Chad Moore Calgary Mortgage Broker

I see a couple ongoing areas of concern worth noting in today’s economic and Real Estate market. Unwinding the Mortgage deferral program and extending emergency relief benefits to Canadians.

Mortgage Deferral Update:

In the height of the economic lockdown, Mortgage default insurers and Mortgage lenders – across Canada – were offering Mortgage deferrals to Canadians.

I think the original intention of the program was for Mortgage holders, on the verge of Mortgage default (truly unable to make Mortgage payments and on the edge of entering Mortgage default), to defer their Mortgage payments while in acute income hardship.

I think some Mortgage holders in Canada requested, and were granted, cautionary Mortgage deferrals, anticipating some form of income interruption. Considering the entire economy was shuttered at that time, understandably so.

As a result, I think the initial Mortgage deferral request percentage in Canada – as a signal of Mortgages on the brink of default – was slightly inflated. As the economy has been slowly re-opening, with some return to regular economic activity for many industries, or at least a shift away from a potential great depression, Mortgage deferral requests have been reversing.

Here is some data from Genworth Canada. Genworth is a private Mortgage Default Insurance company in Canada (competitor to Canada Mortgage and Housing Corporation (CMHC)). Genworth receives Mortgage applications from a wide rage of Mortgage lenders in Canada, from major branded banks to mono-line Mortgage lenders.

• Peak deferral rate, for Mortgages with less than 20% down payment, was 18.9%. For Mortgages with more than 20% down payment, the peak deferral rate was 11.9%.
• For Mortgage holders in Alberta, with less than 20% down payment, the peak deferral rate was 23.9%.

Understandably, these numbers are a wee-bit scary. Should these deferrals turn into Mortgage arrears, defaults and ultimately result in foreclosures OR desperate home sellers, that will negatively impact the overall housing market.

These fears seem to be subsiding as Mortgage deferral requests move off of their peak levels. I know some of my clients who requested deferrals, have voluntarily started making payments again. It seems this has been happening across the country …

For example, First National Financial, a large mono-line Mortgage lender in Canada, has seen their portfolio of Mortgage deferrals shrink from 13.9% down to 4.5%.

I think the big number to watch across Canada is the Mortgage arrears rate. Mortgage arrears are when people fall behind on their Mortgage payments. With this number, we can compare year-over-year data. We can’t really compare year over year Mortgage deferral data :-).

Deferral Cliff?

I’ve heard and read the term “Mortgage deferral cliff”. The thought is, once the Mortgage deferral program ends, Mortgage holders will be responsible to make their Mortgage payments on-time. Once this line in the sand is crossed, many Canadian households will be in a tough financial situation.

With so much time, energy and resources spent rolling out the Mortgage deferral program, I don’t see the wisdom of pulling the rug from under people now. I think those who really need to defer their Mortgage, will be granted that option. I don’t think the program can go on forever, but I think some form of extension (or multiple extensions) will be created.

Government Income Support:

Canada Emergency Relief Benefit (CERB) is not eligible as income or for down payment in Mortgage qualifying.

Short term Employment Insurance (EI) income is also not eligible income for Mortgage qualifying.

* (EI income is eligible for Mortgage qualifying if a history of seasonal EI income has been earned, verified by the applicants income tax records).

If these Government income stimulus dollars are not eligible for Mortgage qualifying, why is Canada’s housing market rallying? Can we really look to the income stimulus as a reason?

Yes, and no.

Yes because one half of the household might be receiving Government stimulus so the household does not feel the full economic shock of employment loss. With this confidence, purchasing a home might seem more palatable for this kind of household?

And no because the reality is the income stimulus does not assist in Mortgage qualifying.

I think the real reason for such a National housing rush is artificially low interest rates AND Government stimulus pumped throughout the economy (including income stimulus).

I’ve written about this recently here. The forward guidance from the Bank of Canada, and more recently the US Federal Reserve, is rates will be low for some time. Additional stimulus is coming as needed. Our financial leaders want inflation, and are willing to look through even if it “runs hot”.

Conclusion:

The looming Mortgage deferrals and government stimulus packages coming to a conclusion are looming in the near future. And I think they are worth noting.

However, the direction our society is taking is to continue to pump money into the system (economy), to no end, as a “fix”. So yes, the original deferral deadline is looming and government stimulus is set to slow down, but count on extensions and more money to enter. Count on continued interest rates artificially suppressed lower for longer.