Canada’s Expected Mortgage Credit Losses Reaches A Record $1.4 Billion

Despite Canada’s hot real estate market, lenders expect a record amount in losses. Statistics Canada (Stat Can) data shows expected credit losses (ECL) jumped in Q3 2020. ECLs are now at a record high according to the agency, but are a relatively small percent of total mortgage debt. It’s a little confusing, but expected losses are soaring. Lenders are just creating new mortgage debt so quickly, the rise barely registers.

Expected Credit Losses (ECL)

The expected credit losses (ECL) are the amount companies expect to lose. The estimate is based on risk standards used to determine how much cash needs to be set aside to cover the bad debt. Putting aside too little cash can mean a threat to the solvency of a company in the event of a sudden risk event. Set aside too much cash, and capital that could be invested becomes tied up dragging on profits. This has led companies like banks to assess risk as accurately as possible, without a public bias. Today we’ll be looking at ECLs related to mortgage risk. 

Canadian Mortgage Losses Rise Almost 86%

Mortgage related ECLs soared in the recent data, reaching levels not seen before. ECLs came in at $1.482 billion in Q3 2020, up 22.99% from the previous quarter. Compared to a year before, this represents an 85.95% increase. It works out to 0.09% of mortgage credit that’s earmarked for losses. This is up almost double from the rate just a year before. Is that bad? It depends who’s looking at it. 

Canadian Mortgage Expected Credit Losses

The estimated quarterly dollar amount of expected credit losses related to mortgage debt, in billions of dollars.
Source: Stat Can, Better Dwelling.

From the perspective of  banks and the government, this is a relatively small amount. Even at double the rate of losses, banks can easily absorb 0.09% of mortgage debt disappearing. It’s still a big climb in losses, but fast growing mortgage debt makes the issue much smaller. Sure, $1.482 million in losses means a lot more people are going to default. However, $40.79 billion in new purchase mortgages came in over the same quarter. The new flow of capital far exceeds the potential losses, which eases the pain. At least for the lenders.

Canadian Mortgage Rate of Losses

The estimated quarterly ratio of expected credit losses related to mortgages, as a percent of total outstanding mortgage credit.
Source: Stat Can, Better Dwelling.

There’s few things normal about this market, but here’s another one for the pile. The dollar amount of losses related to mortgage lending is soaring, but so is new lending. In a normal situation, those two don’t occur at the same time. In this situation, real estate markets are booming at the same time as real estate losses. Bad if you’re a person, but who cares if you’re a bank.

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  • WE 3 years ago

    Average house is what, $750,000 across Canada? That’s only ~1,860 homes. Nothing burger.

    • James Wilson 3 years ago

      That’s a lot, actually.

    • Jason Chau 3 years ago

      That’s not how that works.

    • Jon Silver 3 years ago

      Wouldn’t loss be the bank’s loss on the remaining mortgage amount minus what they can sell the property for?

      Probably still a nothing burger. They probably err on the side of caution due to the the abnormal market conditions; less profits is better than risking insolvency.

      • Doomcouver 3 years ago

        Taken in isolation it is insignificant, but when looking for possible early-warning signs of instability in Canada’s mortgage market, ECL’s are a good place to look. Whether or not this is just a blip, or symptomatic of a much larger problem coming down the pipe is up for debate.

  • Peter Drunken 3 years ago

    What happens to all of these homes where people default? I never see them on the market.

    • Doomcouver 3 years ago

      You probably do, I just don’t think it’s obvious when it’s a forced sale by the bank.

  • Jason 3 years ago

    When lending becomes risky because people can’t pay their mortgages or the economy is doing bad the banks will incorporate a credit crunch. Then the real fun begins.

  • Doomcouver 3 years ago

    I’d agree these numbers aren’t alarming yet, it’s more a problem if this is an early-indicator of acceleration in the mortgage default rate. Q3 2020 most mortgage holders could have still been on deferral as well, so much more dramatic mortgage default rates could be rolling in soon once the bank realizes how many people will actually be defaulting.

  • FormerUW 3 years ago

    Didn’t all the big banks reduce their loan loss provisions during their Q4 results?
    Banks are reporting Q1 results next week. Am I getting this wrong?

  • Repo Man 3 years ago

    This is bad and only getting worse. Keep in mind it will be tougher for shaky borrowers to stay out of the bank and lenders scrutiny as the spring market or non market unfolds

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