TORONTO (AP) – Canada’s central bank warned Thursday that many Canadians might lose their homes if the global financial market turmoil worsens.

The Bank of Canada said the nation could experience a substantial increase in default rates on household debt as household balance sheets feel the pressure from weak equity markets, softening house prices, slowing income growth and record-high debt-to-income ratios.

“If the risk of a prolonged global downturn materializes, then there will be a stronger moderation in house prices, which could lead to a more significant increase in default rates on mortgages,” the central bank said in its December Financial Systems Review.

Canada has staved off a foreclosure crisis, analysts say, due stricter lending practices. Canadian banks and financial institutions only lend up to 80 percent of the purchase value of a home or condominum. That means the home buyer would have to place a deposit of 20 percent, reducing the risks of default. Canada also has mandatory insurance on risky mortgages.

But the central bank warned Thursday that if the economic downturn becomes more severe with incomes dropping and unemployment rising, the number of Canadian households that are financially stretched and vulnerable could increase sharply.

“Although the overall financial situation of the Canadian household sector still appears reasonably healthy, indicators of financial stress, such as arrears on loans and bankruptcies, have picked up modestly, albeit from historically low levels,” said the bank’s governor Mark Carney and his five deputies.

The central bank noted that house prices have been falling since the middle of the year and it expects further declines in the coming year.

“Household indebtedness could act as a channel of contagion spreading losses through the Canadian financial system and causing a further tightening of credit conditions,” said the report.

The Bank of Canada has injected more than 40 billion Canadian dollars ($33 billion) into the financial system, and the government has also taken steps to limit recessionary forces.

Last month, Finance Minister Jim Flaherty announced that Canada will buy CA$50 billion ($41 billion) in mortgages from the country’s banks in an effort to maintain the availability of credit. The move followed similar action in October to purchase up to CA$25 billion ($20 billion) in mortgages.

Earlier this week, the Bank also cut its key interest rate by three quarters of a percentage point to 1.50 percent, its lowest level in 50 years, saying the country is entering a recession.

While the Bank of Canada said these steps will likely lead to the gradual improvement of markets and credit conditions in Canada, the the timing of an economic turnaround is uncertain and Canadians could face a deep and prolonged recession, slow income growth and severe trouble for those already carrying heavy debt loads.

AP-ES-12-11-08 1412EST


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