Canada’s banks may have to take on a new side hustle—involuntary real estate liquidator. Preliminary Q1 2026 OSFI filings reveal explosive growth in uninsured mortgage net impairment amounts, funds that lenders recover by seizing and selling homes. This figure has surged 150% just as real estate values have plunged, leaving questions regarding how much can be recovered. Especially when it comes to the recent flood of mortgages on pre-construction homes, secured with stale blanket appraisals.
Net Impaired Mortgage Debt: How Banks Plan To Recover Losses
The net impaired amount is the total losses banks face after credit provisions. It’s obtained by taking the value of Stage 3 mortgage debt outstanding and subtracting allowances for expected credit losses. Don’t worry, we’ll break it down for those who left their bankster-to-reality dictionary at home.
Stage 3 mortgage credit is debt that they believe the borrower is unlikely to repay. Generally speaking, this is mortgage debt at least 90 days past due (DPD), though it can be sooner or later if the lender can justify why.
Stage 3 allowances for credit losses are the cash the bank has set aside to cover any potential losses. In this case, residential mortgages are attached to a house that the lender can sell to recover a good chunk of its cash.
Therefore, net impairment is the gap between the mortgage value at risk and cash set aside to cover expected losses. Or to be blunt, it’s funds lenders plan to recover from the sale of the home. Regular readers spot why this is suddenly relevant, but let’s circle back after we discuss the mind-boggling growth in this segment.
Betting The House: Canadian Banks Target $7.2B On Mortgage Delinquency Recovery
Canadian uninsured mortgage net impairment: Funds that banks plan to recover by seizing and selling homes with severely delinquent mortgages.
Source: Office of the Superintendent of Financial Institutions (OSFI); Bank filings; Better Dwelling.
The amount banks are depending on recovering via home sales has seen an unprecedented spike. Preliminary OSFI filing data shows $7.2 billion in uninsured mortgage net impairment for Q1 2026, 14.9% higher than last year. The official amount won’t be finalized for a few days, but it’s easy to appreciate the rapid escalation here.
The volume has surged 150% since 2022, while home prices have shed roughly 21% of their value over that period. And that’s the problem to pay attention to—the recoverable value.
The banks don’t disclose which parties are struggling, but post-real estate boom, the growth is historically concentrated in the high-credit, investor segment. While the media is exceptional at finding a perfect family that fell behind on its mortgage, quantitative data is strongly in conflict with the anecdotal evidence. In reality, long-time owners have significant equity built up over time, and first-time home buyers are largely priced out of speculative bubbles.
This problem isn’t ready to fizzle out. It’s forecast to amplify over the next two years. Big Six banks now dominate the investor mortgage space, increasingly using stale blanket appraisals to validate pre-construction contract prices from years ago. With home prices having already shed 21% of their value, it’s unclear how much of that $7.2 billion in “recoverable” debt is backed by real-world equity. This isn’t just speculation, but it’s an issue creating tension between Canada’s bank regulator and the banks behind closed doors.
How do they even accurately assess this problem with blanket appraisals and low sales volume? I say this as someone with formal training in appraisals.
Does the CMHC allow buying insurance on uninsured mortgages? If so, that might be a key factor in the coming months.
Yes, the IMF and Bank for International Settlements have been warning about the moral hazard of portfolio insurance for more than a decade now…
“Portfolio or “bulk” insurance is the most common form of low ratio mortgage insurance. Lenders pool together mortgages that are uninsured at origination and purchase default insurance on all the loans in the pool. The pools are then converted into tradeable financial assets through Canada Mortgage and Housing Corporation (CMHC) securitization programs and purchased by investors. Insuring and selling off pools of mortgages provides lenders a stable source of funding through which they can continue lending, thereby increasing the available amount of mortgage funding in the market.”
https://gazette.gc.ca/rp-pr/p2/2021/2021-01-06/html/sor-dors296-eng.html
Otherwise known as qualitative easing or direct subsidies for bank lending. In 2009, what Carney and Harper did was exactly that. They bought up impaired loans from banks, which then allowed banks to keep on creating more new money. The BoC could keep bad debt on their balance sheet without concern, since they aren’t really a bank.
It was the continuation of lending that led to the recovery in Canada, and avoided the GFC. However, the problem is that this also created inflation and monetary expansion which eventually puts Canada here. Its like when someone gets a debt consolidation loan, and then is able to use their credit cards that were maxed out again….
That could also be a reason why the Carney Government is moving funding programs for new housing to Build Canada Homes and gutting the similar programs at CMHC who is being faced with a mountain of potential defaults on the near horizon.
CMHC held back the $700mil dividend it normally pays to the Feds. An obese canary in the coal mine I wonder..
I doubt it. Consumers only buy mortgage insurance to allow banks to lend to them. As we saw in the last week, in ON the buyers have disappeared, so Ford is using HST rebates to keep them buying? Even worse, the clear target of this, like Freeland’s inclusion of investors in CHMC baking in 2024, is to keep investors buying to keep the market from collapsing.
The problem is, and its a very big problem, is how many impaired mortgages are there that are CHMC insured? The CHMC has almost no policy reserves set up to offset a major housing collapse, and since the banks assume that the govt will make them whole, can let these mortgages get really behind before foreclosing.
You can see this today where chmc insured mortgages are priced from 50-100bp lower than conventional mortgages? Why should someone who had little or no down payment, and barely qualified to buy the place (including a huge number of investors thanks to the Liberals) pay lower rates than someone with 25, 45, 80% equity?
If we consider that the total mortgage market is now $2.5Tr, and at least half of it is insured, then the potential liability for the CHMC and you and me is $1.25Tr or more? This would effectively mean increasing the national debt by 50% or more, since the govt also backs up a bunch of other bad loans through the EDC, BDC and so on….
So now you see why this fictious story of ‘supply’ determining price comes from. The govt needs to stop this from collapsing or Canada will very quickly leapfrog over the rest of the G8 and become the Greece of 2026.
The reliance on ‘appraisals’ to manage risk is a serious problem. Similar to using credit ratings of an insurer to determine risk for MBS, as we saw with AIG in 2009. Consider how banks and monetary policy works. Banks are able to lend up to a multiple of deposits and retained earnings, from 2-11%. So if a bank has deposits and retained earnings of 100B, that allows them to effectively create 20x that much net new money. That net new money is used to fund credit cards, loans and mortgages.
So when interest rates are low, and the economy is expanding, that allows banks to create a whole lot of money. Even better, since Canada has 6 big banks, when a mortgage is created at RBC, the proceeds are paid to BMO, which then increases the amount of ‘liquidity’ for BMO, who can create even more money to fund mortgages, loans or credit cards. Since these banks have a 90% share of the market, in effect, they are creating money to lend and at the same time creating more liquidity to create more net new money.
Now, when someone goes shopping for a home, the first thing they do is get a ‘preapproval’ telling them how much they can spend. So as that number rises, so does the cost (ie appraised value’) of housing. Pretty soon you have a mess like Canada is in now, where almost no one can qualify for a mortgage to buy a ho0me, so to keep the M3 growth and profits going, the banks and govt prioritize ‘investors’ who buy multiple units. In the end, appraising houses based on sales of comparables is never going to manage that risk, since, for all intensive purposes, its the base mortgage approval rates for a mean income family that are driving house prices, not supply and demand.
This is particularly an issue when we know that expansionary monetary policy is the only real cause of the systemic inflation we have seen since 2021, but it was the shock to the price of oil or food that drove it out of housing and into everything else. Sop just like the BoC left now chasing its tail to manage inflation, appraising real estate today is only going to be effective if the appraisal is based on a deflationary metric of the comparable sales for the exponential drop in prices. However, since banks, realtors, politicians and everyone else wants ever higher housing prices, no one will do anything until the market collapses.
There was a very interesting theory by professor Krugman from Princeton about changing how central banks manage inflation by managing the Broad money supply, M3 growth, not interest costs. This makes sense since the mechanism to correct for too much M3 expansion by lending is to effectively bankrupt people with higher rates. This is a very destructive process, and could be easily managed by regulating bank and government money creation to a factor of the gdp….
So this is the exact same problem the USA had in 2007, and as much as everyone wants to think Canada is not going to end up there, the path down is clear from here.
That growth is really something. On the upside, banks haven’t had much turbulence over the past bazillion years. Not exactly like it’s going to collapse them.
Three big issues with that train of thought. First, is that most of the high risk mortgages are not actually underwritten by the banks, but by the tax payer, through the completely unfunded CHMC. So all those people buying houses with 5%, or 0% down, and have half their family tree on the mortgage to qualify are insured, and not included here. Secondly, banks are not really businesses in the way you think. Banks are mostly just a flow through, with a fiat from the govt to create money to lend out. So the actual ability for any size bank to withstand a major run on their assets is nil. Finally, since Canada is only served by a handful of national banks, unlike the USA which has thousands of medium sized banks, if one fails there is no ‘good’ solution for customers. For example, lets say that CIBC ends up on the wrong side of the CDIC, and has to be liquidated. Who can they get to do this? Will folding CIBC or BMO into TD or RBC help you and me? not a chance.
If you looked at the US crisis in 2008, it was major banks like Bank of America, Citibank, Chase that were offside of the FDIC. The sale of Wachovia to BoA was not to save the customers of Wachovia, but to save BoA who were in worse shape than Wachovia?
The single biggest issue is still that our current govt has shown they will through you and me under the bus to save the bank CEOs. This is a fundamental problem, since banks only operate at the pleasure of the govt and the BoC, so in effect its the tail wagging the dog.
I’m starting to think Canada is a housing bubble and organized crime in a trench coat.
That’s a more important angle than we may realize. My work invites experts to explain a topic we don’t understand, and Steven was the guess a little while back.
He brought up this great point: If money laundering drove ~50% of GTA mortgages on the back half of the bubble, who’s buying the properties they need to dispose of now?
The government scrambling to give leverage to young adults to support inflated home prices is effectively a transfer of public wealth (we’ll incur debt), secured by debt that raises all borrowing costs providing a business drag, to bail out literal criminals.
Jim, you are absolutely right. The problem today in the GTA is that there are literally tens of thousands of condos that are worthless. No one really wants a 900k 450 sq ft condo with a 750/mo maintenance fee. The Liberals are literally selling you and me up the river to fund people who dont deserve a penny.
The other problem, and you are absolutely right, is that Canada’s big banks are leaders in the international money laundering and tax evasion business. Most of Canada is apparently blissfully unaware that TD bank was caught by the FBI as the worst offending bank in money laundering in history in 2025?
So if Canada is a haven for money laundering, why is Ford and Carney offering to rebate these people the HST (13%) on new home builds? I mean if it made housing cheaper for first time buyers, fine, but this is clearly not about that. Its about subsidizing a continuation of the mess that got us here ….
Great point ! ..
Is there any source for “money laundering drove up 50 % of GTA Mortgages” ?
I have no doubt at all that it was substantial, I have never seen a figure for it…
… and then I wonder what % of mortgages were Brampton Mortgages.. ? I suspect that overlaps a bit into money laundering category.
Canada has ignored money laundering by our banks for a long time. The charges brought against TD bank north should have been a major wake up call, since it is clear that this was not just happening in a bubble in the USA, but it barely hit the news in Canada?
The problem with offshore banking, tax evasion and money laundering is that is it very very profitable for banks, and the wealthy. So why would a country run by about 50-70 families want to investigate themselves?
On the up side: We’ve now attained 2% of GDP spending on military simply by tanking the economy by 20%
The banks do not want to be holding developers’ debt. They would prefer to give unrealistically high appraisals and pass the dept to individuals where they can more easily collect.
100% The Canadian Way
This is a great article. However, the bigger issue is the transition of the CHMC from a first time homebuyers insurance fund into a govt subsidy for banks and investors. The situation is deteriorating fast in the GTA where all that ‘supply’ everyone told us we needed to drop prices is now an existential threat not only to developers and realtors, but banks and govt.
The simple fact that the feds and ON is willing to drop the 13% HST on new builds to ‘encourage’ buying shows that these parties were never interested in making housing affordable, but only in maintaining prices as high as possible.
Now just like your friend who uses their mastercard to pay their visa, and then gets a LOC to pay off those debts, only to fill them up again, this ends badly.
The real question is how many ‘insured’ mo4rtgages are 90 days overdue, and therefore moving to foreclosure. Since the banks know that the feds will pay them for these, it is likely better for them to just let them get really deep in the hole before doing anything. So we can be sure that 7B is likely really $20-40B.
The other problem is that the curve is exponential. If people start to realize their house or condo is underwater by 50k, and all that stretching to afford to pay the mortgage becomes a chore, we may see what happened in AB the last time the liberals messed up the economy in 1982, homeowners just handing the keys to the bank.
So far the narrative from above is the housing market is fine, and our banks and mortgages are strong. There is NO RISK of a US style housing crisis. This is clearly nonsense. Canada’s credit risk has gotten progressively worse since 2015, with ever higher amounts of debt and revenue from housing. At the same time, the productive parts of the economy are starved of capital. So the credit portfolio is much higher risk today than in 2015, since we had a lot more credit for things like pipelines, manufacturing, mining, shipping, and so on. The irony that the PM is the guy from the BoC should be glaring at this point, since it is hard to understand how he can say much of what he has been saying since 2025 and know whats going on.
You clearly have a wealth of knowledge and a Master of Science in Economics. Too bad politicians were not required to have this kind of education as well. We might not be in this mess now.
Thank you for your insights. Please continue to post! If you were teaching a class on this subject, I would attend.