'Thrifts' keep fit in Canada

Canada's thrift industry superficially resembles its counterpart in the United States. The institutions invest heavily in home mortgages. They accept passbook-type accounts and term certificates of various sorts.

But Canada's thrifts, called trust companies and mortgage loan companies, are in great financial shape. By contrast, most US savings-and-loan associations or mutual savings banks are in grim condition.

In fact, Richard W. Kopcke, an economist with the Federal Reserve Bank of Boston, calculates that some two-thirds of American thrifts will be technically insolvent by the end of this decade. Their liabilities will exceed their assets. That's because they hold so many old mortgages paying interest rates well below current interest rates and those expected in the years ahead.

How did Canadian thrifts avoid this trap?

In the late 1960s Canadian thrifts switched from fixed-rate mortgages to more flexible debt instruments. The typical Canadian mortgage is for 20 to 30 years, but the interest rate is repriced every five years, explains Robert W. Eisenmenger, the Fed branch's director of research. So, in a period of rising interest rates and inflation, the thrift is not left holding the bag of a devalued mortgage. The householder pays more. But usually his income will have risen along with inflation in those five years.

Moreover, the Canadian institutions attempt rather successfully to match the maturity of their liabilities to the maturity of their assets. They have concentrated on selling five-year term deposits - matching the five-year repricing formula for their mortgages.

In more recent years they have been accepting one-year deposits, and mortgages have been structured similarly.

As a result, the book net worth of the assets of Canadian thrifts is very close to their market value, notes Mr. Eisenmenger, who recently did a study of the Canadian situation. In the US, the market value of thrift assets is far below their book value.

What happened is that Canadian regulatory bodies forced their thrifts to balance the terms of their assets and liabilities - a principle long considered sacred for financial institutions.

In addition, neither the federal government nor any provincial government has imposed any usury ceiling on mortgages. Nor, since 1967, has Canada imposed any interest rate ceilings on deposits. Canadian thrifts can pay market interest rates on deposits. Thus Canada has no money market mutual funds. The small saver has not been robbed, as in the US, by an interest rate ceiling.

In the US, Congress refused in 1969 and for years afterward to go along with the request of federal savings-and-loan associations to have the power to make mortgages with adjustable interest rates. Congressmen put on their ''consumer-protection hats,'' maintaining that more flexible mortages would hurt the housing industry and reduce the proportion of the population able to buy homes.

Commented Eisenmenger: ''Now these institutions are being beaten over the head for their lack of foresight.''

It may cost the government literally tens of billions of dollars to prevent the thrift industry from going under. Canada has no such problem, with its sounder house-financing policy.

Canada also has a considerably tougher tax policy toward housing than the United States. Canadians cannot deduct their mortgage interest and property taxes from their federal taxes. Those who have never owned a house can set aside tax-free in a special savings account up to $1,000 a year, to a maximum of $10, 000 over 20 years - money that must be used as a down payment on a house. This is a relatively small subsidy for housing which also encourages saving.

The effect of this stronger free-market philosophy in housing is that Canadians use housing more efficiently. They tend to have smaller homes. Instead of hanging on to a large home when the children are gone, because of a cheap mortgage, they are likely to sell. Down payments are larger, usually above 20 or 30 percent; the proportion financed is smaller.

Canadians, said Mr. Eisenmenger, have had ''a more sensible approach.'' The US could learn something from their example.

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