As Finance Minister Flaherty announced, the mortgage rules in Canada are changing on March 18, 2011. On this date the CMHC will no longer insure 35 year mortgages and will also cut the borrowing against the equity of homes from 90% down to 80%. The main reason why the goverment in implementing these guidelines is to curb household debt, which it perceives to be on the rise. If these rules are not implemented and home prices begin to fall, the so called "Underwater Mortgages" will surely rise and could undermine the Canadian economy as it did in the US. Below i quote and article from the Globe and Mail explaining what exactly happened in the US and why our government is preventing it from happening here.
Underwater mortgages rise as U.S. home prices fall
CoreLogic said Tuesday that about 11.1 million households, or 23.1 per cent of all mortgaged homes, were underwater in the October-December quarter. That's up from 22.5 per cent, or 10.8 million households, in the July-September quarter.
The number of underwater mortgages had fallen in the previous three quarters. But that was mostly because more homes had fallen into foreclosure.
Underwater mortgages typically rise when home prices fall. Home prices in December hit their lowest point since the housing bust in 11 of 20 major U.S. metro areas. In a healthy housing market, about 5 per cent of homeowners are underwater.
About 2.4 million people have only 5 per cent equity or less in their homes, putting them near the tipping point if prices in their area fall.
Roughly two-thirds of homeowners in Nevada with a mortgage had negative home equity, the worst in the country. Arizona, Florida, Michigan and California were next, with nearly 50 per cent of homeowners with mortgages in those states underwater.
Oklahoma had the smallest percentage of underwater homeowners in the October-December quarter, at 5.8 per cent. Only nine states recorded percentages less than 10 per cent.
When a mortgage is underwater, the homeowner often can't qualify for mortgage refinancing and has little recourse but to continue making payments in hopes the property eventually regains its value.
The slide in home prices began stabilizing last year. But prices are expected to continue falling in many markets due to still-high levels of foreclosure and unemployment.
That means homes purchased at the height of the real estate boom are unlikely to recover lost value for years.
Underwater mortgages also dampen home sales. Homeowners who might otherwise sell their home refuse to take a loss or can't get the bank to agree to a short sale — when a lender lets a borrower sell their property for less than the amount owed on the mortgage.
Home sales have been weaker in areas where there are a large number of homeowners with negative equity.
The total amount of negative equity increased to $751-billion nationwide, up from $744-billion in the previous quarter.