What went wrong with mortgages during the housing boom? Easy: banks were too easy with credit. If they'd merely restrained themselves from providing home loans to anyone with a pulse, they may have avoided a very nasty financial crisis. Howard Schneider suggests today in the Washington Post that the U.S. should observe the way our conservative friend to the north handles mortgages:
Heading into the crisis, banks here were under stricter rules, forced to set aside more capital than U.S. firms and managed with a more conservative bent. Government agencies such as the Canada Mortgage and Housing Corp. hewed closely to policies in which they supported the housing market by offering mortgage insurance, but unlike Fannie Mae and Freddie Mac in the United States, they were never expected to encourage homeownership as a social or economic end.
Canadian tax law is neutral: Interest on mortgage payments is not deductible, a fact that encourages home buyers to make larger down payments and avoid withdrawing equity. The banks themselves expect to hold on to the mortgages they make and collect the interest. Most loans allow interest rates to be reset after five years, and most also carry prepayment penalties -- rare in the United States.
Read the full story at the Washington Post.