How law can make us pay

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(DALE CUMMINGS / WINNIPEG FREE PRESS)

Canadians are more prudent borrowers than our American neighbours, a recent Canada Mortgage and Housing Corp. publication seems to suggest. The U.S.'s rate of residential mortgage arrears was more than eight times higher than Canada's in the second quarter of 2012, the last quarter for which stats are available, the federal agency's Canadian Housing Observer reports. During the quarter, the Canadian rate of mortgage arrears was 0.36 per cent. The U.S. arrears rate was 3.04 per cent.

But it's not national borrowing habits, or the respective states of the Canadian and American economies, or even the escalating-interest-rate loans once the vogue stateside that solely account for the stunning disparity in rates of mortgage default.

Chalk up at least some of the huge gap to contrasting Canadian and U.S. mortgage-lending laws. U.S. and Canadian lenders have different legal remedies against borrowers who miss residential mortgage payments. On balance, Canadians are governed by a much tougher mortgage-lending regime. And that's reflected in CMHC's comparative rates for our two countries.

Almost all Canadian residential mortgages are what's known as full-recourse loans. This means a defaulting borrower remains responsible for any unpaid balance of the mortgage debt, even where the lender takes over the home, boots out the homeowners and sells it to a new buyer on the open market. Though the house that secured the mortgage may be long gone, borrower liability for the debt remains if the lender doesn't recoup all it is owed on the mortgage sale.

Thus when a Canadian bank or credit union sells a house in mortgage default, and the sale proceeds don't pay off the balance of the mortgage debt, including arrears, interest and penalties, it often pursues the borrowers for the remaining debt. The financial institution can sue, get a judgment and collect the balance of money owed via garnishment of wages or bank accounts or seizure and sale of vehicles, boats, equipment or any chattels of significant value. In Canada, there's no incentive to become a delinquent borrower and simply let arrears accrue, because your other assets can be tapped by a lender.

Defaulting U.S. residential borrowers, on the other hand -- though there's some variation state to state -- face no such pursuit by mortgage lenders.

American mortgages are what lawyers and bankers call non-recourse loans. Unlike Canadians, American borrowers aren't personally liable for their mortgage debt, and can't be sued for any unpaid balance of the loan. And once an American lender forecloses, its claim against the borrowers for any remaining balance is legally extinguished. This sometimes enables homeowners to let a mortgage fall into arrears, allow the arrears to pile up, and then just walk away from the home. The lender's only legal remedy is to foreclose, assume ownership of the house, and thereafter try to sell it or rent it out.

Canadians aren't in mortgage arrears in far lesser numbers than Americans by dint of any yawning difference in national character. If we're more responsible borrowers, it's because, at least in part, our mortgage laws compel us to be.

Republished from the Winnipeg Free Press print edition December 21, 2012 A12