July 10, 2020 | The Temptation

What did the nation’s housing agency mean when it warned about a ‘deferral cliff’? (Because it appears most people think this is a nothingburger.)

Housing Armageddon, apparently. After all, about 750,000 households are currently withholding payments on $180 billion in mortgage debt, blaming the virus. One third of the Canadian workforce is unemployed (despite this week’s stats). According to the feds, the jobless rate will still be 10% by the end of the year and 8% (at least) well into 2021. And what if there’s a second Covid wave? Or a busload of germy Arizonians sneak across the border and wipe out, say, Windsor or White Rock?

Mortgage deferrals were for six months only, and that ends in September. CMHC’s point is simple: thousands – maybe tens of thousands – of people with houses won’t be abe to resume making payments because they lack employment. That would trigger a wave of defaults, foreclosures, powers of sale and oodles of new listings. It’s one reason the agency warned Canadians that real estate values could fall over the next year by 18%.

So why were sales in the GTA up over 80% pushing prices 12% year/year? Don’t people know what might be coming? Don’t they care? Why would you buy when there’s a cliff ahead? Are they listening to their moms instead of reading this pathetic blog and preparing?

Here’ the current thinking: next month the federal Liberals will announce a mortgage deferral extension. Four more months, maybe, to January. So almost a year’s worth of unpaid interest will be heaped on the backs of borrowers, but spare them from making monthly payments. It’s not a holiday from debt, but a giant exercise in kicking the can down the road and hoping for an economic miracle, come 2021. What a gamble. And it’s a fair bet most of the deferral folks have no idea how damaging this could be.

First, deferrals will not be automatic this time. The banks will extend them only to people in need. In other words, to qualify you’ll have to prove the virus stole your income, materially affected your ability to finance your debts and that you are without the resources to meet your contractual obligation. That, in itself, is a problem. Credit will be damaged in the eyes of the lender as you’re flagged a future credit risk. How could it be otherwise? Common sense.

Similar extensions have been announced in Britain and also house-horny Australia, Banks are being allowed to offer the deferrals – which impact their cash flow and asset base performance – without having to pony up new capital to offset the losses. Ottawa will do the same. But unless you 100% cannot pay your mortgage after Labour Day, don’t even apply.

The following words from a mortgage industry publication might be helpful in explaining the obvious, which is that mortgage deferrals will always be noticed, noted and could have credit consequences. The journal reports discussions with brokers on the misinformation most borrowers have about deferrals:

The broker explains that a customer showed them the most recent credit report he had received from his Big Six lender. Prominently featured multiple times was the phrase “Mortgage Deferred Payment Plan”.

“This is the first time we’ve seen this on a credit report,” the broker says.

Alerting other lenders to a client’s inability to pay a mortgage is neither new nor nefarious. But it’s worth asking: How many homeowners who opted to defer their mortgages did so under the assumption that their situations would be looked at differently because COVID-19 was the sole reason behind their inability to pay? There could be thousands of homeowners now facing the prospect of dragging their damaged credit reports, which they assumed would remain healthy even after deferring their payments, to lenders who will now have far less interest in working with them.

As reported here previously, credit bureaus (we have but two) aren’t listing deferred payments as missed ones, eroding credit scores, but lenders certainly are internally. Says another broker: “Our theory was that if you go and defer a bunch of payments with, let’s say, Scotiabank, and then you go to Scotia for a refinance, that’s probably not going to look good.”

Besides bruising credit, deferrals cost money. Debt totals rise and future payments will increase as a result. Those who skipped them to buy hot tubs, build decks, put in new kitchen counters or flow the cash into their TFSAs might regret it. Ironically people deferring would be better off to save the cash then make a lump sum payment against their home loan. But that wouldn’t feel like sticking it to the bank. Would it?

In conclusion, mortgage deferrals will be extended. The prime minister will stare at you with moist eyes and make you feel like he’s personally paying it for you. If you have no job, no income and no money to feed your family and pay your debt, defer. Then sell the damn house. Before the next crisis.

Garth Turner July 10th, 2020

Posted In: The Greater Fool

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