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August 20, 2020 | Pay Up

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Will all those who’ve made no mortgage payments since the spring get a further holiday?

Big debate happening, and it seems the answer increasingly is… no. Sorry.

The bug ain’t leaving anytime soon. Lots of big employers are keeping workers remote until 2021. That includes all the banks. Travel restrictions remain. Tourism, pro sports, conventions, concerts, normal airline operations – all kaput. One in five small business are teetering. Unemployment last month was still almost 11% nationally. More in Toronto and Vancouver, where the jobless rate is 11.6%.

Things will get better. Next year should be robust (Mr. Market thinks so). But between now and then the largesse has to stop. Lenders have gone without payments on $180 billion in residential mortgages, as well as billions more in personal loans and credit card debt.

The mortgage industry is fretting about this situation, in which almost 800,000 families opted to stop forking over their monthlies – 16% of all those with a home loan. Come next month and October, say  the Mortgage Professionals of Canada, “The general expectation is that these families will be forced to sell their homes, and that this influx of housing inventory to the market will create price softening as more housing options are made available to buyers.”

That’s what CMHC boss, the evil Evan Siddall, called the ‘deferral cliff.’ Because of that (and the ongoing virus) the federal agency has suggested the current housing boom will end, and prices could fall by 20%. As you know, that would carve $300,000 off the price of a slanty semi in Toronto or a moldy Vancouver Special.

The mortgage guys are asking the feds to sanction another six months of no payments, until jobs start reappearing and Covid is chased away by a vaccine. Other jurisdictions have done this – notably the UK and Australia – where the holiday has ben extended by an average of four months – but only when borrowers can prove financial hardship (which is never a good idea to tell your lender).

So far CMHC says no way. This is what it told credit unions a few weeks ago: “At this time, there are no plans to extend the deferral period.” In fact Siddall’s guys have come up with a ‘Default Management Playbook’ which lists various options open to lenders as they deal with homeowners who obviously can’t afford the real estate that they bought. “Further extensions,” CHMC says, “are not a viable option on a global basis.”

Private insurer Genworth says it’s expecting most of its no-pay, deferral clients to resume their obligations by next month. Homeowners who are still jobless and truly cannot pay may go into default. “As a result, the Company and its lenders have plans in place to increase loss mitigation activities to address the increase in reported delinquencies that is expected starting in the fourth quarter of this year.”

Those measures will include working with troubled homeowners individually to sort out a new payment scheme, possibly giving four more months of deferrals before the hammer comes down. Meanwhile the credit unions – also huge lenders for residential real estate, many of whom with staggering exposure to it – are floating the idea of increasing the amortization period of home loans by the number of months that payments were abandoned.

That would keep the monthly from being increased to make up the missed amounts, but that money would be capitalized – added to the principal outstanding, then spread over the extended amortization period. The result: more interest payable. More money owing at renewal period. More years to pay off the outstanding debt.

In short, there is now zero indication (unlike a few weeks ago) that blanket deferrals will be extended. Everybody is expected to start ponying up their payments in the next six or eight weeks. What you missed handing over you will still owe. Some lenders will increase monthly payments. Some will capitalize them. Some may extend the am. Some won’t.

And, yes, some people who should never have bought their properties will be forced to list and sell. How many of the 800,000 will that be? If it were 10%, the market would be flooded with listings and prices materially affected. If it’s 1%, meh, no biggie.

Some deferrers will have a harder time renewing their loans. Some will face an interest rate premium when they do so. This is uncharted territory since never before in our lifetimes have we faced a global pandemic, nor had a society so indebted, so exposed, and with so much of their net worth in a single, leveraged asset.

Will we learn a lesson?

Nah. Not a chance.

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August 20th, 2020

Posted In: The Greater Fool

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