Canada’s big banks are seeing a sharp erosion in mortgage credit quality. Canadian Bankers Association (CBA) data shows mortgage arrears climbed sharply in October. The rate now sits at a five-year high, but the stress may be even worse than it appears. CBA member banks are holding fewer total mortgages, potentially signaling risk mitigation.
Canadian Mortgage Arrears A Hit 5-Year High
Canadian residential mortgages in arrears at least 90 days at CBA member banks.
Source: CBA; Better Dwelling.
Canada’s largest banks continue to see borrowers fall behind on mortgage payments. The arrears rate at CBA member banks climbed 1 basis point (bp) to 0.25% in October, up 4 bps from last year. The rate is now the highest since September 2020, and now sits above pre-pandemic levels. It’s also worth noting that most of the CBA’s largest members reported higher rates in their quarterly earnings.
In our experience, it’s not easy to appreciate how large (or small) a number is without much context. The rate works out to 12,200 mortgages in arrears for the month, 19.0% higher than last year. While the rate seems small in the grand scheme of things, the pace of credit erosion is concerning. The rate isn’t just bigger than last year, it has also surged nearly 20%.
Canadian Banks Holding Fewer Mortgages On Their Books
Total Canadian residential mortgages held by CBA member banks.
Source: CBA; Better Dwelling.
Canada’s largest banks are also hanging onto fewer mortgages, amplifying pressure. The CBA reported 4.96 million mortgages held in October, down 0.91% from last year. It’s rare for the total volume to shrink, but annual growth has been negative since April 2023. This marks the longest contraction on record, meaning every delinquency matters more. It raises questions about why the contraction is happening, despite steady mortgage growth.
The decline in total mortgages is a sign the rising arrears isn’t the whole story. While details are scarce (likely by design), the bulk of the decline is due to migration to non-bank lenders. There are a few reasons to use non-bank lenders—monoline lenders tend to have better rates for high quality borrowers. However, borrowers can also be pushed to more expensive non-bank lenders as a part of risk mitigation.
Banks often sell non-performing loans (NPLs) to more risk tolerant B-lenders. They also conduct non-renewal purges of riskier borrowers, sending the problem downstream. In both cases, these borrowers often end up at private lenders that represent up to 15% of the market. These lenders also often carry much higher delinquency rates, sitting as high as 5%. This is a route that may be popular in coming months, considering the emerging investor cash flow issue.
Mortgage arrears data is such junk in Canada. Only 70% of the market reports, it costs $50/home to check a province, and the 15% of private lenders (where 1 in 10 pre-construction investors obtain financing), don’t report at all.
Then there’s insured mortgages that aren’t included at all in bank books, and considered “private” data. All of this is to reduce negative sentiment that can slow sales, but I think even with this mess they’re running out of luck. It’s getting hard to buy into the narrative when all of this s**t is hitting the fan.
Over 5 million mortgages of which 12,200 are 90 days or more behind on payments – not necessarily in foreclosure, just behind on payments.
Another commenter claims insured mortgages in arrears are not reported. That is just plain false.
Most countries would weep with joy if they could get their mortgage arrears as low as is Canada’s rate.
Let’s just consider that housing prices across canada are now off their peak. So you couldn’t go from Toronto to Halifax or calgary and make an easy 10-15% gain to cover up the fact you don’t have enough income to pay the mortgage.
Leading up to this refinancing would allow a borrower to get ‘cash back’ cause they had a gain on the price. This meant they didn’t default, nor were they afraid of a huge mortgage.
Applied to the aggregate data, we quickly see, as you note, there is no c9nstitency 8n reporting, no regulation, no enforcement in canada. The liberals seem to still be believing g the false narrative that our banks are ‘safer’, despite having g some of the lowest capital requireme ts on earth, and some of the highest fees?
The other big problem is that these numbers are severely lagging the market, now 6mo behind (3mos in arrears + 3 mos lag in reporting). So if we extrapolate this out by 6-9 mos the issue become serious. Even more serious is carney plowing billions into ‘supply’ that is keeps prices artificially high and increases the unfunded chmc liabilities which arenow 1.5 to 2Tr. So canada is now looking more and more like greece in 2009.
Do you seriously think the Canadian Bankers Association is falsifying their data?
So when will they make 40 year amortizations legal?