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Oh, Canada…

By: 7 February 2012 One Comment

The Office of the Superintendent of Financial Institutions of Canada (OSFI) has raised concerns over lending practices similar to those that gave rise to the crash of the subprime mortgage market in the United States.

According to documents obtained by Bloomberg News, OFSI officials are concerned about increasingly lenders’ increasing liberal practices when it comes to writing mortgages and home equity credit lines. Those practices include not requiring proof of income for those big-ticket loans.

To put that all in context, subprime lending in the U.S. went from an historical rate of 8 percent of all mortgages issued to 20 percent or more between 2004 and 2006. Both home ownership rates and home prices rose dramatically during that period. Americans got heavily into debt during that period, too – The Economist reported in 2008 that average consumer and mortgage debts by 2008 had risen to 127 percent of disposable income, up from 77 percent in 1990.

We all know what happened next. Consumers got in over their heads in droves, resulting to massive foreclosures, the outright death of the subprime lending market in 2007 and falling home prices. The national economy is still reeling from the mess and American bankers have tightened lending requirements in an effort to make sure that people who take out mortgages or refinance their homes are likely to pay back their loans.

Meanwhile, home prices in Canada have skyrocketed since 2009 thanks to low mortgage interest rates and less restrictive lending, Bloomberg reports. The average Canadian’s debt reached 153 percent of disposable income last year and Bank of Canada Governor Mark Carney has identified high consumer debt as the greatest threat to the nation’s financial institutions.

So, real estate markets in Canada are going through increasing prices, high ownership rates and increased levels of construction activity. That scenario, indeed, looks eerily similar to what happened in the U.S. just a few years ago. Will, however, real estate markets in Canada go through the same turmoil as the ones in the U.S. did?

That’s hard to say and it’s not entirely encouraging to see some economists forecasting a 25 percent drop in average home prices in Canada in the coming years. However, there are some differences in Canada worth mentioning.

For one thing, subprime mortgages make up less than 5 percent of all purchase loans in Canada. For another, those lenders who aren’t required to provide extensive verification of income are typically those that put up large down payments on properties.

Also, the government has started pushing for reforms – and urging banks to revise lending practices – at the first signs of trouble rather than reacting to a full-blown crisis.

The Canadian government and lenders in that country may learn a thing or two by studying the subprime lending crisis in the U.S. Meanwhile, we may have a thing or two to learn by watching how they deal with concerns in the current market.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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