June 1, 2020 | ‘Something Has to Happen’

Three months into the Great Mortgage Deferral and just 90 days to go now before… the cliff. On a call with analysts last week CMHC’s head economics guys had this warning: “Something has to happen to avoid having these deferrals escalate into foreclosure.”

Whoa. This is a seriously meaningful statement, coming from the federal housing agency. If even a small slice of the can’t-pay-won’t-pay people end up walking away from their houses, we have a major property plop on our hands.

Here’s the latest: the banks together have allowed forbearance on $180 billion worth of mortgages and HELOCs. CIBC, for example, deferred payments on $36 billion in loans (16% of its portfolio) and RBC has waived the monthly on $47 billion in residential mortgages (18% of its total). That’s not all. The banks are also allowing payment holidays on credit card balances and loans, bringing the aggregate to $300 billion in debt not now being serviced by households and borrowers.

At this moment about three-quarters of a million families aren’t paying, representing 15% of all home loans. This is expected to reach 20% by September. And in October, the deferrals end. Or can they?

Let’s be realistic. Unemployment of 13-17% now (depending on methodology) will not be 5-7% in 90 days. It could actually increase. So if households needed mortgage deferrals to stave off insolvency in May, what will have changed in November? Is this massive problem of over-borrowing, uber-leveraging and house-horny over-buying not just being kicked down the road? Is this why the Big Five banks just set aside $11 billion to cover bad loans in the coming months? Is that even enough?

Remember it took only 8% of American homeowners to run into financing problems in 2005-6 to crash US average real estate values by 32% and plunge the world into a credit crisis. Canada’s too middling a place to cause any global issues, but a wave of foreclosures or a surge in listings by people in financial distress would be more than enough to tip markets. Bottom line: now could be a horrible time to buy. A good time to sell.

There’s more.

Rents are falling and amateur landlords are in a vice. Since the virus came to town, rental rates in the big cities like Toronto have steadily snaked lower. Last year an estimated 40% of condo owners with tenants were in negative cash flow, but anticipating capital gains on their units. No more.

Now condos are rapidly falling out of favour (germy elevators, yucky garbage rooms, suspect common areas), while lease rates are fading (2.7% so far). Losses-per-month are piling up for all those thousands of people (12% of Toronto homeowners also have rental units) who bought concrete sky boxes, usually with big leverage against their houses.

Yup. More listings coming as many of these sad, deceived and delusional people exit an asset class whose time has passed.

Says Toronto housing analyst Ben Myers: “This pandemic could have a real impact on the supply of new housing in the GTA in the long term, as missed payments by tenants and lower rents could have many investors rethinking future pre-construction condo purchase.”

Real estate can go down. Pandemics happen. Tenants can be schmucks. Who knew?

There’s more.

Mortgage investment corporations (MICs) are blowing up. You know the ones – those investment vehicles which sucked in GIC refugees with 8-10% annual returns ‘guaranteed’ because they held ‘secure mortgages on residential properties.’

This blog has warned for years that anyone investing in baskets of mortgages rejected by the banks were fools. The MICs typically hold garbage loans made at high rates to people you’d avoid in a gas station restroom. Yes, that’s an awful and elitist thing to say, but when it comes to retirement assets (most MIC investors are older and looking for yield) these are not the folks you want to finance.

The virus is crashing real estate values which has resulted in many MICs halting redemptions and may result in insolvency. Losses could be substantial enough to entirely wipe away years of income – or worse. Yup, additional properties coming to market.

There’s more.

Did you catch CBC’s big expose  this week on a bank ripping off some hapless (single mom) homeowner with a giant mortgage pay-out penalty? About a year-and-a-half into a 5-year home loan the lady wanted out, so the bank calculated an IRD of $30,000. (The penalty is standard at three months interest or the difference between existing rates and the loan rate on the principal owing over the time remaining – whichever is greater.)

The back story: she’s a realtor. The 905 house was financed based on two tenants living there plus an Airbnb suite. So when her income dried up, the renters left and no tourists arrived, she was facing financial ruin living in a giant house with $600,000 in financing. She listed and sold. And the bank wanted its due. Now the realtor (and the CBC) cry for the government to interve

There will be more forced sales in the months ahead. More households in distress after pushing their problems into the future. More listings. More condos vacated. More defaults and foreclosures. More sob stories. More calls for bail-outs, hand-outs, deferrals, extensions, reprieves and forgiveness as the sins, greed, avarice, speculation and property lust of the last few years find their inevitable harvest.

This has only begun.

Garth Turner June 1st, 2020

Posted In: The Greater Fool

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