Canadian homeowners on insured mortgage deferrals are starting to feel the heat. The Canada Mortgage and Housing Corporation (CMHC) updated the federal government on the state of housing last week. During this update, they warned first-time homebuyers to be extra careful purchasing. To highlight this, they ran through a scenario on how a small downturn could leave the homeowner paying multiples of what they put down. Looking at some data from the organization, this wasn’t just an illustrative example. It’s going to be real life for a number of people currently on insured mortgage deferrals.
Payment Deferrals, Price Declines, and Underwater Mortgages
The number of Canadians on mortgage deferrals has been rapidly rising, and that number is expected to climb further. The CMHC estimates 12% of insured mortgages are now on a payment deferral. They expect this number will rise to 20% towards the end of the summer – by September. Which is part of the reason they warned first-time homebuyers to be careful with the amount of debt they assume.
The other part is how quickly homes are expected to fall in value, which would be amplified by forced sales. The CMHC is forecasting price declines between 9 and 18 percent over the next 12 months. If you’re thinking that’s an extreme forecast, it’s actually balanced between CIBC and Moody’s. The national housing agency also expects home prices won’t recover until 2022 – at the earliest.
What does this mean? A lot of insured mortgages with deferrals will be underwater soon. For those that don’t know, an underwater mortgage is when the balance of the loan is greater than the home’s value. All sorts of issues pop up in this situation, like a bank not renewing the mortgage. Even worse, once this happens, the only option if forced to sell, is to pay even more. That’s right, if you need to move for any reason, like you found a better job, you’ll still owe the mortgage, any difference, and the cost of selling.
Canadian Insured Mortgages On Payment Deferral
The share of insured mortgages on payment deferral, grouped by loan-to-value (LTV).
Source: CMHC, Better Dwelling.
Over 70% of Insured Mortgages Deferred Projected To Have A Maximum of 1% Equity
Is the CMHC being overdramatic? Not at all. Using the low end of the forecasted price drop, 70% of insured mortgages on deferral will have a maximum of 1% equity. About 91% of those homes will see equity losses of at least half, with 70% suffering a loss of at least 90% of their equity. This is if the decline is on the low end of the forecast.
Canadian Insured Mortgage Equity Remaining
The average maximum equity remaining in 12-months according to the CMHC’s forecasted price movement, grouped by loan to value (LTV) at defferal. Shown for 9 and 18 percent price declines.
Source: CMHC, Better Dwelling.
If the declines are on the high end, very few of the mortgages currently on deferrals would have any equity. If prices drop the full 18%, just 9% of mortgages on deferral would have any equity. Of those above water, 62.5% would have 2% equity or less. The 91% underwater would range from -3% to at least -13%. This is only the equity though.
Sellers In This Situation Are In A Much Worse Position
Negative equity is one thing, but if you’re forced to sell the losses are even higher. If you add insurance fees, and average selling costs – these homeowners may take a big hit. On the low end, if prices dropped just 9% – 91% of those with an insured mortgage on deferral would suffer a loss of at least 1.7%. The 5% of deferrals currently with between 75 and 80 percent equity would retain ~3.7%.
Forecasted Equity Remaining For Deferred Borrowers At Sale
The average estimated equity remaining if forced to sell in 12-months, grouped by loan to value (LTV) at defferal. Shown for 9 and 18 percent price declines forecasted.
Source: CMHC, Better Dwelling.
On the higher end, very few of those forced to sell while currently on a mortgage deferral would keep any money. Only 4% of insured mortgages on deferrals would receive money back from a sale – at most. Of those, 75% getting any money back, would get a maximum of 2.9% of the pre-drop price. The bottom 96% would owe at least 4.9% of the initial purchase price, to sell with this kind of downturn. The lowest 70% of those on deferrals would owe at least 16.1% of the initial purchase price.
These are rough calculations, just to give an overview of how extreme of a situation people got themselves into. This is also only using insured mortgages with a payment deferral. Other mortgages not on a deferral also have equity that would be exposed to a similar situation as well. As the deferral rate increases, we’ll see this become more and more of a risk. Forced sales, especially in the high-rise condo apartment segment, is a risk CIBC warned of. That said, it’s not all that surprising to see everyone from prominent mortgage experts to the CMHC warn, if you’re going to buy right now, make sure you have a solid financial situation.
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Throw in private lenders. I don’t know a single one that would let their homeowner get away with missing a payment.
A real problem for Toronto. Bank of Canada estimates it’s almost 10% of the condo pre-construction market.
I am sure the fact that tenants were given a pass on rent payments and the complete freeze of evictions, really helps the homeowners described here. After all the houses with suites in them, have often CMHC insured mortgages and the rent income is necessary and calculated into the mortgage pre-qualifications. Apparently, however, the ‘rich’ homeowner can always shelter the poor tenant.
Many of them are in a precarious situation sitting in second position while the values are slowly decreasing and the 1st mortgages are falling behind.
Like all cycles, there will be a chunk of private lenders who’ll take a beating on ambitious loans that were predicated on the idea that real estate will just keep climbing. No income/credit score qualifications, simply equity lending.
Right now you have delinquent borrowers living for free knowing full well they need to vacate or sell but will cruise for another 4 months without paying a dime.
Difficult situation it seems. I know people winning bidding wars on places was based on how much leverage your individual bank was willing to do. (Even though both bidders had the 5% down)
Fortunately I’m on of the fortune few that has job security and praying my employer will allow WFH and maybe coming into the office a few times a month. If so bye bye Vancouver and hopefully I can get a good deal in 6-12months when people are forced to sell and take 100% equity loss.
This isn’t at all relevant to the point the article is making. This about the mortgage deferral cliff, not what’s happening right now. You would use this for forecasting supply, and credit risk – not what your friends are doing on the weekend.
Due to the Mortgage Stress Test that was and still in place. A lot of borrowers have gone to the Private and Shadow bankers. I do not see how these borrowers will be able to defer their mortgage payments? The loan sharks are also going to collapse holding the collateral of the unpaid loans. They will have to sell those properties FAST. I do not see anyway the PM is going to be able to come to their rescue.
This is the Black Swan event of the Canadian housing market. Keep your power dry and buy a property with as little leverage as you can when the dominoes begin to fall.
Each and every politician should be removed from the office at the earliest of opportunity. They have failed the people they represent! They can’t even manage a bubblegum machine, let alone the economy of the country!
I saw this event happen in Calgary years ago. The price of homes, apartments and apartment building dropped to the point that you could purchase anything in housing cheaper than building new by a wide margin..
This killed new construction..which is about to happen in Vancouver..
Many projects nearly completed will go broke or forced to close down..
If the SHTF ? lowballing every offer. Seen this movie before, starting in 1980. Gonna be epic this gasbag should have been deflated 10 years ago. Governments drunk on the revenues and bought off by developers combined with FOMO created by RE lies.
TOXIC
Hi Stephen,
Do projected calculations include HELOC or just what is on the books recorded as a mortgage?
Thanks
HELOC is a mortgage, 2nd mortgage
HELOC is a first mortgage.
Goin down like a lead zeppelin
I would think this is what you get when you could purchase a home with zero or five percent down.
It finally materialized and now CMHC can’t protect the banks ( because they have the banks interest and not yours in mind) and now will have real estate crash just like the U.S.A.
I liked to see how the builders CMHC and the government gather and become even more creative than the zero – five percent down to cause an even bigger mess.
0% down was never a thing
I’m interested to know how much taxpayer money will be going to banks which created garbage sub prime loans which CMHC insured for peanuts… and that are now defaulting.
Heads rolling at CMHC for their bad underwriting standards that deliberately set taxpayers up as bag holders for mortgage junk from banks.
Articles like this give me so much hope then the government puts those old Sea Kings to work dropping sacks of cash all o’er the land.
In case you were wondering, this is the scenario CMHC ran through:
“Unless we act, a first time homebuyer purchasing a $300,000 home with a 5% down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10%,” he said.
Which isn’t actually correct. Just being underwater doesn’t create a loss, selling an underwater property does.
All of this number crunching is well and good, but none of it means anything until a house gets sold. As long as they keep making payments none of it will come to fruition. It’s not like they get a text alert that their mortgage is underwater and then immediately list their house. Ignorance truly is bliss in this situation.
And the story and all comments are only about the deferred mortgages which are only for owner occupied properties.
None of this even considers that massive number of houses/condos owned for investment purposes with tenants now legally allowed to stiff their landlords of rent for months and months. Lots of these landlords will also be looking to unload their property albatrosses in the days to come.
Just because the courts are closed and you can stiff a landlord, doesn’t mean the landlord can’t pursue the issue afterwards. The government knows that, they’re hoping to distribute losses.
Greed.. the plague of North America which evolved into the curse of the world. You will all understand what matters soon enough.. it is not playing with dollars and cents
I agree with you 100%. We will be unloading ours, not because we have to, but because we are tired of being designated by the RTB (against our wishes), as the social assistance and support for tenants.
CHMC charge people but only insure bankers to gurantee their money safe. Bank on their turn give prime rate and gives no fuck to risks. Here is where quality of purchases are lost. Banks were to give money even if person was to buy shipping container house for $375k as long as there is enough idiots on the market. Guess what it is not even matter what real value is. All these will be stuck with their loans because they need a place to live. Negative value or not they will not want to sell them now. So I think CHMC assume wrong.
On the other hand value may go down for a simple reason that the rate of do up houses that people fix and sell for living still a thing. So if certain percentage of houses gets on the market at constant rate and no brave to buy (either no income or uncertainty) then average prices would naturally go down to negotiate a better deal. However, this is not gonna be a thing once sales pick up. The demand will unwrap and supply will be needed. CHMC simply wants something new to roll out to charge even more but do exactly nothing even in times like this. They all know pandemic is temporary but fear is in their advantage right now. In 9/10 cases property will be a better investment during all (except housing) crisis. The remaining 1/10 is when someone sells because of fear. We have medical issue and economic stall (which do good for house prices). Because they forget to tell that there is no good investments at the moment. A 2%? Lucky to get above 3% (~-0.25% taxes on profit). Inflation is a hidden factor of -2%. Housing on the other hand has been doing 10% on average including crisis time. There is gov. website That shows average anual house price change per city. Unless you live in covid-19 hotspot and need to sell you just use your judgement and real data. Not data from CHMC a cohort specific to 5% high-ratio mortgages and those who took deferral by speculating on if prices drop they will have to sell. CHMC is the reason why people forced to achieve lower bank rate they need high ratio mortgage 20% forced on less ideal rate. Absurd. I was forced myself to do 5% in order to get best deal. The remainig I invested. It worked out just fine but it did create multilevel risk. CHMC wants people to stay at high risk because someone not paying an extra to their mortgage will stay in high ratio(preferred rate). Anyone smart will try to pay it off and find themself paying more interest for the remaining 80%.