In a time when the economy and the housing market in the United States lacks stability and confidence, our neighbors to the north continue to thrive.

Canada’s dollar has continued to see its strongest performance in over a decade. From a record low of 62 cents on the U.S. dollar in January 2002, the currency is now nearly equal in value — $1.01 on the U.S. dollar as of last week – Canadian citizens’ median net worth is nearly 50 percent higher than those residing in the United States, even though the average after-tax income is nearly equal.  

Perhaps even more astonishing is that while one in every 492 homes in the United States received a foreclosure notice in November 2011, less than 1 percent of all Canadian mortgages are in arrears. This alone should merit a review of what makes Canada different.

One factor for the large discrepancy in net worth between the citizens is the significantly larger amount of student loan debt carried by the average American. However, an even larger factor is homeownership. In 2009, the percentage of housing units owned by its occupant was nearly equivalent between the two countries – 67.4 percent in the United States versus 65 percent in Canada, though estimated higher now.  

The dissimilarity, however, comes down to the percentage of homeowners with or without a mortgage. In the United States, an average of 31.5 percent of homeowners is not encumbered by a mortgage. In Canada, however, nearly half of all homeowners own their home outright, accounting for one cause of the virtually non-existent foreclosure market.

‘Soundest Banks In World’

So what accounts for such a large divergence in homeownership and foreclosure rates? One influence may be the banking laws in Canada. The World Economic Forum has named Canadian banks as the best in the world and has continually named them the “soundest” banks in the world throughout the U.S.’s recession.  

In fact, not a single Canadian bank failed during The Great Recession, while hundreds of banks in the United States collapsed and financial giants were bailed out.

In Canada, there is no secondary market for mortgages. Mortgages are not bundled and sold on the securities market, as in the United States where supporters argued the secondary market allowed the banks to take the loans off its books to free them up to lend more money. This practice, however, also incentivized banks to lower their standards and fueled the issuance of subprime mortgages.  

Canada insists on more rigorous mortgage underwriting than the United States. In Canada, while the loans remain on the bank’s books, the risk is passed on to government agencies. More than half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages. Essentially all mortgages with a loan-to-value ratio greater than 80 percent are guaranteed directly or indirectly by the Canadian Mortgage and Housing Corp.

Witnessing the housing market crash in this country, the Canadian government adjusted the rules for government-backed insured mortgages in an attempt to keep the Canadian housing market healthy and stable, while preventing Canadian households from getting overextended.  

As of April 19, 2010, the Canadian government required that all borrowers meet the standards for a five-year fixed rate mortgage, even if they chose a mortgage with a lower interest rate and shorter term, endeavoring to prepare borrowers for higher interest rates in the future.  

The amount a Canadian could withdraw in refinancing a mortgage was lowered from 95 percent to 90 percent to help ensure that home ownership is a more effective way to save. Finally, the government required a minimum down payment of 20 percent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation.

Maybe the Canadian banking system can only be successful in a concentrated economy, or perhaps Canadians are simply culturally more averse to accruing debt than their neighbors to the south.  

Regardless, it is worth examining whether a hard analysis of Canadian banking could suggest progressive alternatives to current housing financing in the United States.

 Melanie is an associate attorney in the commercial litigation department of Halloran & Sage in Hartford, Conn.