September 08, 2007

BOB FINNIGAN

bring forward to you by James Kan, Broker

Century 21 Leading Edge Realty Inc

Direct: 416-806-0707

'Oh Canada, Get a load of this boom!" What a great headline,

especially since I found it on the front page of the real estate section

of the Chicago Tribune (Aug. 5, 2007).

Americans are quite envious of our housing market as they suffer

through the subprime mortgage meltdown. I'm often asked if the same

thing could happen here and I'm happy to say the answer is `no,' at

least according to Peter Vukanovich, president of Genworth Financial

Canada, which, next to CMHC is the largest mortgage insurer in

Canada.

Vukanovich says there are many important differences in lending

practices and regulatory systems in the two countries. The Genworth

head explains that subprime mortgages typically have higher interest

rates and fees than "prime" mortgages and often include features such

as "teaser" rates that offer the homebuyer very low payments for a

short time, or the option to make interest-only payments. As well,

whereas Canadian lenders are very strict about debt ratios, income

verification and credit checks, the American lenders are not nearly as

diligent.

Vukanovich notes that here in Canada, most loans are made for five-

year terms with fixed monthly payments that will not jump quickly to

unaffordable levels. Also, mortgage interest is not tax deductible here,

so we have an incentive to pay off our mortgages as quickly as

possible.

Another important difference in Canada is that mortgage default

insurance is required under federal financial services law for those

making less than a 20 per cent down payment. As a result, 95 per cent

of the loans made in Canada are considered "prime" lending quality

versus a much smaller number in the United States.

By acting as a lender's "second set of eyes," mortgage insurers see

that underwriting standards are consistently applied to about half the

market – approximately 450,000 mortgages in 2006.

Mortgage default insurance works by transferring the homeowner's

risk of default from the lender to the mortgage insurer. It also benefits

Canadian homebuyers by allowing them to obtain loans at lower

interest rates than would otherwise be charged if lenders retained the

risk of default.

"If Canada had a U.S.-style system, at least one-third of all Canadians

who currently have low-cost insured prime mortgages would pay

higher interest rates and additional fees," Vukanovich says.

"All told, Canadians can take comfort in knowing that our mortgage

default insurance system is one of the most efficient, safest and stable

in the world. "

The whole U.S. house of (credit) cards assumed rising housing

markets and stable or declining interest rates. Unfortunately, the U.S.

has seen the opposite trends.

We're very fortunate to be avoiding that fiasco here in Canada,

although we are certainly feeling the side effects on the stock market

side. For years, there were just two mortgage insurance companies in

Canada, but we are starting to see some new players. I think

competition is great, but we must ensure that responsible lending

standards prevail.

The bottom line is that our lending practices are solid and our housing

market remains strong and insulated from the woes of our neighbours

to the south.

Bob Finnigan is president of the Building Industry and Land

Development Association. The views expressed are those of the

president. president@bildgta.ca