How Canada Avoided the Foreclosure Crisis
Home ownership is considered so sacred in the U.S. that, without it, there may be no "American Dream." Economist Robert Shiller even stated in the New York Times that the U.S. government supports home ownership to the extent that it does because it's necessary to preserve the American "sense of national identity."
This deep-seated desire to own a home may in fact be the American consciousness talking...or it may be the very successful real estate lobby.
Should Support for Home Ownership Mean Government Subsidies?
Even if widespread home ownership is desirable and necessary for a stable, law-abiding and contented American society, must the U.S. government -- meaning taxpayers -- support it with subsidies? These subsidies take many forms: guaranteeing the loans of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, allowing homeowners to deduct their mortgage interest on their taxes (which effectively forces renting taxpayers to subsidize home buyers), offering down payment assistance and low down-payment requirements on FHA mortgages to those who can't otherwise qualify for home loans, and so on.
Are these subsidies necessary? Canada doesn't think so.
The Case of the Missing Meltdown
Canada and the U.S. have a lot in common. Both countries are wealthy, stable, technologically advanced democracies with highly developed financial systems. However, as many point out -- including the Wall Street Journal, which also recently asked why Canada avoided a mortgage crisis -- Canada has no Fannie Mae and no Freddie Mac. There is no mortgage interest tax deduction. There are no 30-year fixed-rate home loans that can be freely refinanced and prepaid. Mortgage lending is far more conservative, and Canadian mortgage lenders have a lot more recourse than American ones.
If Canadian homeowners default, their other assets and income are on the line, not just the property. Strategic defaulting is not an attractive option. There is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts -- so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years -- an incentive to pay the debt down faster.
While these provisions aren't so friendly for consumers, they have ensured that Canadian banks have (so far) survived the international financial crisis without requiring the taxpayer bailout. Furthermore, Canadian neighborhoods and individual homeowners have not been destroyed en masse by property bubbles burgeoning and bursting. Canada didn't completely sidestep the recession, but home loan default rates are much lower than in the U.S., where one in 10 mortgages are in trouble.
The Home Ownership Rate
Yet, the National Association of Realtors (NAR) will not countenance any curtailment of taxpayer subsidies for home ownership. "NAR enables more Americans to achieve and protect the dream of home ownership. NAR is 100% opposed to the provision that modifies the Mortgage Interest Deduction and is prepared to use its formidable array of resources against its enactment," the trade group vows.
So what about the home ownership rate? What price does the Canadian system exact?
Today, America's home ownership rate is 67%, down from its peak of 69%. Canada's is 68%. So much for the relationship between government gifts and home ownership.
Fannie Mae and Freddie Mac justified their existence and their high-profit risky policies by flogging the home ownership dogma. They and their (doomed) investors claimed that the GSE-dominated mortgage finance system created the highest home ownership rates in the world (not true). Fannie Mae's annual reports proudly flaunted a house with its American flag flying. Today, the GSEs are just bankrupt behemoths, and for all practical purposes they are government property. This is not to suggest that we replace our American system with a Canadian model, but is just to show that there may be many means to the same end.
So What's the Answer for the U.S.?
Economic scholars at the Brookings Institution don't think Americans would give up their mortgage deductions or submit to Canadian-style oversight. They also agree that imposing more regulations willy-nilly isn't the way to go, either. Panelists at a discussion sponsored by Brookings and the Woodrow Wilson International Center for Scholars concluded that what helped Canada survive the financial crisis is an instrument that the United States doesn't yet have -- a single consolidated financial regulator. That said, there are only a handful of banks in Canada, and perhaps 8,000 in this country. It is unlikely that one regulator would be able to manage them all.
If financial reform includes the creation of a strong regulatory body to oversee all mortgage and consumer lending, like the previously proposed Consumer Financial Protection Agency (CFPA), Americans might get the protections they need, hopefully one which preserves innovation, competition and choice, things Americans are accustomed to.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.