Canada

Impaired Mortgages Soar At Canadian Banks, As “Standardized” Reporting Hits

Impaired Mortgages Soar At Canadian Banks, As “Standardized” Reporting Hits

A new accounting framework adopted by Canadian banks is sending impaired loan numbers soaring. The International Accounting Standards Board (IASB) released a new standard, improving accounting transparency in a few key areas. The standard, known as IFRS-9, became mandatory for members starting January 2018. Despite only being around for a short time, it’s having a big impact on impaired mortgage numbers at the Big Six banks.

IFRS 9 Standardizes Reporting

The International Financial Reporting Standard 9 (IFRS-9) makes it easier to compare numbers around the world. This round of improvements focuses on the measurement of financial instruments, hedge accounting, and impairment of loans. All really exciting improvements, if you get your rocks off to accounting standards. Sadly, today we’ll just be looking at the impairment of loans portion. Specifically, around the impairment of residential mortgages.

Canada’s “Special” Accounting System

You’ve probably heard Canadian banks have some of the lowest impaired mortgage rates in the world? That’s because we used our own special method to account for them. In Canada, loans securitized by a private insurance company, aren’t considered impaired until 180 days of non-payment. Loans securitized by the government backed Canada Housing and Mortgage Corporation (CMHC), aren’t considered impaired until 365 days of non-payment. That’s a lot of time to screw up on payments, list your home, and even make a profit during a bull market. A large part of why impaired mortgage dollar volumes appear lower than they are.

Under IFRS-9, that changes. All loans, except for credit cards, are automatically considered impaired after 90 days of non-payment. That includes CMHC’s obscenely long 365 day window, for accounting purposes at least. This is already making dramatic changes to the numbers banks are reporting.

Canadian Banks See Impaired Loans Rise Up To 136%

Dollar volumes of impaired residential mortgages spiked in the first quarter of 2018, at the Big Six Canadian banks. National Bank of Canada (NBC), the smallest of the Six, has seen impaired dollar volume jump 111.84% compared to the same quarter last year. CIBC came in second, with an increase of 29.89% to the same quarter last year. TD was the only Big Six that saw the dollar volume of impairment fall.

Source: Bank Regulatory Fillings, Better Dwelling.

It could be that borrowers started defaulting at a faster clip, but that’s a big spike. More likely, IFRS-9 adoption is at work. Including more insured loans in the impairment numbers, puts a new class of losses on the books. The jump in the last quarter makes a lot more sense, when you understand this.

Source: Bank Regulatory Fillings, Better Dwelling.

Not a lot changes for the borrowers that defaulted, now included in the numbers. They’ll still be treated mostly the same way, with a few exceptions on renewals. Don’t expect a sudden flood of foreclosures due to this specific change.

We do get a little more insight going forward though. Exuberance for Canadian real estate has been built on opaque data. As transparency improves, we’ll get a more data points on how markets are actually performing. It’s much harder to add spin to numbers that are publicly available.

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72 Comments

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  • Alistair McLaughlin 11 months ago

    180 and 365 days. No wonder our default rates are so low.

    • Labi 11 months ago

      Amazing, right? 30 days go by, notice. 60 days go by, notice. 90 days go by, notice. You now only have 275 days to sell your house to pay the bank.

      Best part: Once it’s sold, you’ll still owe us the money, but it’s not a default. It’s a consumer loan.

    • Bluetheimpala 11 months ago

      Lol…got hijacked. Mods need to secure the screen names!

  • Canucks Be Cray-Cray 11 months ago

    Dayyymmmn. 365 days before an insured mortgage is declared in default at the CMHC? No wonder Canada’s arrears rate is so low. Who can’t sell their house in a year, especially when it’s been determined the other option will be a seizure? They really do doctor everything up north to seem rosy.

  • Mark Baum 11 months ago

    They bought their prebuilt homes at the market’s peak. Now they face financial ruin: https://www.thestar.com/business/2018/04/04/they-bought-their-prebuilt-homes-at-the-markets-peak-now-they-face-financial-ruin.html

    The victims’ complaint website & personal stories: https://www.communityforfairness.ca/our-stories

    The crash is here.

    • RM 11 months ago

      I was totally going to post this as well! You beat me to it, Mark.

      Ah, the greater fool.

    • Bluetheimpala 11 months ago

      The music has stopped and now they want a bailout for their exuberance? Hold the asset or sell for a loss or declare bankruptcy… There are choices. It isn’t my families responsibility to subsidize bad decisions.

      • Bluetheimpala 11 months ago

        *family’s…

      • John 11 months ago

        My question to those families is where is my 200k subsidy to buy?

        That’s right, I dont get one so neither do you.

        • dani 11 months ago

          when I read this type of article, I stop and ponder how many times I heard in the elevators of Downtown toronto…My house is worth $200,000 more now; our investment property went up $150,000 last year…. Now, the taxpayer needs to pay for those who were in FOMO. As someone else said….where’s my $200,000 subsidy….

    • Joe 11 months ago

      It’s crazy to read articles like this and many more should be coming out soon… select things like the one guy:

      “I track everything and I’m telling you, the risk I took when I purchased this (new) home was very calculated.”

      Followed up by:

      “Like the Khans, the Bashiruddins were watching real estate prices climb in 2016 and early 2017. They worried they wouldn’t be able to afford a move.”

      ummm… that isn’t a calculated purchase, that is a complete FOMO buy and *exactly* why you are not supposed to do that!

      Then you have the people saying they purchased the house to raise a family but now the prices have gone down. Boo-hoo… you still have the home you purchased “for your family”… sorry about your luck with it going down, are you going to cover any capital losses I have in the stock market too?

      • Bluetheimpala 11 months ago

        Like my father in-law who has cracked the roulette table and only makes smart bets… Sweet lord…how did housing become a casino?

        • Trader Jim 11 months ago

          lol! As long as you have a system, you should be good to go with gambling.

      • Grizzly Gus 11 months ago

        If you read that complaint website you will also see that a ton of them bought their new Pre construction before selling their old home….

        We made our decision based on the fact we could get X for our old spot and prices wouldn’t go down……….

        It use to be that you always sold before buying so that there would be no chance of you not being able to close. Anyone doing the opposite is doing do expecting to make a bunch of money. Lock in a house at today’s price, sell my old one for 20% more next year. Normal families are not supposed to own multiple homes

        • Bluetheimpala 11 months ago

          When the dust settles all were we’re left with are pigs(greed) and possums(crooks)… Looks like the pigs are heading to slaughter while the possums head back to the darkness.

        • MM 11 months ago

          Did you know in Sweden the banks won’t allow you to buy your new home until you’ve sold your old one? I wonder how things would be here in Canada if we had a similar rule? Seems like that would have saved quite a few of these families from the stress and heart ache that they are now feeling.

        • Maverick 11 months ago

          Is there a website where home buyers can post their stories? I bet there will be more like me than those on that website who bought a 1.5 million dollar house depending on a bubble which was there for all to see. Fact is they over spent, just that simple.

          • Maverick 11 months ago

            Correction! : – “Is there a website where first home buyers (who cant buy a house because of people like them who overspent and contributed to the bubble) can post their stories?”

          • MM 11 months ago

            That’s exactly what I am sitting here thinking! I need to start a “Housing Fairness” website. Or somehow start a new trend where all first time home buyers work together and decide to stop buying in protest all at once!! I’m here in Vancouver. For 2 years we’ve been trying to beef up our finances so that we could weather things if the market suddenly stopped being so rosy. So that we wouldn’t end up just like those folks on that website. In those 2 years townhouses out in the suburbs have nearly doubled in price. Gone up like 200-300k. With all the rules the BC and the Federal governments have put in place and still this market seems unphased?!?! Markets can be illogical longer than you can stay solvent sometimes.

          • xelan 11 months ago

            MM, just be patient, Vancouver is the first one to go down with its 5 months of inventory, new regulations coming, deteriorating sales and ave. condo price peaked at $1.1M recently. Average… condo… price – unbelievable. Just remember this number because I doubt you will see it again in a very long time.

          • carlton 11 months ago

            When did the grammar police take over this site? Who complained? start writing tickets and fines …….. how dare these commentators!

      • Alistair McLaughlin 11 months ago

        Imagine if you won $1 million through Lotto 649. You’re on your way to the OLG office to pick up your cheque, and you run over a pedestrian. Much to your horror, you realize at that very instant that your car insurance expired yesterday – you forgot to renew! You get sued by the injured pedestrian for $1.5 million. In a heartbeat, you went from $1 M up to $500K in the hole, and your only way out is bankruptcy. Worst of all, you’ve got no one to blame but yourself.

        That’s exactly the situation the 3 couples interviewed are in. All 3 were already GTA home owners. They were sitting on massive equity gains. No doubt they bragged to friends and family how their net worth was increasing. What a lottery ticket buying a home turned out to be! Time to cash in the ticket. (Of course, they’re thinking was more along the lines of “Time to reward ourselves for our astute investment.”) They swagger to the Mattamy Homes office to select a floor plan and make a deposit.

        “No hurry to sell our current home. We’ve locked in a price on the new place. Let’s sit on it for the next year and let our equity appreciate at both ends! We’re such clever and smart and careful investors after all.”

        Suddenly, a market reversal steamrolls their dreams, erasing $600K in equity (in both homes) almost overnight. Then B20 kicks in just in time to prevent them from borrowing to fill the gap.

        Someday, maybe they’ll realize they weren’t the victims of random events or arbitrary government intervention. No, they got careless on their way to cash in their winning lottery tickets. And it was their own damned fault.

    • Tim 11 months ago

      happening in Kleinberg, Durham region, Unionville, Oakville.

      And you young no it all’s still think its a bull market….LOL

      More blood. they all deserve it. Read the fine print or %^&* off!

      • Joe 11 months ago

        Not just Kleinberg… the entirety of Vaughan itself is completely imploding beyond belief… with Richmond Hill and Newmarket even outpacing that.

    • Joe 11 months ago

      “We’re not investors. We purchased homes to raise our children,” she said. “If the government wanted to implement cooling measures, why was it so reckless? Why did they not stop and think about the families that were in the middle of a transaction.”

      When is removing the punchbowl from the party being reckless?

      • Bluetheimpala 11 months ago

        Here here…money is no different than any other drug. Now the addicts are complaining that the supply was cut off.

      • Grizzly Gus 11 months ago

        I do feel bad that a lot of innocent people who do not understand economic principals such as credit cycles and asset bubbles who got wrapped up into all of this……….
        But even though they say they are not investors, they chose to hold multiple properties doubling their exposure to both the good and the bad…….. They just didn’t think the bad was possible…

        ALSO, everyone knows what happened in the US 10 years ago…… They just thought it was different up here…… or that they are smarter then those “subprime” borrows in the US…..

        Most of them even say they thought it was a great deal at the time. Ok, so had the market appreciated another 20% would they be looking to pay Mattemy another 20% on closing…… No they would think of themselves as financial geniuses.

      • Joe 11 months ago

        The thing about the “complaint website & personal stories” site, is that you wonder if it is for the actual homebuyers, or a front for real estate agents and developers looking for loosen regulations. Both stand to gain in the short run, or get out of the situation they are in.

        • Grizzly Gus 11 months ago

          I think that site is basically a conservative super pac type organization.

          • Grizzly Gus 11 months ago

            Hits all the real estate points but everything links back to somehow being a liberal attack against the middle class

          • Joe 11 months ago

            Exactly. You don’t see people owning up to their decisions. They tell a sob story and then point to government over regulations being the culprit.

    • Andre 11 months ago

      It is very sad to observe the consequences on people’s lives of such massive bad investment decision. They bought at peak price and at maximum borrowing limits + all in saving. In my opinion every person that bought last year between Jan – March is pouched. It will take a very long time to come back to positive equity. At the same time, we are all grown ups and they will have to face the consequences. If the situation was the opposite, appreciation of the asset, the builder would not seek additional compensation…. fair game.

    • functioning brain 11 months ago

      lol this was literally a HILARIOUS read!

      Like I actually face-palmed multiple times!!!

      So you buy at the PEAK and extend yourself to your literal MAX.

      Then prices fall, remember prices have the capacity to go both up or down for literally ANY commodity, and all of the sudden you plea ignorance (which isn’t a defense under law btw) to the fact that you may not be able to sell your home at peak prices, receive the same mortgage level anticipated under higher property valuation, or may need to use alt lenders you CAN’T afford.

      For the love of baby Jesus in the hay do these people need to be reminded how to breath when they wake every morning?

      Who drops 1.6-2 mill without considering all possible outcomes?
      You shouldn’t be dropping this kinda wad IF YOU CAN’T EASILY AFFORD TO.

      Now Mattamy which is not a charity is suppose to do what?
      The government is suppose to do what?
      Tax payers who did not take these foolish risks are suppose to contribute what so that these morons can live in million dollar plus homes?

      The stupidity and entitlement is truly breathtaking.

      They think think things salty now? Wait till September, it is going to start to roll biblical, they’ll all be pillars of salt.

      NO ONE is responsible for your bad choices OTHER THAN YOU!

      • Alistair McLaughlin 11 months ago

        Buying $1.6 million homes before selling your current home is just normal middle class “Joe & Jane Average” behaviour isn’t it? Besides, they really needed that new floor plan you know.

        The sad thing is, Wynne is facing re-election, and she will come through for them with interest free loans to fill the gap. You know she will. And I wouldn’t put it past populist Dougie to offer the same assistance.

      • carlton 11 months ago

        Amen sister!

    • Bob 11 months ago

      If they thought it was a ‘great price’ then, why isn’t it still a great price? How do they know that government intervention had anything to do with their inability to sell their existing homes for the stratospheric prices they had imagined?

      And is it true that prices are down 20-30% ‘across the board’? I don’t see the hard data for that. It feels more like the only thing that is down 20-30% is the sky-high imaginary price they were going to get for their existing home. But how do you know how much you’ll get for it until it’s sold? Isn’t it common sense to sell first?

      • Xelan 11 months ago

        Here is a piece of current worst GTA YoY price changes from Zolo:
        Oakville -17.5%
        Vaughan -21.8%
        Mono -22.1%
        Aurora -24.0%
        Markham -26.2%
        East Gwillimbury -26.7%
        Whitchurch-Stouffville -26.9%
        Bradford West Gwillimbury -28.7%
        Uxbridge -29.7%
        Newmarket -29.9%
        Richmond Hill -30.9%
        Georgina -31.3%

    • Alistair McLaughlin 11 months ago

      They bought new builds without first selling their own homes. Now they’re shocked that the risk they took backfired? I realize that was/is standard practice, but that doesn’t mean it’s risk free. Follow the sheep, get sheered with the sheep. WTF is wrong with these people?

      Funny, Garth is saying we are approaching a bottom. Fact is, we’re still closer to the top than the bottom.

    • Justin Thyme 11 months ago

      It costs exactly the same amount to build a house today in the same subdivision as it did a year ago. Yet the developers are selling exactly the same model for thousands, if not hundreds of thousands, less.

      Just goes to show you the kinds of profits PER HOUSE that the developers were getting.

      Hundreds of thousands per house sold, not a penny extra in costs. All pure profit.

      Yes, it is imperative on the government to act in this. The final sale price should be the lower of the current price on the equivalent model, or the original sale price.

      When prices fall during construction, the developer should take the loss, not the buyer.

      • Alistair McLaughlin 11 months ago

        Sale prices are based on what the market will bear, not on what the costs are. If people are willing to pay for a 50% profit margin, the builders won’t offer it for a 30% margin. Boo hoo for the buyers. It’s not up to the government to protect them from themselves.

        • Justin Thyme 11 months ago

          But the builder/developers are claiming in the article that they can not give the home buyer a break because they are committed to trades contracts and such. Yet the contracts would all be the same now or six months ago.

          • Alistair McLaughlin 11 months ago

            The builders would claim they need the money to pay for surgery for their ailing grandmothers if they thought people would believe it. Fact is, they’re sitting on iron-clad contracts and they know it. They’ve done their calculations, and thus far, even if those buyers default and declare bankruptcy, Mattamy believes it will keep the deposits and relist the properties and still make decent coin.

            Mattamy’s tune might change if prices keep dropping. But right now it’s a game of chicken. Matammy is saying “Do you wanna default on your deposit? Do yah really?”

            Personally, if I were Matammy, I would be flexible, not because the buyers deserve it, but because it might be in my own best interests to get the deals done before things get much worse. Those deposits won’t cover the price differential for much longer if prices keep dropping.

      • RM 11 months ago

        That makes no sense. If there’s no possibility to lose money why wouldn’t we all just buy 3 of them. No wait, I’ll take 10! And as someone pointed out earlier, if your method was indeed enacted, then buyers should have to give back any appreciation during the same period. It has to work both ways… but we all know that there’s no way that anyone would be willing to give up the difference of the appreciation because we’re all real estate tycoons up here. In fact, I’ll go so far as to say that if all this were in fact a rule, we wouldn’t be nearly as f*cked as we are now because speculators wouldn’t have had the incentive to buy. They made a bad investment, plain and simple, and building cost has nothing to do with it.

        • Justin Thyme 11 months ago

          I remember in the 80’s, when house prices went up astronomically between ‘purchase’ and ‘completion’, builders started substituting crap building supplies for those specified (vinyl rather than brick, chip board rather than plywood, veneer rather than solid wood cabinetry) and basically told the buyers that either they take what they got, or they could cancel the deal. If the buyers cancelled, the builder would sell at the new price, and the buyer would have to buy at the new price as well. The buyers ended up with crappy slapped together shoddy workmanship houses, not what they paid for. That’s why HUDAC was brought in.

  • EC 11 months ago

    What are the actual dollar volumes for impaired mortgages? Unless I’m missing something, I only see percentages.

    • Trader Jim 11 months ago

      I’m getting 4.453 billion for Q1 2018 for all banks, 9.14% higher than last year. All banks highlighted IFRS-9 changes, and separated them from the old standard. I’m assuming most of those are from a change in accounting, since a 17.15% jump from the previous quarter would be absurdly large.

  • Bluetheimpala 11 months ago

    The cracks the cracks oh how they split, one tick then a tock interest rates won’t stop. No more money, it was always a ghost and now poof all you’re left with is your socks. All were left with are pigs and possum at his point and the pigs are getting stuck. Soooweee! On a lighter note I do feel bad for these families but I’m not sure what they were expecting….perpetual asset appreciation until we’re all paper millionaires? BD4L

  • Mark Baum 11 months ago

    CREA now marketing Canadian real estate to international investors, IE:

    https://China.realtor.ca

    http://UK.realtor.ca – Trusted resources for investors from the UK looking to buy Canadian real estate

  • MH 11 months ago

    365 days? What a freaking ponzi… I am pretty sure we are still to learn a lot about “sound lending practices”, “no subprime in Canada”, etc.

    This tax season consider your cheque to CRA to be a love letter to CMHC and the bunch of good folks you are sending money to bail out.

  • Grizzly Gus 11 months ago

    Queen’s Quay E is going to be a shitshow. That whole neighborhood is being built up at the same time. Couple thousand units. Most of them pre sold end of 2016 early 2017.

    I took a look at a few of the projects last January and was getting quoted over $1000/sqft. For example, the Daniels Lighthouse West tower – $840k for a 2bdr 800sqft unit. These units are all hitting between end of 2018-2021. Daniels launched west tower before east tower, I have heard whispers that they have had to relaunch the east side with lower prices to clear it.

    • dani 11 months ago

      Drive out to Humber Bay shores. Same prices, not transit and some fake idea that this a high end location. I’m so happy to finally see reality sinking in….I will be furious if we taxpayers have to continue being on the hook to save other’s from their own stupidity (CMHC mortgage insurance is more than enough).

  • functioning brain 11 months ago

    Guys thanks for the link to that page for the Mattamy buyers!!

    I am pouring through their sob stories!

    This is the most entertained I have been in a very long time!!!

    Hours of hilarity over there!

  • Cassius King 11 months ago

    The bagholder’s plan was to buy the new house at 2017 prices and sell the old place in 2018 when the market was 20 to 30% higher.

  • Alistair McLaughlin 11 months ago

    Hey Blue, looks like you’ve got your very own fan club now, in the form of an imposter. He/she called me a loser (at least he’s right about that) . Maybe Professor of Real Estate is back here to teach us all a lesson .

    • Maverick 11 months ago

      Lol! People can only engage in a fair debate for so long.

    • Bluetheimpala 11 months ago

      Imitation is the highest form of flattery. Actually I cloned myself like in duplicity but unfortunately the first one came out a little retarded. I’m working on a replacement, this time with boobs.

  • CC 11 months ago

    Minsky Moment?

    Watching YoYoYoY… house price gains outstrip most “9 to 5” incomes, anyone’s life not participating in this financial orgy has already endured a slow train wreck of shattered dreams. As the years rolled by where house prices looked like that of Bitcoin, it was demoralizing to listen to “watercooler” talk about how rich everyone else was getting with little to no effort. It’s actually quite remarkable how long the government continued to foster and/or allowed creation of third class WORKING citizens with; low interest rates, mortgage fraud, speculation, money laundering (snow washing) etc…. displacing younger people refusing to buy into the Ponzi.

    Well, it’s time to pass the baton of sleepless nights, domestic arguments and overall demoralization. Hopefully the government DOESN’T bail anyone out (oh wait CMHC, CDIC, etc.) They already made that mistake in 2009 where Canada’s housing took an escalator instead of pulling a parachute along the US economy financial crisis. We’ll, the bill has finally arrived!

    To those that made the conscious decision to play in the final inning, over leveraged or own five houses, think about hearing how wrong you were for the next five to ten years. That’s a good starting point.

    • Alistair McLaughlin 11 months ago

      I love your commentary. I want to frame it. Sums up my own feelings perfectly. Housing has been on a 2 decade romp. It has made paper millionaires out of countless “geniuses” who did nothing more than take on more debt and more risk than they had any business taking on. The whole reward system has been skewed towards the debt-laden house hoarders for so long, it’s difficult to imagine it ever ending. But it’s ending now. The Mattamy buyers are among the first dead canaries. First of many.

      • cc 11 months ago

        Very well put Alistair, I agree! Thank you for your response,

  • vnm 11 months ago

    Surveys suggest that more than half of people think housing prices will never fall, even though they already have!

    From a Ryerson University City Building Institute report 2017:

    “As housing bubbles are allowed to expand, many are hurt or drawn into unsustainable financial situations. This is particularly the case for young Torontonians. When housing bubbles unwind, there is major collateral damage and people are hurt through little or no fault of their own. And the historical record is that they do unwind, essentially without fail.”

  • Contrarian 11 months ago

    Except for foreign and investor buyers, people need housing and will buy when they can regardless of market prices if they can afford to because they have the use of their investment and, in the long run, they are buiding equity for them selves. The financial losers are those who are forcd to sell and lose their equity or, worse, additionally have a residual mortgage debt they can’t pay.

  • Justin Thyme 11 months ago

    If the government acts, it will not be the first time a ‘buyer protection plan’ was legislated.

    That is, the product is always sold at the lower of the current price and the contracted price.

    It is not novel, many retailers now do it, and it is the only way developers and builders will find customers in a declining market.

    Absolutely no one will put down a deposit on a signed contract if they expect the price will be lower at completion, and the fact that these people made the news will only scare more buyers away.

    Matammy came up with exactly the worst response to a crisis, and they will pay dearly for it.

    If they do not protect their buyers, then the buyer will go to a builder who WILL, in writing, guarantee the lower price.

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