurance and VA guarantees. Not to mention the implicit government guarantees of mortgage pools.

The problem with all the fawning adulation on Canada's banks right now is that is misses half the picture. Lending practices must tread a tightrope. Be too tough on who you lend to and you will throttle the economy down and prevent the creation of wealth. Be too loose with the money and THIS bubble burst economy happens.

Canada accidentally exploited the system and got the best of both worlds for a time based on OUR mistakes. Their own banks focused on safe lending at modest returns due to their lending laws. The more high risk businesses had access to US investment capital right next door. So the risky stuff they funded with other people's money and the safe stuff they funded with their own.

What all the adulation of Canada right now ignores is that approach doesn't work if you don't have a rich and careless uncle willing to fund your riskier investments. If the USA goes extremely conservative on lending standards (we're not just talking mortgages here folks), we risk overcompensating and unnecessarily slowing our economic recovery.

Too bad I'm not smart enough to know where the ideal level of risk/reward is. Who IS?

[quote="manualman, post:6, topic:203469"]
The problem with all the fawning adulation on Canada's banks right now is that is misses half the picture. Lending practices must tread a tightrope. Be too tough on who you lend to and you will throttle the economy down and prevent the creation of wealth. Be too loose with the money and THIS bubble burst economy happens.

Canada accidentally exploited the system and got the best of both worlds for a time based on OUR mistakes. Their own banks focused on safe lending at modest returns due to their lending laws. The more high risk businesses had access to US investment capital right next door. So the risky stuff they funded with other people's money and the safe stuff they funded with their own.

What all the adulation of Canada right now ignores is that approach doesn't work if you don't have a rich and careless uncle willing to fund your riskier investments. If the USA goes extremely conservative on lending standards (we're not just talking mortgages here folks), we risk overcompensating and unnecessarily slowing our economic recovery.

Too bad I'm not smart enough to know where the ideal level of risk/reward is. Who IS?

[/quote]

Excuse me but what you've said is 99% bunkum.Canada has always had tight reins on lending especially mortgages.You must PROVE that you are able to repay your mortgage principle and interest.While it is common practise in the US to refinance to buy cars and other goodies and make no real attempt to pay down your mortgage because of mortgage interest deductability from taxes the opposite is true in Canada.We cannot deduct mortgage interest from our taxes so we pay the principal down ASAP.

As far as "our rich uncle" willing to underwrite our riskier adventures that is plain fantasyAn outrageous statement based solely on envy.Canada is the number one leader in fiscal growth of all g8 nations.We have been diligently paying down our debt for the past 25 years while the US spending has been profligate and irresponsible.

Our economy is sound in spite of a world wide recession,simply because government oversight prevented the cowboys of Bay street to immitate the unconscionable greedheadedness of the cowboys of Wall street.

You folk are drowning in debt because your politicians lack the courage to raise your taxes and reduce services.Corporate welfare is profligate in the US-look at your bankers who sucked billions from the taxpayer while paying themselves outrageous bonuses.

Canada is where it is because of fiscal responsibility-to suggest that America is somehow responsible is chutzpah beyond belief.Your government has tried to thwart the FTA at every turn.Denying Canadian softwood lumber to your markets because your own forest industry is archaic,which in turn has driven up the cost of new house construction to Joe American.But that doesn't really matter because there is a fire sale in housing in the US.I've heard that in some cities one out of every four homes is in receivership which makes the homes near it worthless..,

Canada is completely self-sufficient in energy,agriculture,mineral development,top flight tech industries.Our entrepreneurial sector is beyond compare and American Scientists are being lured North of the border in ever increasing numbers by generous grants and carte blanche operations.

"".What all the adulation of Canada right now ignores is that approach doesn't work if you don't have a rich and careless uncle willing to fund your riskier investments'"This is such a mean spirited statement that it is utterly beneath my contempt.However it is so outrageous that it demands outrageous proof.PROVE IT!!!!I'll be waiting right here and I'll keep reminding you.I can hardly wait to see what laughable proof you'll offer.

Canada is the envy of the G8 because of hard work and fiscally prudent governments and stringent banking regulations.Oh and by the way Canada owns 1/3 of the worlds water supply-the next "oil" and we have much more crude than Saudi Arabia and excellent universal health care that does not bankrupt neither employer nor employee so we are even MORE competitive and by the way we live 2.5 years longer than you do too

Sorry to be so triumphalistic but when I see some of the fairytales,lies and misinformation about my country on this forum I see red,and while we Canadians are renowned for our politeness never mistake that for weakness.

Manualman you really should read more about your friendly neighbour to the North.:cool:

[quote="manualman, post:6, topic:203469"]
The problem with all the fawning adulation on Canada's banks right now is that is misses half the picture. Lending practices must tread a tightrope. Be too tough on who you lend to and you will throttle the economy down and prevent the creation of wealth. Be too loose with the money and THIS bubble burst economy happens.

Canada accidentally exploited the system and got the best of both worlds for a time based on OUR mistakes. Their own banks focused on safe lending at modest returns due to their lending laws. The more high risk businesses had access to US investment capital right next door. So the risky stuff they funded with other people's money and the safe stuff they funded with their own.

What all the adulation of Canada right now ignores is that approach doesn't work if you don't have a rich and careless uncle willing to fund your riskier investments. If the USA goes extremely conservative on lending standards (we're not just talking mortgages here folks), we risk overcompensating and unnecessarily slowing our economic recovery.

Too bad I'm not smart enough to know where the ideal level of risk/reward is. Who IS?

[/quote]

Ahem.......apparantly we are.

Wow, a little sensitive?

Tone is a rather hard thing to read on the internet, so I'll cut you some slack.

My intention is not to slam Canada or its fiscal policies. As today's economy proves you are dead-on right to criticize the careless lending habits of US banks. This is not about timber issues or political spending irresponsibility. Relax. My point is that it can be equally damaging to an economy to be TOO tight with lending to the point where worthwhile investment is stifled and opportunities for growth are lost. Canadian businesses haven't suffered that problem in the last 15 years because when they were convinced of the worthiness of a project they could always get funding from an American bank instead. I've helped my developer clients with cost projections for 15 years. Consistently I've seen that Canada based banks like Harris will only fund the fattest of projects, but then at pretty goodand fair rates. Lots of successful and profitable projects were turned down for loans by Harris and funded through a US bank and turned out well.

My concern is that people will draw the conclusion that Canada's level of risk tolerance is the ideal one. The facts on the ground don't prove that because Canada's economic growth was not constrained by the risk averse policies of her own bankers, her entrepenuers had other options during the boom years. It remains to be seen if the typical Canadian lending practices established across the globe will be excessively restrictive to business growth.

There's no question that things need to be tightened up. The question is how far should it go? We need to be cautious in drawing conclusions from Canada's successful experience because Canada simply does not exist in a vacuum. She has a mutually beneficial and intertwined economy with the USA.

Canada is the US biggest trading partner not Japan.Our economy is the best run in the world,yours is in a shambles.My girlfriend lives in Missouri and I get to hear all the gory details first hand.You started it by saying "our’ Uncle took all the risks while we clipped coupons.That is a falsehood and it’s quite obvious to any Canadian that you don’t know whereof you speak.So please back off-I was just defending the truth about my country.Sensitive?You can dish it out but you SURE can’t take it.

We also trade with the rest of the world,and probably have greater resources than Russia and compared to the Russians we’re expert capitalists.You don’t like it when someone unjustly criticises YOUR country.I don’t like it when someone does the same thing to MINE.

Why is the rest of the world adopting Canadian Banking Policies-because they work.Wall street was run like the Wild West.How many company heads made out like bandits while their erstwhile employees were left holding the empty bag,with no pensions.How many have been jailed,like Dennis Kusinich(sp?).

Why were all your rich banks bailed out?Why did BANKS take such insane risks in the first place?Because they KNEW the US would not let them fail as it would destroy the US economy.Do you realise how deeply in debt your country really is?Greece is one thing but the Us is rapidly approaching the point where your debt repayment will exceed your GNP,THEN the rest of the world will suffer because of the irresponsibility of your banks,investment funds and the completely unbelieveable lack of oversight by your federal Government.

Bubbles ALWAYS burst.We know that,why didn’t you?This is not in your face gloating,this is a defense of my country to your original innacurate and quite envious post.You basically said Canada was lucky.We pinched our belts for 30 years to finally get a dynamic economy.We EARNED it-we didn’t SPECULATE it as somebody always loses bigtime,usually the speculator or winds up in jail for shady bookkeeping.No hard feelings but don’t tread on US(I LOVE that flag-may we borrow it?:)) .

By the way have you ever heard of the GST,HST,VAT?You’d bertter start reading about it cause one is coming your way and you’ll howl just as loud as we did.

You DO shout a lot, don't you?

[quote="manualman, post:11, topic:203469"]
You DO shout a lot, don't you?

[/quote]

Ad hominum-quite beneath a person of your intelligence and skilled articulation

.I am not yelling-I merely use capitalisation when I'm trying to make a point.I am a luddite on the computer and do not know how to italicise.If I have offended you by my use of capitalisation ,i do. apologise as that was not my intent.Sorry:blush:

I guess tone is hard for me to interpret on the web as well.

I can see where the 'rich uncle' remark would seem snide or condescending. It wasn't supposed to be. It was an allusion to the easy money tossed about to nearly anybody by US banks during the bubble years. If anything, it was a put-down to them, not you or your country. Peace.

[quote="manualman, post:13, topic:203469"]
I guess tone is hard for me to interpret on the web as well.

I can see where the 'rich uncle' remark would seem snide or condescending. It wasn't supposed to be. It was an allusion to the easy money tossed about to nearly anybody by US banks during the bubble years. If anything, it was a put-down to them, not you or your country. Peace.

[/quote]

Peace Mr.M:)

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