For the last three years or so, many investors have been asking the question, “When is the next recession going to happen?”
My take on it was that it was going to be caused by something unknown or unpredictable.
More specifically, I was thinking a war somewhere could cause some global uncertainty and plunge us into recession. Recently, that tiff with Iran looked like it could do the trick. But it ended up being something even more unpredictable: a war on a virus that knows no borders.
If you are a landlord, you must be thinking of your tenants’ ability to pay rent right now. Just last week we were talking with our property manager and putting together a plan to raise rents to market rates. Now that has been put on hold. Many landlords are offering incentives, credits, or even waiving rent next month.
There are a lot of other questions out there, as well. While the real estate industry hasn’t been hit hard yet, we’re starting to see deals fall out of escrow, sellers wait even longer to put property on the market, and investors wondering if that deal they’ve got locked up would be better put on hold.
Some sellers may panic sell to liquidate assets, but I haven’t seen that quite yet. I’d love to hear in the comments what you’re seeing in your market though!
All this to say, these are uncertain times. So, how is a real estate investor to navigate the treacherous waters ahead? Here are several principles to help you shape your investing strategy in times of uncertainty.
Investing in Uncertain Times: 5 Things to Keep in Mind
Principle #1: Have Patience
Since we can’t predict the future, patience needs to be exercised. If things are worse than expected, then the market may not bottom out for some time. We’ll need to be patient as landlords, as well.
Principle #2: Look for Opportunity
Times like these are when wealth is created. Many people, myself included, wish they would have bought up properties between 2009 to 2014 (give or take). Here’s an oft-cited quote from Warren Buffett:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
For those who wish to acquire properties—and have the means to save or raise money in the meantime—now is the time to prepare for those opportunities that will most likely be coming down the road. (Of course, the optimal time to prepare is always two years ago.)
Principle #4: Continue to Learn
You should constantly be learning. But in times like these, it’s important to learn from your mistakes or assumptions you’ve made in the past.
The last few years, I thought that affordable housing was bulletproof (or close to it). My rationale was that even if a recession were to hit, the more affordable a place is, the more likely there is to be sufficient demand to maintain solid occupancy rates.
Now I’m not so sure. Blue-collar and hourly workers are most likely to be affected by the latest circumstances, and they are the ones to most likely be renting “affordable” housing.
Further, with schools now closed and children at home, the burden is on parents to care for their children first. Working from home and seeking out new employment will prove difficult.
Those with white-collar jobs or the ability to work remotely uninterrupted will be far less affected—unless the ripple effect in their particular industry hampers their ability to earn.
Principle #5: Be Optimistic
It’s important during tough times to maintain a sense of optimism.
I’ll be honest. This has been hard for me—I don’t like the disruption of routine and being told what I can or can’t do.
But we can’t dwell on the negative. This too shall pass (hopefully quickly). We’re in this together, so let’s put on a brave face, help each other out, and come out on the other side stronger, more resilient, and more grateful.
All of us have a mind-boggling range of challenges to deal with in these stressful and uncharted times of COVID-19. But for many home owners, sellers, and buyers, one concern rises to the top: Are we heading straight into another housing crash?
Little is assured these days, and our current situation is without precedent. But most housing experts believe the wave of across-the-board home-price slashing and desperate sell-offs that characterized the aftermath of the Great Recession are far less likely to materialize this time around.
Why will things be different? Because bad mortgages, rampant home flipping and speculation, and overbuilding all contributed to the last financial meltdown. This time around, the much-stronger housing market isn’t the driver of the crisis—it’s one of COVID-19’s many victims.
That could provide something of a cushion for real estate to prevent another repeat of the late aughts.
“There’s no way we get through this unscathed. But I don’t think the world will fall apart in the housing market the way it did in the last recession,” says realtor.com®’s chief economist, Danielle Hale. “We won’t see prices driven down out of necessity because people were forced to sell like before.”
In fact, the fundamentals of the housing market couldn’t be more different from the economic meltdown of 2007–09. In the lead-up to the Great Recession, it seemed like just about anyone could get a mortgage—or two or three. Today, only buyers deemed less of a risk can score a loan. Credit scores need to be higher, debt-to-income ratios need to be lower, and lenders verify incomes much more carefully.
Additionally, in the mid- to late-aughts, there was a vast oversupply of homes. So when the market crashed, there simply weren’t enough qualified buyers to purchase them. And with all of the foreclosures going up for sale, a result of bad loans, home prices plummeted.
But today, there’s a severe housing shortage that’s keeping prices high.
The biggest wildcards in this current mess are just how long it takes to get the virus under control—and then how quickly the economy takes to bounce back. About 22 million people, or 13% of the U.S. workforce, filed for unemployment in a month’s time. Experts predict unemployment could rise to 15% or even 20% before the pain subsides.
Those financial struggles have made it increasingly difficult for folks to pay their rents and mortgages—let alone purchase starter homes or trade-up residences. Roughly 6% of mortgages were in forbearance as of April 12, according to the most recent data released from the Mortgage Bankers Association.
This has sparked fears of another foreclosure crisis—one of the hallmarks of the Great Recession and its aftermath.
“We’re [not going to] get through this recession without any challenges for the housing market,” says Hale.
Will there be another housing fire sale? Probably not
Deep price cuts are the dream of many cash-strapped buyers—and dread of home sellers. They may not happen this time around, but a slowdown in the price hikes of the past decade are likely, most housing experts say. Home prices may dip—but just slightly, says Hale. (The median home price was $320,000 in March, according to the most recent realtor.com data.)
Prices are driven by the rules of supply and demand. On the supply side there is a record-low inventory of homes on the market, as sellers have been steadily yanking them off. Many don’t want potentially infected strangers walking through their homes and want to wait for the economy to improve so they can fetch top dollar for their properties. Others don’t want their homes to linger on the market unsold during a time when fewer transactions are taking place.
Still, demand for new homes hasn’t evaporated. There are simply too many would-be buyers out there: millennials eager to put down roots and start families, folks who lost their homes during the last recession and want to buy another property, and boomers looking to downsize.
“People need a place to live, and at some point we’re going to get past the virus,” says Robert Dietz, chief economist of the National Association of Home Builders.
And while many potential buyers will grapple with job losses or the prospect of them, others will be lured in by the prospect of superlow mortgage interest rates. Rates were just 3.31% for 30-year fixed-rate loans as of the week ending April 16, according to Freddie Mac.
“I don’t think we’ll see significant price cuts,” says Dietz. “There’s a lot of young people who want to attain homeownership.”
There will likely be a “sharp decline” in home sales until the threat of the virus and its economic toll have waned, says Lawrence Yun, chief economist of the National Association of Realtors®. But he anticipates sales will pick right back up as soon as things return to some semblance of normalcy. That will also keep prices high.
The luxury market could take the biggest blows, however.
Even in the best of times, these ultraexpensive homes can be harder to unload. But it will likely be harder to find buyers willing to pay top dollar with the economy and stock market in shambles. Wealthier buyers often have more invested in financial markets, which are being buffeted by wild fluctuations.
“The higher-priced homes are the ones that are being withdrawn [from the market] more often,” says Frank Nothaft, chief economist of the real estate data firm CoreLogic. “The lower-priced homes continue to be in really strong demand.”
But not everyone has such confidence that home prices will remain strong.
Ken Johnson, a real estate economist at Florida Atlantic University in Boca Raton, FL, expects that prices will fall much more along the lines of what many bargain-hunting buyers have been hoping to see.
If the economy reopens quickly, prices may decrease only by 5% to 10% nationally, says Johnson. They could be more or less depending on the individual market. But if the crisis and stay-at-home orders go on for another 60 to 90 days, he anticipates prices will plummet up to 50% as there won’t be many folks shopping for homes.
“I expect sales to dry up. I expect listings to dry up. I expect showings to dry up,” says Johnson. “I hope for the best and fear the worst.”
We’ve underbuilt rather than overbuilt in the run-up to this crisis
The glut of new construction was a calling card of the Great Recession. Newly built homes and communities sat vacant, or mostly empty, after the crash. Cities and suburbs were pocked with stalled construction sites. There were too many homes for too few buyers.
But things are quite different now. Last year, builders put up just under 900,000 single-family homes, shy of the nearly 1.1 million homes considered necessary to alleviate the housing shortage and accommodate the growing population.
“We entered this [new] recession underbuilt rather than overbuilt,” says NAHB’s Dietz.
But a reduced demand from buyers will likely translate to fewer homes being erected in the near future. And the financial crisis is already making it more difficult for builders to secure the financing needed to put up new homes and developments.
Housing starts, construction that’s begun but not completed, were down 22.3% from February to March, according to the seasonally adjusted numbers in the most recent U.S. Census Bureau and the U.S. Department of Housing and Urban Development report. Traditionally, this is a time when construction generally picks up alongside the warmer weather heading into the busy spring and summer season.
“Building has been far below average for 10 consecutive years, which is the reason why we’ve faced housing shortages,” says NAR’s Yun. “Today during the pandemic, there are even fewer listings.”
Bad mortgages are largely a thing of the past
One of the biggest culprits of the last economic downturn were riskier subprime mortgages and “liar loans.” Since the housing bubble popped, these loans have largely ceased to exist.
Subprime loans were doled out to less qualified and often uninformed buyers, typically lower-income minorities with lower credit scores. After a set period of time, the interest rates on these loans ballooned higher—well out of reach of the borrowers. They defaulted on their mortgages, which set off the housing bust resulting in scores of foreclosures and short sales.
Liar loans were those given to folks whose lenders didn’t verify their income. That slipshod practice has largely vanished.
“The mortgages made today have much lower risk. Lenders have tightened up their standards for making loans,” says CoreLogic’s Nothaft. “They verify income, they verify employment. Subprime lending and liar loans are gone from the market.”
Of course, it’s still likely to be difficult for even the most qualified homeowners to make their mortgage payments if they’ve lost their jobs or a portion of income to the coronavirus. So the federal government is stepping in.
Mortgage forbearance, as well as loan modifications in many cases, are being offered on government-backed mortgages for up to 12 months for those affected by the coronavirus. Many lenders are offering similar assistance to those who don’t have a Fannie Mae or Freddie Mac loan.
“The mortgage forbearance is going to prevent foreclosures,” says Yun.
But that doesn’t mean there won’t be some down the line.
“We will probably see some delinquencies rise,” says realtor.com’s Hale. “And once the moratoriums are lifted, some people are going to struggle to pay their mortgages.”
In addition, investors aren’t running rampant like they were in the aughts. Instead of buying properties to hold them and jack up the prices, they’ve been investing in and upgrading the properties they’re buying. And they’ve had a tougher time of it as the number of foreclosures, short sales, and other cheap and auctioned-off homes have become harder to find as the economy had rebounded.
What does the future of the housing market look like?
How the housing market will fare over the coming months and years is still a mystery, since no one knows just how long this public health pandemic will last and how long the economy will take to rebound. Real estate is likely to suffer until the economy improves and folks feel more confident in buying and selling homes again.
The stimulus bill and extra $600 a week in additional unemployment funding are likely to buoy the economy and “relieve some of the anxiety,” says Yun.
Even in a worst-case scenario, the majority of Americans are still employed. And mortgage interest rates are at record lows. They’re hovering around 3%, unlike the more than 6% they were at at the beginning of the Great Recession.
“This [crisis] is short-term,” says Yun. “We will come out of this.”
Even those with less rosy views believe that a strong rebound for housing may be in the cards.
“If we go for an extended period where we’re under stay-at-home orders, then we can expect a crash on par with the previous one,” says real estate economist Johnson. “But the comeback could be quicker.”
The Federal Reserve building. | J. David Ake/AP Photo
The U.S. mortgage finance system could collapse if the Federal Reserve doesn’t step in with emergency loans tooffset a coming wave of missed payments from borrowers crippled by the coronavirus pandemic.
Congress did not include relief for the mortgage industry in its $2 trillion rescue package — even as lawmakers required mortgage companies to allow homeowners up to a year’s delay in making payments on federally backed loans.
When individuals stop making payments on their home mortgages,the companies that handle the loans and process those payments, so-called mortgage servicers, are still on the hook: They’re legally obligated to keep sending money to insurers and investors in mortgage-backed securities, the giant bundles of home loans that are packaged and sold on the securities markets.
Now industry executives and regulators are worried that Congress’s generosity toward homeowners could wipe out those companies, causing investors not to get paid and potentially bankrupting the entire mortgage finance system — a domino effect that would make it much harder for borrowers to access credit to buy homes.
Housing lobbyists sounded the alarm to Senate staff about the potential danger, but the sheer scale of the rescue bill and the focus on communicating the industry’s other big concerns — such as the details of how long mortgages would be suspended — meant their warnings were unheeded in the rush to finish the massive legislation.
Yet while the final bill allocates $454 billion for the Treasury Department to support the Federal Reserve’s emergency lending programs, including for large corporations, there is no overt requirement for lending to mortgage companies, despite a weeklong lobbying push by the industry.
“There was a strong desire on the part of housing lobbyists to have the bill explicitly direct the Fed and Treasury to use some of that money to finance servicing advances,” said Michael Bright, CEO of the Structured Finance Association, which represents 370 financial institutions in the bond market.
Now industry lobbyists are turning their efforts to Trump administration officials.
“We have been in constant contact with many parts of the administration to ensure that they understand the urgency of this liquidity facility being set up,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, a trade group.
Concerns about liquidity in the mortgage finance system have been building for years, as the companies that service mortgage loans are increasingly nonbanks — which don’t have banks’ access to Fed loans or their strict capital requirements and deposits to fall back on. Banks, which once dominated the business, have steadily pulled back since the 2008 housing market meltdown.
Usually, a mortgage company can withstand a few borrowers failing to make payments, but the breadth of the coronavirus pandemic has sparked industry estimates of between 25 and 50 percent of borrowers being unable to pay.
State regulators wanted to weigh in because “our members are the primary regulators of the nonbank servicers,” said Margaret Liu, CSBS senior vice president and deputy general counsel.
If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payments, according to Jay Bray, CEO of the servicing company Mr. Cooper. Depending on how long the situation lasts, Broeksmit said demands on servicers “could exceed $75 billion and could climb well above $100 billion.”
And if mortgage companies fail across the board, “the system breaks down,” said Andrew Jakabovics, vice president for policy development at Enterprise Community Partners, an affordable housing nonprofit.
“The kinds of relief we did during the foreclosure crisis — all of that had to do with the fact that we wanted to ensure that investors from across the world would continue to treat U.S. mortgage-backed securities as an incredibly safe investment,” Jakabovics said. “That would have very serious ramifications for the availability and price of mortgage credit.”
Bright, who formerly managed the $2 trillion portfolio of government-run mortgage financier Ginnie Mae, said he believes the Fed will come through with an emergency lending program for the industry.
“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.
Federal Housing Finance Agency Director Mark Calabria — who regulates Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants that prop up about half of the nation’s $11 trillion market — said this week in a Bloomberg TV interviewthat he was confident that large banks would continue to extend credit to mortgage servicers for the time being.
Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”
Broeksmit said some mortgage companies won’t make it that long, depending on the share of loans in their portfolios located in areas of the country where the virus has hit particularly hard.
“Some servicers will need the liquidity sooner than others, so we’re hoping that the facility will be set up immediately,” Broeksmit said.
Liu also said the credit lines from banks wouldn’t be enough to keep the system afloat.
“The mortgage market is one of the many multiple complexly interconnected pieces of our financial system, so those assurances are really important, but I think the role of the government in being a reliable and available source of credit for the mortgage market and mortgage servicers during a crisis is even more important,” she said.
In the meantime, the industry is crossing its fingers that the individual cash relief in the Senate bill will lead to fewer people needing to request forbearance on their payments.
“We’re hoping that the take-up rate won’t be too high and that the duration is not extended, but we have to prepare for both,” Broeksmit said.
Last week, the President of the Canadian Bankers Association announced that all six major banks would offer deferral payments on their mortgages and other credit products. Just like many public announcements over the last couple of months, many were left with more questions than answers.
One question that still has yet to be answered is, how deferred mortgage payments might affect your credit score? Equifax recently announced, “In the event that a [lender] makes a credit relief or payment deferral program available to its consumers to opt out of making monthly payments during the pandemic, Equifax’s expectation is that the [lender] would take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus that is misaligned with the program it has implemented.”
Scott Hannah, B.C.-based CEO of the non-profit Credit Counselling Society, was quoted in the Globe and Mail as saying, “I don’t see creditors punishing consumers for being as responsible as they can under circumstances beyond their control.”
Many financial professionals have been posting messages online and sending emails to reassure the public and their clients that a deferral payment will not affect their credit score.
I agree that Canadians should not have their credit affected by deferred payments, although I predict a much different reality for consumers starting April 1. Lenders update the payment history of each credit account electronically to Equifax and TransUnion.
In order for these deferred payments to not be reported to the credit reporting agencies as late, as Equifax alluded too, the lender would need to “take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus.”
Lenders big and small have been bombarded with phone calls that have put pressure on their personal and electronic systems. Are you willing to gamble your credit score and assume that every lender has updated its reporting system?
Millions of Canadians have found errors in their credit reports. For over a decade, I personally have received thousands of calls from consumers stating that a customer service rep told them one thing, only to find out that it was reported incorrect on their credit report.
In reality, it doesn’t matter what the customer service rep, the government, or what the industry experts tell you. If the lender’s internal system sees it as a late payment, that is how it will report. No one will know for sure if all these deferred payments will report correctly or not.
We can all agree that the amount of deferred payments over the coming months is unprecedented. For this reason, I expect an increase in the amount of mortgage, loan and credit card payments reporting incorrectly on Canadian credit reports.
Even with the chance that a deferred payment will show up as a late payment, many Canadians will still need to take advantage of such programs being offered by banks.
For those that don’t really need to defer their payments this month, I suggest you wait until it is necessary. A deferred payment is not free money. You will have to pay the lender back with interest.
Any delay is just going to increase the amount on future required payments. My hope is that, going forward, underwriters or those reviewing credit applications will be lenient on any late payments during the COVID-19 pandemic.
However, I am positive that the credit scoring system will not show much sympathy. On average, one late payment will drop your score 20 to 40 points.
A low credit score, regardless if it was caused by an error or not, will make it much more difficult to qualify for best-rate financing, renting, some employment opportunities and discounted insurance premiums. This is not to say your life will be over, but it will take at least 6 to 12 months for your credit to recover.
For those who have no choice but to request a deferred payment, here are some ways to protect your credit.
Request electronic or written confirmation that the payment is being deferred.
Ask for the employee number or service rep’s name that confirmed your deferred payment.
Write down the day and time you talked to the customer service rep.
Place all supporting documentation and record keeping in a safe place where you will actually remember where to find it.
Track both your Equifax and TransUnion credit reports for at least the next few months
If you do see an error, reach out to your lender and the credit reporting agencies to open up a dispute.
I’m sure the thought of making another call might be overwhelming for the hundreds of thousands of Canadians who have already spent hours on the phone to request the deferred payment.
For anyone who has something better to do than to spend hours listening to the annoying automated voice and elevator music, I suggest you start with suggestion number three.
I don’t want to create panic or be like Chicken Little saying the sky is falling. The point I sincerely want to get across is that reporting errors are common and always have been.
It is unrealistic to think there won’t be any errors as a result of the increased demand for deferred payments. Regardless of what happens, now is the perfect time to monitor and learn how to better protect your credit.
Some Canadians looking to defer mortgage payments due to COVID-19 say they are facing delays, confusion and outright denials from the country’s big banks.
“My wife called the 1-800 number for Bank of Montreal, talked to an adviser on the line to see what we are eligible for,” said Evan McFatridge of Dartmouth, N.S., whose family is down to a single income because his wife has been laid off from her job at a restaurant.
“She was told that our mortgage was too new to qualify for a deferral,” he said.
As part of the government’s pledge to help Canadians suffering financially due to COVID-19, Finance Minister Bill Morneau asked the heads of Canada’s big banks to allow people to defer mortgage payments for up to six months.
The banks responded by issuing a statement saying they “have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19.”
But some Canadians looking for relief from mortgage payments say they’re encountering a confusing, opaque and seemingly arbitrary process that is only adding to the stress of illness, isolation and lost income.
“I called in yesterday, spent two hours on the phone, and they required a full credit check and credit application in order to even see if I was qualified [for a deferral] and then didn’t even give me a time frame,” said one former BMO branch manager.
CBC has agreed to keep his name confidential because of his concerns that his comments could jeopardize his current employment situation.
“So, they had to speak to both me and my wife over the phone, get all our income, our jobs, our assets, our liabilities, said they had to send it to the credit department for review and that someone would contact us,” he said.
“They had no criteria for what they’re looking for. If they said to me, ‘One of you has to be laid off. One of you has to be in isolation. You have to sign a disclosure statement.’ Fine.”
The man’s wife is on reduced hours at home because she has to care for their kids, whose schools have been shut. Facing the loss of a large chunk of their family income, he said ,he wanted to get ahead of the problem and defer two or three months of payments.
“Even if I had to pay the interest payments during that time and they deferred the principal amount so the balance stayed the same, so be it, that’s fine,” he said.
“I’ve been through things in Alberta like the Fort McMurray fires where basically [all that was required then] was a call in to defer payments.”
Questions for banks unanswered
CBC News asked each of the big five banks for more information on the criteria for the case-by-case-based decisions on mortgage and credit deferrals.
Who would qualify?
Is there an application process?
Does the entire household have to be off work?
Will they require documentation?
None of the banks answered any of those questions.
TD, CIBC and Scotiabank all responded by repeating their commitment to work with personal and small-business banking customers on a case-by-case basis. Each encouraged customers to contact their call centres directly or visit their websites.
BMO and RBC did not respond to emails from CBC News.
‘My family will run out of money’
RBC customer Elsie Mamaradlo of Edmonton said she was also denied a deferral because her mortgage was too new.
“I got so frustrated and at the same time worried,” said Mamaradlo, who lost her job when the public recreation centre she works at was shut down due to coronavirus concerns.
Mamaradlo said that without the mortgage deferral, she faces a grim future.
“My family will run out of money for food and essentials,” she said.
Mamaradlo’s mortgage is insured with the Canada Mortgage and Housing Corporation (CMHC). The government is purchasing up to $50 billion of insured mortgage pools through the CMHC, which says that stable funding for the banks and mortgage lenders is meant to ensure continued lending to Canadian consumers.
In a tweet, CMHC said it “will support lenders in allowing deferral of mortgage payments for up to six months for those impacted [by the coronavirus].”
Alyson Whittle of Cochrane, Alta., said her bank, B2B, which is a subsidiary of Laurentian Bank, told her she could defer her next mortgage payment but then the following payment would be double.
“I was super frustrated,” she said.
Whittle, who works in sales for a home builder, and her husband, a utilities driller, are both out of work.
“My mom came to visit us and she had just come back from Las Vegas and developed a respiratory illness,” she said.
After that visit, Whittle says both she and her husband started feeling similar symptoms. They’re now both off work in isolation but haven’t been tested yet.
Laurentian Financial Group’s assistant vice-president of communications, Hélène Soulard, said it’s possible Whittle called before they were able to inform their call centre representatives about the deferral options.
“Rest assured we are committed to helping our customers who are facing hardships if they are not able to work due to illness, job loss or other reasons related to the COVID-19 crisis,” she said.
Terrio warned that this figure will noticeably increase in the very near future.
“I think 20% estimates will be drastically low if this drags on for months,” he said in an interview with BNN Bloomberg. “This [virus impact] is now drastically out of control.”
Declared as a pandemic by the World Health Organization last March 11, the COVID-19 virus has ground global markets to a standstill, with economies currently on freefall.
As of press time, more than 225,000 cases have been reported in over 150 nations. Jobs markets have suffered as governments worldwide mandated various restrictions, including social distancing and work stoppages.
The possibility of lower, or even zero, income has especially dire implications upon Canadian tenants, Terrio stated.
“Renters who lose their jobs are going to be in big trouble [in major centres]” he explained. “This is going to lead to huge increases in insolvencies, it’s just a matter of when.”
“I’m hoping [the government is] aiming more funds at people who don’t own homes. If 93% of people filing insolvencies are renters, there better be support for renters,” Terrio added.
“Once people lose their jobs and absorb what happened, this is going to be crazy. Could be summer, could be early fall. But I think it will happen within six months, and I think it’s going to be way more than we thought.”
“American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
Rep. Ayanna Pressley says she is “thrilled” that the House of Representatives passed her bill to reform the credit report system, though the legislation’s future in the Senate is unclear.
The House approved the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency (CREDIT) Act on a mostly party-line vote Wednesday afternoon.
Pressley — who has championed often-arcanefinancial reform bills during her first term in Congress — says the legislation would address a “fundamentally flawed” system that can impede upward economic mobility in a country where “our credit reports are our reputations.”
“When credit reports determine where you can live, work and how much you will have to pay for everything from a car to a college degree, consumers deserve a system that ensures equity, transparency and accountability,” the Massachusetts congresswoman said in a statement. “American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
The Comprehensive CREDIT Act includes measures to make it easier for the estimated 20 percent of consumers who have a “potentially material error” on their credit report to seek corrections; limit the use of credit scores for employment purposes; expand the opportunity for student loan borrowers to improve their credit scores; restore credit to victims of predatory agencies; ban the reporting of debt incurred from “medically necessary procedures” and delay the reporting of other medical debt; shorten the time that most adverse credit information stays on a report from seven years to four years, and from 10 years to seven years in the case of a bankruptcy; and bolster the Consumer Financial Protection Bureau’s oversight of the industry.
According to CFPB data, the watchdog agency has received more than 326,000 complaints against credit reporting agencies since 2012, which accounts for nearly 22 percent of the total complaints filed during that time period.
According to Pressley’s office, the Comprehensive CREDIT Act comprises tenets of several other bills introduced by fellow members of the House Financial Services Committee. However, the Boston Democrat authored the student loan-focused section of the bill, which would:
Establish a credit rehabilitation process overseen by the CFPB for borrowers facing economic hardship to repair their credit profile.
Prohibit credit reporting agencies from including any information on a credit report relating to a delinquent or defaulted student loan after the borrower makes nine on-time monthly payments.
Provide a grace period for borrowers seeking rehabilitation but experiencing significant financial hardship or other extenuating circumstances such as certain military deployments or residing in an area impacted by a major disaster.
Require private lenders offering repayment plans to borrowers seeking rehabilitation to offer affordable monthly payments and additional assistance.
Student debt has become an increasing burden for students in Massachusetts. A study in 2018 found that the average debt load for Bay State graduates increased by 77 percent between 2004 and 2016, faster than in any other state in the country except Delaware. According to Pressley’s office, more than 855,000 borrowers owed a total of $33.3 billion in student debt last year in Massachusetts — and nearly 100,000 are behind on their loans.
“Even if we wipe out all student debt tomorrow, the devastating impact on consumers’ credit would remain for years to come,” Pressley said in her speech. “For that very reason, we must give folks a real chance at recovery and repair.”
The bill passed the Democrat-controlled House by a 221-to-189 margin. With the exception of two moderate Democrats who joined Republicans to vote against the legislation, the vote was divided by party lines.
For the legislation to proceed any further, Democrats will likely have to wait until at least another election. Sen. Mitch McConnell, the Republican-controlled Senate’s majority leader, has repeatedly ignored the hundreds of bills passed by House Democrats.
Massachusetts state lawmakers have also recently proposed new protections for student borrowers in the wake of relaxed federal oversight under President Donald Trump.
Many Canadians are taking risks with their financial security and some of those that say they know better are building up higher levels of debt.
A new survey shows that 67% of respondents said that they are financially literate but when tested two thirds are not repaying credit cards in full each month (30% believe making the minimum payment stops interest charges); 72% are not saving on a regular basis; and 43% are not tracking their monthly expenses or spending habits.
The survey from loan search and comparison platform Loans Canada also reveals that 46% of respondents are ‘loan stacking’ or taking on multiple loans from several lenders for emergency funds or just to cover everyday expenses.
When arranging a loan 60% do not call the lender and 38% don’t compare lenders.
Almost half of the credit-constrained Canadians carry high-interest debt in the form of payday loans (45%) and credit cards (55%).
“The purpose of this survey was to learn more about credit-challenged Canadians and the role their financial literacy plays in the financial decisions they make.” said Loans Canada CTO Cris Ravazzano.
Source: Real Estate Professional – by Steve Randall 24 Jan 2020
It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.
This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.
“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”
Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.
Nantel, who refused to comment for this article, persisted.
Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.
And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.
Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.
Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.
One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.
“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.
“It shows that the bankrupt has not received the message.”
In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.
Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.
The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.
Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.
Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”
“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.
Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.
Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.
The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.
In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.
When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).
In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.
The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.
Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.
Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.
Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.
Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”
Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.
With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.
“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.
Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.
At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.
“There’s a cost to it. No question. There is a societal cost,” he said.
It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.
Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.
“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.
There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.
Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”
Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”
Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.
The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.
In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.
“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.
Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.
Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.
In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).
The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”
“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.
Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.
“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.
“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”
Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.
In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.
Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.
Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?
“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.
“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”
Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.
Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.
A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.
Those credit card companies may only recover a portion of what they’re owed.
“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”
A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.
Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.
The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.
But Gauger does not expect to see any of that.
Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.
“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.
For Gauger, it doesn’t feel just.
“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”
The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.
Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.
The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.
“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”
More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.
And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.
Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.
Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.
The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.
Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.
The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.
How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.
This is where the system’s consistency unspools.
In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.
“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.
But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.
Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.
The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.
“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.
Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.
In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.
“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”
In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.
Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.
A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.
“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”
His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.
“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.
In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.
It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.
He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.
“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.
Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.
When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.
Nantel can be discharged from his fifth bankruptcy as early as September 2020.
Source: Toronto Star – JESSE MCLEANDECEMBER 09, 2019
This investigation was done in partnership with Katia Gagnon and Marie-Eve Fournier of La Presse.Data analysis by Andrew Bailey.With reporting contributions from Bryan Meler and Jaye Williams of the Ryerson School of Journalism
After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.
Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.
When Can You Buy A Home After A Consumer Proposal?
Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.
First things first: pay off your consumer proposal completely before you take on major new mortgage debt.
If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.
You will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit history—with new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal)
If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.
In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.
Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first) it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.
When Can You Refinance Your Home After A Consumer Proposal?
This, too, can happen very quickly—in fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.
This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.
Should You Pay Off Your Consumer Proposal When You Refinance?
Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.
I prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same time—like a home improvement project or a child’s higher education, or other family debts.
CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.
Why Would You Pay off Your Consumer Proposal Early?
1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.
2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.
Worse than that, some of them will be erroneously reporting as R9s—written off completely.
And some credit cards may say they were included in a bankruptcy, even though that is not true.
A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!
If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.
3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.
And if you want a new smartphone, or lease or finance a new car, bad credit will make all this that much harder.
If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.
4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.
How Do You Refinance To Pay Off A Consumer Proposal?
First, your mortgage broker will do a thorough assessment of whether or not this is even doable. S/he will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.
An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?
Another consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago— it can make things difficult.
If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And s/he will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.
We actually see that happen less often than the other approach,which is to first apply for a private second mortgage.
In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.
During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.
After a year, (longer if that makes sense) we then refinance the two mortgages into a single first mortgage.
It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.
Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.
But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.