Yesterday a number of our readers commented on an article in the Edmonton Journal: Mortgage Arrears Soar in Alberta; consumers live cheque to cheque. I thought it was worth a little further discussion today…
I found the author exaggerated the story. For one thing, I couldn’t find any mention of the report from the Canadian Bankers Association from any other author, so obviously no one thought this was big news. When I went to the Canadian Bankers Association web site the most recent article is all good news (Good news for Canadians: World economic forum again ranks Canada’s banks as the world’s soundest). In fact, when I searched the CBA web site for "mortgage arrears" I found one article with this quote:
Canadians are careful borrowers. In March 2010, just 0.44% of mortgages were in arrears. The rate of arrears in the US is more than ten times higher than in Canada.
The author of the article in question misquoted the national percentage at .42% and added this detail:
According to data as of June by the Canadian Bankers Association, there were a total of 500,429 mortgages in Alberta, through banks belonging to the association, and 3,707 of those, or 0.74 per cent, were considered to be in arrears of three or more months.
He further drew comparisons to the mortgage arrears in 2007, saying that arrears are "soaring." Talk about blowing things out of proportion! If you compare anything about today’s market (or pretty much anything other year) to 2007 it is going to look abysmal, it is simply not a fair comparison. In addition, saying that Alberta’s rates are "by far the highest in the country" is a bit much when you’re talking about a few 10th’s of a percentage point, imho.
The article goes on to talk about the debt load of Canadians. While I do agree our society is too addicted to credit, I also think his take on the situation was quite slanted. When asked "Would you be in financial difficulty if your pay cheque was delayed?" who wouldn’t answer yes? No one wants their pay cheque delayed and of course it’s going to cause concern.
That’s my two cents…
These are still historically VERY low levels and very manageable. The media is just looking for sensationalism where there is none, unfortunately.
Alberta arrears are at the highest levels in over 20 years.
Please explain how this is “historically VERY low levels”. Thanks.
Highest levels by a fraction of a percent, as Sara pointed out. Still well within what I’d call historical norms, and not anywhere near the extraordinary changes seen in the US. Gord’s right, the media is searching for a story where there isn’t one.
Here is mortgage arrear stats from the CBA.
http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf
This is where Mario Toneguzzi the Author got his info.
It’s actually pretty funny that when Mario Toneguzzi (the author of the above article) writes a story that isn’t 100% doom and gloom the bears jump all over him, calling him nothing but a shill for the real estate industry. Now that he has finally written a 100% doom and gloom story those same uber bears still aren’t happy. What the hell do you uber bears want? Complete and total destruction. LOL. Read the comments, it’s hilarious. There are a few bulls and realist posts,, but most are from uber doom and gloomers. Again it’s F&*#$ hilarious
Who said sensationalized news doesn’t sell, LOL.
Just thinking.
Why do people with negative outlooks have to be so vocal?
These levels seem pretty high compared with historical levels, the only month where I can see arrears rate in the past 20 years in this past January. The raw data is available here:
http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf
The posting argues that .74 isn’t signifigant because it represents tenths of percentage points. I’d imagine where actual defaults would effect the real estate market is in creating more inventory. So it’s worth noting that the edmonton metro area has about 400,000 dwellings in total (according to stats can) . Right now there are about 6500 MLS listings in the metro area, if arrears in Edmonton are equal to the .74% figure for Alberta that means 2960 houses are risking foreclosure which has the potential to really impact the supply of houses…which we know correlates with price. Now some of these houses may already be listed etc. I am just saying talking about it as fractions of percentages isn’t neccessarily valid as Edmonton’s entire MLS inventory could also be expressed in tenths of percents (1.6% of houses to be more precise). The more concerning part is we are at a 20 year high default rate with record low interest rates so it seems poised to increase as rates rise.
I just shows that interest rates have nothing to do with arrears, only economic activity, or lack there of, does. When economic activity drops, arrears rise, that’s a given.
This is typical increase just after a recession. I would bet the reason for the higher rate since previous recessions is the changes to assumable mortgages. ie not being assumable anymore.
Also arrears doesn’t mean foreclosure. And I would guess all these houses that are in arrears are already listed, unless Alberta also has an higher percentage of total idiots than the rest of Canada, which I doubt.
I think you hit on part of the reason. A great deal of distressed mortagors would have previously been able to get out of the situation by selling to an investor like myself who would have assumed the mortgage. Now that option is pretty much extinct.
Good point!
Glad you covered that point too Chris…
I am hearing anecdotes of lenders going after people who ditch on their mortgages in the US even in non-recourse situations. I’m not sure what success they’re having but I think they’re trying to establish some precedent or at least give people something to think about before walking away.
Where interest rates become relevant is if you are struggling to make mortgage payments now due to the economic conditions (i.e. unemploiyed, making less money) an increase in Mortgage rates could be the proverbial straw that breaks the camels back. It’s no secret there are a lot of overleveraged homeowners out there.
So you are correct the catalyst for an increased rate of arrears is economic conditions (i.e. no longer have the wages to support the payment) but higher interest rates (i.e. increasing that payment that a few were barely affording) could see that rate increase.
Canadian disposable income has been going down for quite some time, and that extra hundred dollars or couple of hundred that would accompany an increase in interest rate could impact the arrears rate. Remember 59% of Canadians say they live paycheque to paycheque
http://www.cbc.ca/consumer/story/2010/09/13/payroll-survey-canada.html
First: Fixed rate mortgages have been decreasing as of late, so I don’t see that being any cause for arrears.
Second: I would bet most people struggling to make mortgage payments have 5 year fix rate mortgages and high loan to value ratios. These same people probable jumped into the market when they thought that new high paying job was going to last for ever and it did’t. During this last little boom there was a lot of hiring and throwing money at people that should have never been. Now we have returned to a normal employment market and the dead wood or problem employees are being weeded out. That’s the boom/bust cycle. Good for everyone during the boom and only good for the qualified during the bust.
If these people can hold on for just a while longer the good time will return. In the businesses I deal with It’s already happening. The not so well qualified are returning and to big bucks again.
Another thing is the don’t just give low rate variables to anyone. The Banks only offer people with high equity or outstanding credit variable mortgages. And yes there are most likely is a few who gambled their credit rating and lost, but those few wouldn’t be enough to influence the market.
Thanks for digging a little deeper!
Great comments, and I agree completely. I feel bad for Mario, who has written some great balanced pieces on the industry.
I’d like to see what people think a ‘normal’ arrears rate would be. I expect you’d get the same answer as when asking what the ‘normal’ unemployment rate is (a blank look).
Re-Credit Addiction, I agree here too, but I am a little worried out more restrictive system will allow the personal borrowing to smoulder and fester, rather than letting enough people go crazy and necessitating real change. Just a thought.
I did make a mistake by hastily shouting out “historically very low” without checking my facts. Mea Culpa.
I was basing my assertion on data I had previously seen comparing Canadian arrears to US arrears, and the Canadian levels are substantially better than that in the US (granted we’re talking 30 day (US) vs. 90 (CDN) day arrears too).
I’ve heard numerous speakers on this topic and, while nobody likes to see arrears going up, the numbers were within reason given the recession and the number of jobs lost. There are, from time to time, also some “strategic defaults” which is what is driving up the number in the US, and I suspect some of the arrears here in Canada. There may be a number of people who purchased at the peak in 2007 with very little down who are now regretting that decision, or who purchased from a builder only to find out later that the value has evaporated.
As the fine economists at the AMBA conference in Red Deer told us the other day, “This is normal in a real estate cycle.”
And here’s the link I forgot to add:
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/04/mortgage-arrears-us-vs-canada.html
US to Canadian arrears rates are apples to oranges. An American homeowner can walk away from a mortgage without liability beyond losing his or her house. I’m sure if this were the case in Canada some opportunists would have ditched the house they purchased at the peak of the market to buy a similiar house more cheaply. Face it, if my house went down 40% in value (say I lived in Vegas or Phoniex) and I knew I couldn’t be held liable for the difference between the present market price and a much higher purchase price I may be very inclined to walk away.
Point of Order: In Alberta we have non-recourse mortgages like in the states. You could default and the banks can’t pursue your other assets. (Conventional mortgages only, check with a real lawyer for more info)
Well you are partially correct, I think a lwayer would tell you Alberta has less-recourse mortgages in contrast to the rest of Canada.
Let’s not forget a foreclosure will remain on your credit record for 6 years after it is settled so you can never just ‘walk away’ from it.
In the early 80s this happened where people had to walk away from their homes when the banks foreclosed on mortgages exceeding the worth of the house. They helped and encouraged people to do so as CMHC cover all the losses to the bank.
Also, an existing home will never be worth more than it is on the day it is built unless you add on or renovate. It is the land on which it sits that increases in value. To say we can never have a price crash is wishful thinking. It would be horrible but possible. Banks holding too many foreclosures will start dropping the prices to get rid of them as there is no risk to them until the price reaches 75% of the mortgage value, and they are not in the business of owning residential real estate and all the risks involved (i.e. fire, damage, flooding…)
Why is he partially right? We talk about Alberta arrears, don’t we?
The majority of Mortgages in Alberta are covered by the National Housing Act which allows lenders full recourse (the National Housing Act trumps Alberta legislation). Also if the home in question is an investment property (i.e. owned by a corporation versus an individual) it is also a full recourse mortgage.
Further even in the case of non-insured (“conventional”) mortgages held by individuals the first step a creditor is going to take is securing a Court order which will hold you liable for the difference between what you owe and market value of your home. You may be able to beat this in the courts, but you are assured of a lengthy court proceeding and the accompanying legal bill.
All these scenarios are in stark contrast to some US states where even high ratio mortgages are non recourse and the right for creditors to sue is greatly diminished. It should be noted that even in the US financing rules are in the hands of the individual state so not all States are non-recourse. Though almost all the states with extremely high default rates, such as California, are.
Thanks for the clarification. I have seen examples of Alberta properties being more difficult to take action on, but at a case-by-case level it’s all very subjective.
Sara, this might topic might make a good post on it’s own
You are absolutely right about this, but few people seem to know this.
“An American homeowner can walk away from a mortgage without liability beyond losing his or her house.” – Not true for all.
This is only true for few (5-6 states) in USA others are like here.
When RE can go 20% in a year then why it cannot go down 10% in a year? Let asset price are decided by free market but not when 90% debt is secured by govt.
Most of people in so much debt in North America they cannot think beyond Real Estate and credit card payment. 60% Canadians are just two paychecks away to lose everything.
Asset price never moves left and right but up/down. House price has to go down or up. ? Up is over.
It surprises me that defaults of 0.14% in June 2007 to 0.72% in June 2010 combined with almost record low interest rate periods have you and most of your readers unfazed. That is over a 500% increase. I would consider that soaring. Defaults were low in the US when things were always going up, there were always options when the house was worth more tomorrow than today.
What’s a normal default rate? There’s always going to be a small group of people who are stupid or end up in bad situations through no fault of their own, and I think we’re running way below that. Small numbers always create big percentages.
Normal? Is this small group of people going to go away? The scary trend is interest rates are lower than last 5 year average and defaults are higher. which way will default rates go, as interest rates continue to increase?
It does make sense that as house prices decline the arrears rate goes up. In 2007 the default rate was a fifth of what it is now because you could quickly sell your house and likely get more then you paid. Now houses linger on the market longer and some homeowners are buried (owe more then they can sell for) hence the higher rate.
So what’s normal is that as housing demand flattens people who could more easily liquidate thier homes are forced to keep them. To be clear we are not talking about a huge wave of potential defaults as .74% represents about 1 in every 120 houses that have missed 90 days of Mortgage payments. This is certainly not insignifigant as a continuation of this trend will create inventory…but isn’t a harbinger of a US style crash either.
Look folks, the whole “you can walk away from a house in the US” is a myth. Some states are recourse (i.e., similar to most of Canada) others are non-recourse. Some of the states (e.g., Florida) with the biggest problems have mortgage rules that are very similar to most of Canada.
As a new immigrant to Canda, one of the worst mistakes I ever made was to assume that Canada=Alberta. Idiosncratic states just like there are idiosyncratic provinces.
Anyway, I know that there was a time when Alberta was actually non-recourse. Anyone know if this is still true?
Oops..looks like Ron S. Beat me to the punch. That’s what I get for commenting before reading the entire thread.
I’m still curious as to what the Alberta-specific rules on default actually are….
Crap..I did it again…thanksn Andrew.
Jobs jobs jobs. It’s all about jobs – and a little bit about interest rates. I’m trying to track down my source but jobs data has a much bigger impact on defaults than interest rates do. If people have jobs they stay in their homes, typically, and can absorb different interest rate shocks. (Remember, a lot of people won’t be in for an interest rate adjustment for 2, 3 or even 5 years. Many of our clients who bought at the peak of the market in 2007 are paying 5.5%, give or take, so rates returning to those levels won’t impact them at all!).
The new mortgage rules have also made it much harder for someone to experience an interest rate payment shock because folks have had to qualify at posted rates if they took anything less than a 5 year term.
RBC published an interesting affordability study that may add some more perspective to this discussion:
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/09/rbc-housing-to-remain-affordable.html
Ahh – found my source:
http://research.cibcwm.com/interdept/download/wmi-1218.pdf
(from Dec 2009 but still relevant)
Three key quotes:
- “Mortgage arrears rates are highly correlated with the unemployment rate.”
- Mortgage arrears have “little or no correlation with changes in interest rates.”
- “Interest rates rise when the economy recovers…the benefits to employment and incomes of an improving economy easily offset the sting of higher interest rates on debt service costs.”
When I was covering mortgage insurance companies (late 70s, early 80s) normal default rates were 0.2 % + or -. Analyst were assured the prevailing 0.3-0.4% default rates were abnormally high. The real estate market crash followed. History may not repeat as the banks had to sell to make an insurance claim. That has changed and although liberal, current lending practices are conservative compared to $99 down. I bought a condo on Chargex. However, 0.74% is well above normal and even the 0.4% level is high enough that interest rates are unlikely to continue rising.
FYI
Record consumer debt has been a concern since I was an analyst 30 years ago.
A little Alberta mortgage policy history.
During the recession of the early 80′s, mortgages where assumable and you could dollar deal your house (sell for $1.00 and have someone assume your mortgage, the buyer didn’t need to qualify). This even worked with CMHC insured mortgages. I know I bought 6 properties, 5 for $1.00 and one for $2800.00. Had to bring the mortgages and tax bill into good standing so those 6 properties really didn’t cost me just a $1.00 each, they each cost a little more. The name $1.00 deal came from the dollar required to make the contract legal.
This is why in early 80′s you will not see very high foreclosures or arrears rates. Back then people could just sell for $1.00 and walk away. The buyer was now responsible for it. The seller would just wash their hands of it and that was the end of story, thus no arrears or foreclosure showed up in the stats.
Not long after this,CMHC changed the rules when assuming CMHC insured mortgages. The original person who took out the CMHC mortgage could be held responsible for the mortgage default, no matter how may times it changed hands. This rule only applied for as long as it was insured through CMHC. Once the mortgage was below CMHC limits of 75% L/V ratio, it could be $1.00 dealt. But then who would be stupid enough to $1.00 deal a 25% equity property. Banks never needed to put this clause into their mortgage contracts because mortgages with less than 25% equity where insured by CMHC and the CHMC policy applied. Plus with 25% equity no one would need to $1.00 deal anyway. During this time all mortgages where still assumable.
In the 90′s there was another recession in Canada but not in Alberta. Things got tight here but there was no recession. Not having $1.00 deals meant arrears went up higher even though the economy was in far better shape than it was during the 80′s recession. Again the reason arrears where higher than the 80′s was there was now just one less way of getting out a mortgage. Mortgages at this time where still assumable though.
Today. There is no more $1.00 dealing, hardly any assumable mortgages and banks have rewritten term mortgage contracts to make it very expensive to break. If you want to get out of a term mortgage with your kahonies still intact you will need a good mortgage broker or real estate paralegal to decipher your contract and hopefully find a loop hole. They do exist.
Due to banks being public companies and more worried about shareholder value than customer loyalty these days. They have become very strict on enforcing these contracts. To the banks you are just the next quarterly result. The more they can bleed from you the better.
So this is why just looking at historical numbers doesn’t tell the whole story. If you only look at the numbers it would look like this current situation is the worst, when really it’s not. The rules have change, that’s all. They now favor the lender and big time. They have made it almost impossible to get out of a term mortgage contract these days. Well without extremely harsh penalties.
So again a brief summary:
In the 80′s it was easy; sell for a $1.00 wash your hands.
In the 90′s, a little harder; just have someone assume your mortgage and maybe pay you a little.
Now, extremely hard; you either have to pay and pay a kings ransom to get out or find someone that can qualify and buy your property at a reasonable price. And at this time it’s not the best time for either option.
Lucky the economy is starting to pick up steam again, especially here in Alberta. This will help a lot of those in arrears and hopefully they will not end up in foreclosure.
Ahh… the good old foreclosure process. It’s actually very time consuming and expensive to foreclose on someone. I know I just foreclosed on someone last year, not cheap and definitely not easy. Banks also know it cost a whole lot of time and money to foreclose on someone, even someone that is CMHC insured. If you didn’t know, CMHC does not cover foreclosure costs, only mortgage losses. Sara and Sheldon already did a few very informative post on the foreclosure process a year or so ago.
PS: Never take a fixed term mortgage without going through the contract with a fine tooth comb. You may have to give up your first born to get out of it, if your not careful.
Great points. DaBull, I shared your comments on my own blog (http://www.chrisdavies.ca/?p=1958) , and I’ll probably come back to the topic in the future. Drop me a line if you’d like to talk about the topic more.
0.74% is less than 1%, right? Is is proper to call it SOARING?
DaBull it was AHMC in the 80′s and there were lot’s of foreclosures. Yes there were dollar deals but only when the box was worth the mortgage on it.
I walked away from a townhouse in Millwoods, paid $63,000 for it at the peak (young and stupid) assuming a $58,000 mortgage. The price crashed down into the low $20,000 range.
I went and saw a lawyer and asked him what my options were, he pulled a piece of paper out of his drawer and said here… follow this. I had 6 months that I could still live there and not make a payment before I had to leave, he said close your curtains and don’t answer the door or phone. I saved up some money not making my payments for 6 months as the prices crashed further and bought a house for $73,000 assuming a $65,000 mortgage. That house had fallen from the $120,000 range. It was easy and slick and the best move I ever made.
Yes there were lots of foreclosures but not as many as there could have been if dollar dealing was not allowed.
To this day you still have 6 to 12 months you can live for free in the foreclosure process, if you so choose.
You must have bought in the spring of 1982 to be dealing with AMHC. CMHC took over a little later. I’m sure all the places I bought for $1.00 , if insured, where originally insured through CMHC not AMHC. Anyway, even though AMHC department does not exist anymore there are still regulations in place in Alberta and they have recently been updated to reflect the changes at CMHC. ie 95% L/V ratio.
http://www.qp.alberta.ca/574.cfm?page=1985_233.cfm&leg_type=Regs&isbncln=9780779745234
See how the rules have changed, there is no easy way out anymore. You let one place go into foreclosure and then assumed a new mortgage a couple of years later, simple and easy. Good luck try that today. Your stuck with what you have, no easy way out. Foreclosure or bankruptcy really the only option left. The Banks may actually be shooting themselves in the foot, only time will tell.
I remember the dollar dealers never making a mortgage payment. Just renting and collecting until that fizzed. lol