U.S. and Canadian Mortgage Comparison Key to Market Differences
Readers who are doing a mortgage comparison and are interested in why the Canadian mortgage and housing markets continue to hum along, albeit with house sales and housing price increases at a much more moderate pace than last year’s record setting level, need look no further than a recent letter to the editor of the Ottawa Citizen submitted by Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association, for a summary of differences between the two markets.
Why, many ask, is the Canadian mortgages and housing market relatively healthy compared to the ongoing mess in markets south-of-the-border? Look no further than the types of home mortgages written by banks in Canada, and who ends up holding the mortgage.
Ms. Anthony clearly makes the point that “non-prime loans”, particularly the now-infamous “sub-prime mortgage” loans make up a much smaller percentage of Canadian home loans than they do in the U.S. And, moreover, Canadian banks tend to keep Canadian home mortgages on their own balance sheets, rather than bundling them up (i.e., “securitizing” them) and selling them off to third party investors. When those investors took a good look at the quality of the home mortgages being written by U.S. banks and then sold off as well-rated securities, the market for sub-prime and other asset-backed commercial paper essentially dried up, sparking a tightening of credit markets around the globe.
“In fact, Canada doesn’t have the same problems with sub-prime mortgages that we have been seeing in the United States,” Ms. Anthony writes. “Generally, non-prime mortgages constitute a wide-ranging category of loans, from those that aren’t much different from prime loans to those that are significantly riskier, such as sub-prime loans. Significantly, she notes, “Non-prime loans make up less than five per cent of all outstanding mortgages in Canada compared to about 20 per cent in the United States.”
Ms. Anthony also points out that Canadian banks securitize a much smaller proportion of the mortgages they write, holding the remaining loans on their books where they accounted for in each of the banks’ bottom line. “Only about 20 per cent of outstanding mortgages in Canada are securitized,” she observes, “while American lenders rely much more heavily on securitization. In other words, Canadian lenders tend to originate and hold mortgages, while in the United, the model was on an ‘originate to distribute’ model.”
The end result? Ms. Anthony notes that the percentage of mortgages Canada that are in arrears is close to an historic low – 0.26 per cent in April, five times lower than a U.S. arrears rate that is climbing, and where foreclosures sales are now commonplace in many regional markets.
What Ms. Anthony fails to note is the large exposure to the U.S housing woes that some Canadian banks and financial institutions incurred due to their overlax lending practices in their U.S. operations . While the Canadian mortgage lending practices of banks like the CIBC may have been conservative, in alignment with Canada’s much more fiscally conservative and prudent regulatory framework, the U.S. lending operations of Canadian banks operating in the United States were not necessarily so. When Canadians making a mortgage comparison look at the differing rates between Canadian lenders, they may find that some of the write downs that Canadian institutions are being forced to take as a result of losses incurred in the U.S. market may be reflected in the rates and terms that are being offered here in Canada.