The standard mortgage in Canada isn’t the 30-year fixed, as it is in the U.S., but a five-year mortgage amortized over 25 years. That means the loan balance has to be refinanced at the end of five years, exposing the borrower to any increase in rates that has occurred in the interim. Prepayment penalties for borrowers hoping to exploit a decline in rates, on the other hand, are very steep.

This looks as if it’s a clear win for banks, which are minimally exposed to increased rates and protected from prepayments. But Canadian mortgages are also portable — if you move before the five-year term is up you can apply your old mortgage to your new home. (If it’s a more expensive home, you take out a new loan for the excess.) That restores some of the balance in the borrower’s favor.

More important, observed Canadian economists Arthur Donner and Douglas Peters in a 2012 report for the Pew Charitable Trusts, the short term of Canadian mortgages allowed them to be funded from local short-term bank deposits at retail bank branches. The mortgage-lending system in Canada to this day resembles the American banking system up to the 1970s, when deregulation took hold and placed fancy, risky and careless lending at the center of the business model. (By the way, mortgage interest isn’t tax-deductible in Canada, so there’s no incentive to over-borrow.)

That may be the single most important factor distinguishing the U.S. and Canadian systems. Canadian banks haven’t had a free ride in regulation like their American cousins. Mortgage terms are very closely supervised, as are the safety and soundness of lending banks. The Canadian system requires, and incentivizes, banks not to sell their loans but keep them on their balance sheets. That factor alone discouraged Canadian banks from offering the kind of wild, who-gives-a-damn mortgage structures that infected the U.S. It also prevented the erosion of underwriting standards seen here.

Canadian banks didn’t have access to the private-label securitization that created that welter of toxic mortgage securities in the U.S., but they didn’t need it. Securitization reached 40% of the market in the U.S. by 2007. In Canada, according to David Min of the Center for American Progress, it never exceeded 3%.

The idea that the U.S. government meddles in the mortgage market more than those free-market paragons in Canada is dead wrong. The truth is just the opposite.

Yes, the U.S. backs the conventional 30-year fixed loan through Fannie Mae and Freddie Mac, its government sponsored home loan firms. But the government-owned Canada Mortgage and Housing Corp, has an even greater influence over that country’s market. It accounts for some 70% of all mortgage insurance, which is required on all loans covering less than 80% of the home value and guarantees the entire mortgage.

http://articles.latimes.com/2014/jan/16/business/la-fi-mh-canada-20140116

The Canadian regulatory system simply didn’t allow the development of exotic mortgages designed to create loans for sale that had to be dressed up by fraudulent appraisals and flagrantly bogus credit ratings.

Put all these factors together — tighter regulation, little securitization, less borrowing, etc. — and you come close to an explanation for the different experience with delinquencies and defaults in the two countries.  In the U.S., defaults peaked at about 5% of all mortgages, and exceeded 20% for those deregulated subprime loans. In Canada, defaults soared in 2008 and after, just as they did in the U.S. But they topped out at about .45% of all mortgages.