How Canada Avoided The Mortgage Mess

It sounds like we could learn something from them which doesn’t surprise.  The biggest thing that sticks out to me is how it brings up Fannie Mae and Freddie Mac.  The reason I say this is because I feel many think that the credit score is more important than it actually is.  I feel as though many years ago prior to the automated underwriting systems credit score was a large determining factor because a human being was making a decision on a loan.  Now if you get an approval through the automated underwriting system the underwriter isn’t turning down a deal because they feel the debt to income ratio is too high.

Fannie Mae did come out with their changes for debt to income rations on December 8, 2009 limiting them to 45% and a maximum of 50% of gross income with compensating factors.  Here’s the catch, FHA still allows up to 55% and so does Freddie Mac.  Now I do feel in certain instances where income is being calculated very conservatively (commission, bonus, self-employed, etc) you can allow a higher debt ratio.  I would like to say you leave it up to the underwriter’s discretion but we all know they would be too scared to make that determination.  Rightfully so, they don’t want to lose their job.  Anyway, there is a lot we can change and a lot more that we can learn from.

Canada makes a useful comparison for the U.S. Both countries are rich, advanced, stable, have sophisticated financial systems and pioneer histories, and stretch from Atlantic to Pacific. But Canada has no housing GSEs. Mortgage interest is not tax deductible. It does not have 30-year fixed rate, freely prepayable mortgage loans. Mortgage lending is more conservative and much more creditor-friendly.

Canadian mortgage lenders have full recourse to the mortgage borrower’s other assets and income, in addition to having the house as collateral. This means there is little incentive for borrowers to “walk away” from their mortgage. The absence of a tax deduction for mortgage interest probably increases the incentive to pay down debt. Most Canadian mortgage payments are made through automatic debit of the borrower’s checking account—a technical but important point. Canadian fixed-rate mortgages typically have prepayment penalties to protect the lender and the interest rate on the loan is fixed for only up to five years.”