How Canada's Too Big To Fail banks avoided the mortgage meltdown.

The USA and Great Britain were hammered by the 2008 financial crisis yet Canada sidestepped it yet they have larger banks compared to the USA (Royal Bank of Canada and TD Bank are huge). Canada does not need a Glass-Steagal to separate deposit and investment banking at all. So how did they do it?

Canada has no mortgage interest deduction on taxes. There is no perverse incentive to buy or overbuy homes.

And Canada is full recourse. You default on a home? They can come after ALL the rest of your assets - not just the house.

So Canadians have no incentive to misallocate their capital.

(I am not from Canada - just a finance guy. Canadians should add their own perspective).

Countries without mortgage interest deductions collapsed, too. And the U.S. mortgage interest deduction existed long, long before the collapse, so it’s not quite that simple.

Of course that helped. It’s really a combination of factors. Primarily, though, Canada has a really, really productive and active regulatory relationship between the government and the banks. Canadian banks are allowed to be immensely profitable, but their risk-taking is limited by regulation. High-risk mortgage instruments of the sort you saw in the USA are actually illegal or extremely disincentivized. It’s not just that mortgage interest deducations encouraged crazy mortgages in the USA but not in Canada, it’s that those mortgages simply were not allowed to exist in Canada.

I’ve told this story before but I’m fond of telling it so will again; my best friend grew up and started his career here in Canada, but moved to California in 1999. He arranged to get a mortgage a few years later and went into the bank, where he was told he had a choice between two mortgages; a “documented” and an “undocumented.” Confused, he asked the difference, and was told that the “documented” mortgage had a lower rate but, unfortunately, he would have to prove that he had a job and income. If he was willing to pay the higher rate, though, no need to bother proving he had an income. I hasted to point out this was at either Wells Fargo or BoA (don’t remember which) not some fly by night operation.

He was flabbergasted. In Canada there’s no other kind of mortgage but documented. It is inconceivable the bank would give you a mortgage otherwise.

Montreal Accord

Interesting. It leads me to believe that you have regulation down at the transaction level.

In the US that would be nearly unthinkable. For instance, ARMs with a 3-year teaser rate that ballooned to 8-10% were common here. The fixed 30 year just was not as profitable during the bubble years.

I haven’t heard it, so I’m glad you told it again. “Documented” and “undocumented”? Wow–just wow.

In response to the OP, I’ll add that Canadian banks, all of which provide mortgages, are federally-regulated. This has provided stability during the recent economic difficulties. Northern Piper explained it nicely at post 66 of this thread:

Canadian banks provided stated-income mortgages (called ‘liar loans’ in the U.S.).
The self-employed were able to get mortgages without any proof to back up their stated income. New regulations are coming into effect that will end this practice. Tax returns will be required to prove your income.

Canadian banks are more risk-averse, although it’s not clear to me that it’s due to better regulation than in the U.S. in all cases. In the case of derivatives, it simply seems to me that most of the innovation in financial products is done by U.S. banks and Canadian banks are left playing catch-up. Sometimes that works in their favour (they avoid a big blow-up) and sometimes it works against them (by the time they finally enter a certain market, there isn’t the same opportunity to make big profits).

In the case of mortgages, it’s certainly clear that Canada has tighter regulation and that was beneficial in this case. But in the case of instruments like CDOs (collateralized debt obligations), I think most Canadian banks would have loved to have cashed in on that sector and that regulators would have followed along the lines of U.S. securities regulators. So why didn’t they lose their shirts during the credit crunch? Because there just wasn’t a large, mature market for Canadian CDOs and they couldn’t really compete with U.S. banks on U.S. CDOs.

All my personal opinion, of course.

Canada’s banks avoided the mortgage meltdown because house prices never went down. From 2000-2008 american home prices went up 100%. During that time banks made alot of money and there were few foreclosures. Since the high of 2008 american home values fell 40%, which caused banks to lose money hand over fist.
In Canada home prices between 2000 and 2009 went up 80% and then fell 10%, recovered and are now up 125% from 2000. If the bubble pops om Canada like it did in the US we will see what happens to the banks. They say recessions uncover what auditors fail to spot.

I assure you that it has never been that easy for the self-employed to get mortgages, and I know from experience. You may have no T4 to provide the bank, but they look for other evidence of income.

Yes, it has been that easy. Otherwise there would be no need to specifically change the rules as has been done.

“No proof of income is required”

This. The current price-rent ratio in Canada is worse then the US was at the height of its bubble, and almost as bad as Ireland’s and Spain’s were.

It maybe that the measures discussed in the OP will keep the bursting of the bubble from having the same ill effects as were seen in the US. But we won’t know until the bubble pops.

…so long as you have 35% equity (or 10% equity for a high-ratio mortgage 2).

2 High-ratio mortgages (for financing over 65% and up to 90%) require default insurance through Genworth Financial Canada/CMHC. An application fee and insurance premiums apply. Available on fixed-rate mortgages only.

You mean there were no interest-only mortgages in Canada? Or no NINJA (no income, no job/asset) loans?


Read the finer print.

“No proof of income is required when all income is from the business and the self-employed applicant has been a principal owner of the same business for at least 2 consecutive years. Conditions and restrictions apply.”

In other words, they tear your info apart. There’s nothing “undocumented” about this process whatsoever. It’s just different documents; you better believe they’re going to be looking at your business’s finances. And you still needed a substantial down payment. See, you had to have MONEY.

In the USA, no down payment was required. No income. Nothing. It was quite common for them to lend you a down payment to make on the undocumented mortgage. Since the lender would then sell your mortgage away, they weren’t holding the bag so why would they care?

It’s difficult for a Canadian to understand how flatly insane the system got, because ours remained sane. People were literally being told by mortgage lenders that they didn’t need a job, because owning a house WAS their job. Since house prices went up 20% a year, you could jut borrow against the house to make the previous mortgage’s payments. The absurdity of this may seem hard to swallow, but people did it.

I believe this is highly exagerated, and that no income loans had higher rates than ordinary mortgages - it was simply a matter of the old trade-off of risk/reward and not “why should they care” as you claim. (The reason they cared is because they were not as stupid as you suggest, and because the loans needed to be sold to investors, including Fannie and Freddie, who were also not completely stupid.)

If you have anything to back up your claims, I’d be interested to see what that is.

I can verify what RickJay is saying. I was self-employed when we bought our first home. I had been the principal owner of the business for about 5 years at that point. The bank was willing to lend me the money, but only if I jumped through an awful lot of hoops. They wanted income statements, tax returns, business plan, assets and liabilities, all sorts of stuff.

In the end, it was easier to just use my wife’s employment income from a normal job to qualify for the loan. And because we only had about 15% to put down on a house, we had to take out a high-ratio mortgage and pay extra (quite a bit extra) for the CMHC home insurance that protected the bank from a default.

In Canada, not only do you have to prove income, but the bank won’t give you a mortgage that pushes your total debt payments up above a certain percentage of your take-home pay. When you apply for the mortgage you have to disclose all other loans, credit cards, auto payments, etc. If you’re carrying too much debt, you can have $100,000 in income and the bank still won’t give you a mortgage.

Back to the OP: It’s simplistic to say that Canada simply has ‘stronger regulations’. The relationship between bank regulators and bankers in Canada is very different than it is in the U.S., as is the entire banking culture. Canadian banks have a culture and history that makes them much more conservative than American banks. Young bankers coming up through the system have this conservative culture drilled into them. Regulators are seen more as high-level partners helping to keep the banks sane, and aren’t viewed as oppositionally as they are in the states. They also tend to work together with banks to figure out sane rules, rather than having a Congress write rules and hand them down from on high.

And has been mentioned before, you can not under-estimate the other factors that kept our real-estate bubble in check - we don’t have a home interest deduction, we have tougher rules for getting mortgages, etc. Our government doesn’t lean on bankers to provide mortgages to people who can’t afford them. Low down-payment mortgages have to have additional default insurance that the homeowner must pay for. We don’t have a Fannie and Freddie buying up mortgages that are too risky for banks to hold, off-loading risk from the banks and giving them an incentive to hand out risky mortgages.

No, Fannie and Freddie were not stupid - they were very smart. They bought risky loans, bundled them, then used the fact that they were a quasi-government agency to give the debt packages the imprimatur of higher safety. They could then sell them for more than they paid, and dump the risk themselves. Their executives were paid enormous sums of money for coming up with this very profitable strategy - especially knowing that if the crap hit the fan the federal government would have to bail them out anyway.

Same in the U.K. - MIRAS was removed over 10 years ago.

Same in the U.K.

I am unclear as to what it is you disagree with.

The existence of NINJA mortgages is not something I just came up with.