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Mortgage defaults not a concern

Blog by Shaun Kimmins | December 15th, 2008

Canadian mortgage industry says rising defaults not a huge concern

VANCOUVER, B.C. — Canada's mortgage industry says it's not concerned about the impact of rising defaults as a result of the recession that has set foot in Canada.

Despite a warning from the Bank of Canada on Thursday that mortgage and loan defaults could rise "significantly" if the global financial crisis deteriorates further, the industry says its products and lending arrangements are safer than those in the U.S., where millions have lost their homes through defaults.

Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, said Thursday the worst-case scenario from the Bank of Canada should not be ignored. But he believes more in the bank's prediction that the "most likely outcome" is for global markets and credit conditions in Canada to gradually improve.

"I do agree 2009 will be difficult," said Murphy.

"There is no question the real estate market is slowing, but we do have different products, we are in better shape, credit is available, and interest rates are low."

Murphy also said the percentage of Canadian mortgages in arrears is at historical lows.

According to the latest figures compiled by the Canadian Bankers Association, the percentage of mortgages that have gone unpaid for at least three months as of September was 0.29 per cent, or 11,362 of about 3.9 million mortgages in the country.

Murphy believes those figures have not grown by very much in the past few months, when the financial crisis started to be felt more deeply across Canada.

Arrears in the U.S. are 6.5 times higher, according to the bank lobby group.

Millions of Americans have lost their homes in the last two years with the collapse of the sub-prime, or high-risk mortgage market, which eventually led to sharply higher interest rates for homeowners with poor credit and produced widespread foreclosures.

However, the sub-prime market is a much smaller part of Canadian mortgage lending and barely exists in today's more restrictive credit environment.

As well, the federal government has effectively banned 40-year-mortgages and requires bigger down payments on house loans, which lessens the risk of defaults. And currently low interest rates as well as falling house prices in many Canadian markets makes housing more affordable.

"Canadian trends are stable. American trends are worsening," according to the bankers' group.

The association says more than 20 per cent of mortgages were in the risky subprime category in the U.S., compared to less than five per cent in Canada.

What's more, the CBA said that American lenders rely much more heavily on securitization - which means the loans are packaged with other financial products and sold off to banks, insurance companies or private investors.

In Canada, the banks and other home loan lenders tend to hold the mortgages they originate.

"Canadian mortgage originators had, and continue to have, a much greater incentive to be prudent because they directly bear the consequences of imprudent lending decisions," said the CBA.

The group also cites the Canadian Bank Act, which requires mortgage loans from banks that exceed 80 per cent of the value of the home to be insured.

"This helps the banks manage the risk of high-ratio mortgages," the CBA said.

Derek Holt, an economist with Scotia Capital, says the Bank of Canada report suggests a "gentle deterioration" of the overall household credit condition over the next year as the recession deepens.

"We're coming off an almost record period when it comes to consumer credit quality if we look at chargeoffs or loan loss provisions, delinquency rates in the entire Canadian financial system," he said in an interview with Business News Network, a Toronto-based business TV channel.

"Some of these new mortgage products actually carry a bit of a shock absorber potential because if you're stressed under a 25-year mortgage amortization plan you can now extend it to a 30 or 35 year plan to ease (your payments)."


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