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Over the past 10 years, Americans have witnessed the explosion of home prices across the country. Subsequently they witnessed the largest collapse in real estate prices of all time. With real estate prices remaining at historically high rates across Canada, many Canadians are wondering if the Canadian marketplace will fall victim to the same collapse as the United States.

To answer this question, we’re going to look at some of the causes of the American real estate collapse

1) Interest Only Mortgages
In the US, interest only mortgages became quite popular early in the new millennium, with many families opting to purchase homes that they really couldn’t afford, with interest only mortgages. Rather than renting, they would spend roughly the same amount on owning their own home. Unfortunately, as soon as the house prices fell slightly, this caused the momentum to continue. With people holding mortgages for more than homes were worth, it was simply in their best interest to walk away from the home and cut their losses. This compounded the problem and drove already falling housing prices even lower.

In Canada: You cannot have an interest only mortgage in Canada. Most mortgages require a 25% downpayment. Therefore, unless housing prices suddenly tumble by more than 25%, this isn’t a risk

2) Failing Economy
There have recently been major issues with the US economy, particularly as manufacturing moves overseas and factories continue to close. The US economy has lagged in recent years and is projected to continue to experience slow growth for at least the next 5 years.

In Canada: While Canada’s economy was impacted by the recession of 2008, the effects have been much more minor than in the US. Canada’s economy is based heavily on natural resources, rather than manufacturing, and therefore isn’t as volatile as the American economy.

3) Failing Banks
American banks have been failing left, right and centre. The financial industry has continued to do poorly since the 2008 collapse. In fact, this is what spurred many of the widespread occupy Wall St protests.

In Canada: Canadian banks are some of the most secure in the world.

If we look at these three triggers for the American real estate collapse, we can see that a collapse in Canada of similar magnitude is highly unlikely. Furthermore, Canada has an incredibly high immigration rate, which continues to push housing prices higher in major centres. For example, in Toronto alone, more than 40,000 new dwellings are needed each year to keep up with demand.

Overall, Canadian Real Estate prices are at an all time high, and it appears that they will continue to rise for the foreseeable future.

Washiington, DC, United States (AHN) – The ailing housing market in the United States has not been able to recover even with historic low interest rates, bargain-hunting American consumers or U.S. government intervention. So, the Senate is proposing a bill that would give foreigners a part in bailing out the industry.

U.S. Sens. Charles Schumer (D-NY) and Sen Mike Lee (R-UT) have introduced a bill that would permit foreigners who shell out at least $500,000 on U.S. residential property to obtain visas allowing them to live in the United States.

The plan might be the boon the U.S. real estate market needs, especially in states particularly hard hit such as California and Florida, which often attract wealthy Chinese and Canadian buyers.

The National Association of Realtors reported that in the 12-month period that ended March 31 residential sales nationwide to foreigners and recent immigrants totaled $82 billion, an increase from $66 billion in the same period a year earlier.

The bipartisan proposal, part of a package that would make it easier for international tourists to visit and vacation in the United States, is similar to an existing program that puts foreigners on a fast track to a green card if they invest at least $500,000 in an American business that creates at least 10 jobs.

There are restriction in the new proposed bill. The purchase must be in cash, with no mortgage or home equity loan. And, the property would have to be purchased for more than its most recent appraised value. In addition, the buyer must live in the home at least 180 days a year, which would require paying U.S. income taxes on any foreign earnings.

The buyer would be able to bring a spouse and minor children to live in the U.S., but would need to apply for a work visa to hold a job. Neither the buyer nor the dependents would be eligible to receive Medicaid, Medicare or Social Security benefits.

Schumer and Lee, who have already secured backing for the bill from the U.S. Chamber of Commerce, the U.S. Travel Association and the American Hotel & Lodging Association, are working to get support from the Obama administration, which received details of the bill Thursday.

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London, England, United Kingdom (AHN) – The Bank of England’s new Financial Policy Committee recommended on Wednesday for British banks to reduce their bonuses and shareholder dividends to strengthen their balance sheets.

The recommendation was made in anticipation of another financial crisis likely to be caused by the worsening eurozone debt contagion. The BoE also warned the banks to prepare for future shocks.

The bank did not specify how much the financial institutions should reduce their discretionary distributions, but in previous reports suggested that by limiting dividend payouts and constraining compensation ratios, the banks could raise up to $15 billion (£10 billion) a year.

The amount could be used to support $75 billion (£50 billion) of new lending to households and businesses. Although the banks cut their bonuses by 8 percent in 2010, the banks still paid out a total of $10.05 billion (£6.7 billion) to executives.

The committee also recommended cutting staff to address the anticipated strains in financial markets. For banks that have strong earnings, the committee advised them to build capital levels further.

Another impact of a second round of financial crisis is possible tighter credit in the coming months, the Bank of England said in its quarterly credit conditions survey it issued alongside the committee’s report.

The FPC also proposed more measures to improve the banks’ balance sheets, such as setting loan-to-value ratio caps for mortgage borrowers, margin requirements, maximum leverage ratios for banks, variable capital buffers, risk weightings on loans and additional transparent disclosure requirements.

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Washington, DC, United States (AHN) – The three-year investigation into whether mortgage giants Fannie Mae and Freddie Mac properly disclosed their exposure to risky subprime loans is about to end. Reports said that the regulators are near a settlement with the two companies.

A proposed settlement with the Securities and Exchange Commission reportedly includes no monetary penalties for the two companies. Also being considered is no admission of fraud.

Despite these terms, Fannie Mae and Freddie Mac’s possible agreement to a settlement are tacit admissions they had a major role in the housing market crash, observers said.

The observers added that it would also be an awkward moment for the two mortgage giants because the government overseer of Fannie and Freddie filed a lawsuit last week against 17 big financial companies for luring the two to purchase troubled loans. The charges are similar to the accusations that the SEC made against Fannie and Freddie that the two companies misled investors.

The investigators are not keen on imposing a fine on the two mortgage giants because of their weak finances, with the government infusing more than $100 billion into the two companies since they came under government control in 2008.

Beginning Oct. 1, the two firms are scheduled to reduce the size of loans they buy from lenders, which would force future borrowers to enter into more expensive and difficult-to-get large loans.

The old limits of $417,000 for single-family residences were hiked in 2008 in some high-cost housing markets to boost the economy. The limits reached $729,750 in some areas, but by October the cap will go down to $625,500.

Other major lenders such as Bank of America, Wells Fargo and JPMorgan Chase have stopped accepting new applications to ensure that those in process would reach the Sept. 30 deadline.

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New York, NY, United States (AHN) – The Federal Housing Finance Agency (FHFA) is set to sue a dozen banks over risky mortgage-backed securities they sold and that lost value during the housing collapse, according to reports from the Wall Street Journal and the New York Times. The suit alleges the banks misrepresented the securities’ quality and stability.

The suits from the FHFA, which oversees mortgage buyers Freddie Mac and Fannie Mae, are expected to be filed within days.

Reports say the securities named in the suit are those sold and backed by risky and subprime loans, but classified as safe by rating agencies.

Banks said to be targeted include Bank of America, JP Morgan Chase, Deutsche Bank and Goldman Sachs.

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New York, NY, United States (AHN) – Attorneys general of the 50 states agreed on Tuesday to remove the New York attorney general from a lead role in bank foreclosure settlement talks.

Iowa Attorney General Tom Miller announced New York Attorney General Eric Schneiderman had been ousted from the executive committee because he appeared to be working to undermine the group’s efforts.

Miller did not directly tell Schneiderman of the decision, but Iowa Assistant Attorney General Patrick Madigan emailed the rest of the attorneys general about the move after lunch Tuesday.

Schneiderman’s removal will not prevent New York from supporting any deal that might emerge. The Big Apple’s absence from the talks, though, may reduce the size of settlements with major American banks since the state is one of the worst hit by the foreclosure crisis and where the headquarters of most of the financial institutions involved are located.

The ongoing discussions were generated by numerous complaints from Americans over widespread mortgage servicing problems, ranging from poor customer service to use of faulty documents to seize homes.

Miller claimed that Schneiderman did not want a settlement with the banks. Several other attorneys general are also against any settlement that would protect the banks from state investigation and prevent them from continuing with their own probes.

The executive committee is composed of 13 attorneys general and two state banking regulators. It has a smaller committee that negotiates directly with Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial.

Schneiderman’s spokesman said that the New York attorney general is committed to a settlement that would provide relief for homeowners and allow the housing market to rise again. Despite the recent developments, Schneiderman said he will work with state and federal officials to reach those objectives.

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New York, NY, United States (AHN) – More American homeowners are reducing the terms of their mortgages because of low interest rates and a desire to reduce debts. According to Freddie Mac, 34 percent of refinancers changed to 20- or 15-year loans. It is the highest level in switches in seven years.

Similarly, online mortgage broker Lending Tree reported requests for 15-year mortgages are up 30 percent compared to 12 months ago.

The shift to shorter-term loans came despite the average rate for 30-year, fixed-rate mortgage at 4.32 percent last week, which is almost a record low.

Changing to shorter-term loan is a better alternative than investing money in the volatile stock market, savings accounts or Treasury securities, while cutting terms of mortgages save the homeowner hundreds or thousands of dollars in interest cost, industry experts said.

To qualify for refinancing, borrowers must have a credit score of 720 or higher at least 20 percent in home equity, but only about 46 percent of homeowners with a mortgage have equity of 20 percent of less in their homes.

Washington is expected to retain playing a major role in the U.S. mortgage market. According to reports, U.S. President Barack Obama asked advisers to develop a proposal that would extend federal loan subsidy for most homebuyers.

Previously, senior economic and housing advisers of the president favored preserving Fannie Mae and Freddie Mac, but under different names and with new constraints.

A White House spokesman said that all three main options in the white paper on reforming the country’s housing finance system are still under active consideration and advisers are still making deeper analysis of how each option could potentially be implemented.

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London, England, United Kingdom (AHN) – The Bank of England will likely keep its record-low interest rate of 0.5 percent because of the weak British economy. The central bank is expected to retain for the 29th straight month the benchmark lending rate when its Monetary Police Committee meets on Thursday.

Because of consumers cutting down on spending and austerity measures initiated by the coalition government, the Office for Budget Responsibility has downgraded three times its growth forecast for the country, now at only 1.7 percent.

Observers said that an increase in the key lending rate would take at least another year, which would be good for borrowers with fixed mortgage rates but bad for savers.

However, there are speculations that the MPC may approve a second round of quantitative easing to help stimulate the British economy.

Shadow Treasury Minister David Hanson said that the OBR’s forecast reduction should make Chancellor George Osborne realize that the tax increases and spending cuts were responsible for the slowdown of Britain’s recovery.

Hanson said the OBR’s 1.7 percent forecast appears to be unrealistic because that would require that Britain register growth rates of 1 percent in the second and third quarters of this year.

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Washington, DC, United States (AHN) – Republicans in Congress Thursday took aim at the Obama administration’s plan for a new Consumer Financial Protection Bureau scheduled to begin operating next week.

A hearing intended to question the architect of the agency about how it would operate turned into a shouting match that caused a half-hour delay in her testimony.

Democrats on the House Oversight and Government Reform Committee said they should be investigating aggressive bank foreclosures of subprime mortgages instead of subjecting Elizabeth Warren, a White House adviser, to another round of hostile questioning.

The Consumer Financial Protection Bureau is a federal agency being created to protect consumers from financial institutions that could take advantage of them.

The agency enforces regulations against financial institutions to avoid risky loans and investments for their customers. The agency also seeks to simplify the lending process for consumers.

“We are opposed to complicated forms and fine print,” Warren said in her opening remarks to the House Oversight and Government Reform Committee Thursday.

Warren, a Harvard professor, was assigned by President Barack Obama to organize the agency. He has not nominated her to head the agency in apparent recognition she would be unlikely to win approval from the Republican-controlled Congress.

The Consumer Financial Protection Bureau is an outgrowth of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Barack Obama signed into law on July 21, 2010.

The Act revamped financial industry regulation by consolidating regulatory agencies, requiring greater transparency from lending institutions and setting uniform standards for investment products.

The law was most controversial with Republicans, who said it exerts too much government control over the free enterprise that has allowed the financial industry to prosper.

Their antagonism over the Obama administration’s regulatory reforms was obvious during the hearing Thursday.

The hearing was called by Darrell Issa (R-CA), chairman of the House Oversight and Government Reform Committee.

“The American people have a right to know how the bureau will advance and enforce its regulatory assignment,” Issa said.

Elijah E. Cummings (D-MD) suggested the committee subpoena mortgage companies accused of predatory lending instead of questioning Warren. The suggestion prompted heated exchanges.

While John F. Tierney (D-MA) tried to make a point about proper procedures for the hearing, he turned to Issa and said, “What part of the English language don’t you understand?”

Issa called a five-minute break to settle disputes before Warren testified.

Even as Warren was being sworn in, Stephen F. Lynch (D-MA) tried to get Issa’s attention but the committee chairman ignored him.

Mild antagonism continued during the questioning of Warren when Rep. Jason Chaffetz (R-UT) asked for proof the Consumer Financial Protection Bureau would be ready to begin operating effectively by next week.

“We’re looking for the transparency in how you’re going to do it,” Chaffetz said.

He seemed unsatisfied with Warren’s response that the relevant information was posted on the agency’s Web site at usaspending.gov.

“No one’s hiding anything,” she said.

Chaffetz also asked how the agency would measure its progress in protecting consumers.

“We’re in the process of developing our performance metrics,” Warren said.

Chaffetz said, “You’re telling me this is going to be ready by next week?”

Republicans expressed concern the agency would ban some investment products, such as payday loans or put caps on interest rates.

They also asked whether the agency would extend its regulatory authority to auto loans and insurance policies.

Warren said, “We don’t have any present plans” to ban financial products.

She also said the agency would have “limited” power to control financial institutions and their services.

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Washington, D.C., United States (AHN) – The U.S. Department of Housing and Urban Development has made available a $1-billion lifeline to American homeowners who have problems with their mortgage payments.

The fund, launched in June, is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its aim is to help homeowners who face foreclosure because they lost their jobs, suffered income reduction, had an economic reversal or a medical condition which make it difficult for them to pay their monthly dues.

The emergency interest-free loan covers a portion of their monthly mortgage up to 24 months or a maximum of $50,000.

According to HUD Secretary Shaun Donovan, the emergency loan program covers 27 states and Puerto Rico. He estimated the program would assist about 30,000 distressed borrowers through an average loan of $35,000.

If recipients of the loan stay in their homes and be current on their payments, the interest-free loan would be written off.

The 30,000 homeowners expected to be helped by the program, however, is only a fraction of the estimated 1.8 million homeowners battling foreclosure. With the HUD expected to be deluged with applications, the department would likely spend the entire fund by the end of Washington’s fiscal year on Sept. 30.

Applicants have until July 22 to submit complete applications. If there are more applicants than what the fund could accommodate, the HUD would use a lottery system to determine beneficiaries of the loan.

There are five additional states that have slightly different rules because they started accepting emergency loan applications earlier under similar programs run by the states. One of them, Maryland, committed $4.2 million to 121 troubled homeowners. Aside from that amount, the state was allocated another $40 million by the HUD.

Another state is Virginia, which has a separate fund aimed to assist 1,223 homeowners. Virginia got another $46.6 million from HUD.

The $1-billion fund complements the Hardest Hit Fund, which made available a larger $7.6-billion fund to troubled homeowners in 18 states and the District of Columbia – which are considered the states hardest hit by the housing crisis.

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