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A continent divided
An overview of the U.S. and Canadian sub–prime mortgage markets
Recent developments in the U.S. sub–prime mortgage market especially with a Canada Mortgage and Housing Corporation
have caused great speculation regarding negative effects on the (CMHC) loan, where the personal guarantee is virtually automatic.
Canadian economy. There are several key differences between the Finally, it is easier to re–establish credit after a bankruptcy in the
two housing economies, which will influence the direction of each United States. This allows weaker borrowing applicants back into
market over the next few years. the marketplace much more easily.
Taxation Brokerage Industry
In the United States, the interest on mortgage payments is tax In the United States, brokers account for 50 to 70 per cent of
deductible, similar to RRSP contributions in Canada. This creates an mortgage originations; Canada is far behind that with only 27 per
incentive there to borrow as much as possible. When you combine cent. The majority of Canadian applications go through banks or
this tax incentive with a variable interest rate, problems often other financial institutions. What this means is that, in America,
occur. Homebuyers borrow too much; and when their interest rate mortgage brokers—who are experts at placing clients in mort-
increases, they can’t make payments. With a fixed rate, payments gages—are finding lenders for all sorts of weaker applicants. In
won’t change, which mitigates debt servicing risk. Canada, where the bulk of applications seem to go through banks,
Canada is the opposite—interest on mortgage payments is not weaker applicants are unable to meet the restrictive conditions, and
tax deductible. This forces any prospective homeowner to con- these clients are never approved for financing.
stantly examine the real cost of ownership. With no year–end tax
breaks on mortgage interest, borrowers are steered toward saving Lender Insurance
in a registered investment or paying down their mortgage as In Canada, many high–ratio deals (10, 5, even 0 per cent down)
much as possible. are insured by the government–run CMHC program or its competi-
tors. Borrowers must comply with nationally enforced conditions.
Legal Issues In America, there are many uninsured lenders lending to whomever
American laws are not lender friendly. It is difficult for the lender they want however they want, potentially putting investors’ money
to pursue action against the borrower; foreclosure is often easier. at serious risk.
In Canada, however, the law allows easier recourse for the lender,

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Default Rates Canada has insulated itself from this self–destructive behaviour
The Canadian mortgage market as a whole is much healthier— through stringent lending regulations. Our economy is flourishing
2006 U.S. default rates were 6.78 per cent, Canada was only 2.09 (especially Western Canada), and homeowners tend to look at their
per cent. That means the likelihood of a borrower defaulting on homes as assets not tax write offs.
payments was more than three times higher in America than in What does the future hold? We suspect that in America there will
Canada—virtually a constant since 1998. be continued market turbulence as it sorts itself out over the next
couple of years but will right itself on the strength of its overall
Loan Characteristics economy. In Canada, there does not seem to be the same warning
With unbridled competition comes increased business and bells going off in our housing market, and we expect “steady as she
financial risk for a corporation. To attract clients, U.S. lenders do goes” for the foreseeable future.
all sorts of weird and wonderful things, such as lending to 125 per –CHUCK MCKITRICK & SANJ SYAL
cent of a home’s value, not asking for income or asset statements,
lending for fifty–year amortizations, or even lending for negative Chuck McKitrick, Mortgage Banker, & Sanj Syal, Financial Analyst,
amortizations (not making a full interest payment every month). In are qualified mortgage lending advisors with Alta West Mortgage.
Canada, our regulatory bodies do not allow the same characteristics Alta West Mortgage has provided Albertans with creative and flex-
to occur; and since there are so few lenders in comparison, there is a ible mortgage solutions for over 15 years. Alta West Mortgage Capi-
greater opportunity for market survival. tal Corporation underwrites and manages a large private mortgage
In essence, the U.S. lending market has put itself way too far portfolio, including three Mortgage Investment Corporations (MIC’s):
out on a limb that is bending, even cracking a little. Borrowers are Fortress Mortgage Inc., Fidelis Mortgage Corporation and Dominion
defaulting, and investors are cashing in their shares. However, the Mortgage Investment Corporation.
United States is an economic superpower; and, due to its overall
strength and the global ramifications of a collapse, this potentially
huge disaster has quietly dissipated.