The Great Canadian Mortgage Payment Relief experiment is coming to an end. Regulatory filings for the Big Six show the majority of mortgage payment deferrals expired in Q4. Most transitioned back to regular payments without much of a hitch. Most didn’t actually need a payment deferral though, but the deferrals did allow problematic mortgages hide – even ones that were issues before the pandemic. As the rest expire, the industry will finally see if pent-up demand for mortgage defaults is a reality.
Mortgage Payment Deferrals
When the pandemic kicked off, Canada’s bank regulators allowed “special treatment” of mortgages. Starting in April, regulators allowed non-performing mortgages to be treated as performing, even if they weren’t paid. The unique treatment allowed banks to hand out payment deferrals for up to 6 months. They didn’t just hand them out to people that needed them though, it was pretty much anyone that asked. Typically these programs do exist on a one-by-one assessment basis. However, the bank needs to take steps to prepare for a loss in these situations. The regulators allowed banks to skip the preparation for a brief period.
The special treatment meant hundreds of thousands of mortgages got payment deferrals. Even mortgages that had issues before the pandemic. This made it hard for risk professionals to spot if there was an issue or not, and if so, how widespread was it? After all, if everyone is getting a mortgage deferral, an inability to not pay your bills doesn’t stand out. The extent of problematic mortgages won’t be clear until all deferrals expire. As of now, the majority of mortgages have now resumed payment. However, there are some signs there’s pent up default demand. More on that later.
Over 69,000 Mortgages At The “Big Six” Are On Payment Deferral
Filings from Canada’s Big Six bank show most people have now resumed payment. There were 69,900 mortgages on payment deferral as of October 31, 2020, down 86.3% from the previous quarter. In total, the value of these mortgages still on payment deferral comes in at $19.9 billion. This is down 85.39% from the previous quarter. The drop in the number of mortgages is similar to the decline in value. This may indicate no particular segment is transitioning faster.
Canadian Mortgage Deferrals At Major Banks
The number of mortgage accounts on payment deferrals at Canada’s Big Six banks. Source: Bank filings, Better Dwelling.Looking at the issue on a bank level, it appears all of the Big Six aren’t too far off from each other. RBC had the most accounts on deferral at 22,300 in Q4, down 83.94% from the previous quarter. Scotiabank follows with 16,000 mortgages on payment deferral, down 83.3% from last quarter. TD is in third with 13,000 mortgages, down 87.85% from last year quarter. The 3 largest banks having the 3 highest number of mortgage deferrals seems normal.
Value of Canadian Mortgage Deferrals At Major Banks
The value of mortgage accounts on payment deferrals at Canada’s Big Six banks. Source: Bank filings, Better Dwelling.Dollar wise, banks were also looking fairly consistent as well. RBC has the highest dollar value still on deferral totaling $5.8 billion in Q4 2020. This is down 85.9% from the previous quarter. BMO comes in second with deferred mortgages worth $4.3 billion, down 54.3% from the previous quarter. Scotiabank is in third with deferred mortgages worth $3.7 billion, down 88.2% from the previous quarter. Not particularly noteworthy, but BMO having a larger balance than Scotiabank is a little odd.
If the declines aren’t important, what’s the takeaway? The expiration of mortgage payment deferrals aren’t as important as the number of people that don’t transition smoothly. So far, banks have seen about 2% of expired deferrals turn delinquent. Whether these turn problematic remains to be seen. Risk firms have stated they don’t expect the issue to appear until next year. However, even banks are expecting defaults to rise next year.
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Deferrals provided households that didn’t need the mortgage deferrals for 4-6 months, so that adds 4-6 months to cashflow.
Correct meaning by May 2021 the effects of the pandemic and unemployment issues will rear their head. At that time we will see massive defaults in payments on mortgages. An article published on this site (a week ago if I recall correctly) brought to light this issue where Equifax actually brought the issue to light when they reported that defaults in credit payments are starting to tick up and that 12% of all new credit vehicles were taken out by people who deferred payments. This won’t end well at all.
Not all people who deferred mortgage payments were in financial distress, so only time will tell us what will happen with defaults. People with mortgages skew heavily towards having kept their jobs during this downturn (Benjamin Tal discusses this), so “new credit” applications don’t necessarily point to difficulty (I needed a car recently, so I bought one, some things can’t be avoided). Presumably people who are working can continue, more so thanks to deferrals, to afford their homes? We do love a good disaster, whether it happens or not.
From the irrelevant but interesting file, realtor.ca says it has 221,500 Canadian listings today. Related or not, 69,000 deferrals is a big number.
And that’s just the big bank’s share. I’d think that is going to become relevant.
How nice of deadbeat mortgage borrowers (including landlords) to be given a government-enforced holiday from their financial obligations while renters got zilch.