Tag Archives: default management

Closing defaults hit Toronto sellers hard in housing plunge: report

Hundreds of homeowners whose real estate transactions collapsed in the aftermath of Toronto’s market plunge last spring lost an average of $140,000 in property value when they eventually managed to sell their houses, according to a new report.

The study is the first to measure the loss of market value associated with so-called closing defaults, an unwelcome reality of real estate that lawyers say surged in the last half of 2017.

The report also identifies high demand from real estate investors as a key factor that fuelled the region’s white-hot market in early 2017. Investors bought 16.5 per cent of all low-rise houses in the Greater Toronto Area in the first quarter last year, a 65-per-cent increase compared to 12 months earlier.

At least 866 sales deals for low-rise houses failed to close in the GTA last year, according to the study released on Thursday by John Pasalis, a Toronto broker who analyzes industry statistics. The actual number of closing defaults is likely much higher as many other homeowners in similar situations still have not found new buyers.

On average, Mr. Pasalis found that homeowners lost $140,200 in property value over the 4.5 months it took them to find another buyer later in 2017, or in the first quarter of 2018, for a combined total loss of $121-million in market value.

“It tells you how rapid the decline was,” Mr. Pasalis said. “It tells you how quickly the markets turn.”

For Vicki Clayton, the cost of her failed deal was even higher. After a buyer agreed to pay $1.9-million for her North York tear-down bungalow in late April, 2017, the transaction fell through as the market plunged and the two parties couldn’t agree on a lower price. She relisted her house and it recently sold for $1.27-million, a loss of $630,000.

“It’s really a sad state of affairs but that’s what’s happened,” said Ms. Clayton, who is 66 and recently retired from her job as an office manager.

Ms. Clayton, who said her health suffered from the stress associated with the failed deal, has launched a lawsuit for damages for lost market value, as well as for the defaulting buyer’s deposit.

The GTA’s real estate market whipsawed from huge gains to rapid declines last year. Home prices were up by 34 per cent in March, 2017, compared with one year earlier, but plunged after the provincial government announced a 15-per-cent foreign-buyers tax in late April, falling 18 per cent in just four months.

The sudden shift caught many by surprise and lawyers reported an uptick in calls from buyers and sellers whose deals were in danger of collapsing. “In some cases, it was beneficial for the seller to just reduce the price, bite the bullet, get the deal closed without litigation,” said Mark Weisleder, a real estate lawyer.

Others have headed to court as angry sellers try to recoup defaulting buyers’ deposits, which are usually held in trust until both sides come to an agreement or a judge issues an order, as well as damages for the difference between their homes’ initial selling prices and what they eventually settled for.

In some cases, lawyers said their clients are involved in litigation related to two properties, as both sellers and buyers, as the domino effect of a buyer not closing on a seller’s deal caused that person to then default on their own purchase of a new property.

“It can be a chain reaction,” said Wendy Greenspoon-Soer, a lawyer who specializes in property-related litigation and currently has about 10 closing default cases already in litigation or heading that way.

For his study, Mr. Pasalis isolated low-rise homes that were sold on the Multiple Listing Service in the GTA in 2017 and then checked to see if they were later resold by the same owner before the end of March, 2018, indicating the first sale collapsed.

Mr. Pasalis and his team found 1,784 properties that sold last year and were later relisted for sale but did not sell, although they did not determine whether the seller for both listings was the same.

He also identified 122 low-rise properties that closed successfully last year, but were later sold again by their new owners for an average loss of $107,325.

“I don’t know if it’s panic selling or just that they’re overstretched financially, they think things are going to get worse,” he said.

Source: Globe and Mail – 

Image result for toronto home sales january 2018

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Good debt, bad debt and good bad debt

There has been an awful lot of noise in the media recently about the increasingly high levels of debt the average Canadian is carrying around on his or her back. And rightfully so: According to a recent report from Statistics Canada, our total national debt load, including mortgages, sits at around $1.8 trillion. (Why does that number always make me think of Mike Myers?). That’s more than $50,000 for every Canuck. But amid all the commotion are some surprisingly difficult-to-answer questions: Is all this debt bad? Is any of it good? And how can we determine what debt is good, what debt is bad or should we just try to avoid all debt like the plague? The answers aren’t always clear-cut. Clearly, further insight is required.

Economic types traditionally describe debt as being either good or bad, depending on what it’s used for. The good stuff is generally defined as money borrowed to buy something that will appreciate in value, like a house. Conversely, bad debt is described as money borrowed to buy something that will depreciate in value, like Buddy using his credit card to borrow $2,000 for a new set of golf clubs (they’re on sale!), because everyone knows you’ll play like Tiger Woods once you have a $2,000 set of his Nike golf clubs.

Unfortunately it’s not that simple. Not all good debt is good and not all bad debt is bad. (Warning: This is going to get wordy.) Yes, I am saying that there is such a thing as bad good debt and good bad debt. An example of bad good debt is when Buddy goes out and buys an oversized house that exceeds his needs. And to make matters worse, Buddy buys the house before he is financially ready. He puts down a too small down payment on his too big house and as a result, he ends up with a too big mortgage—which he amortizes over too many years. Given enough time, the house will likely appreciate, and this technically makes Buddy’s big mortgage “good” debt. However, it’s unlikely the house’s value will increase enough to cover the cost of the interest he’ll end up paying, let alone the larger expenses the house is going to generate: heating, upkeep, taxes and so on. To boot, there is a real possibility that this “good” debt will interfere with Buddy’s ability to properly save for his future. Broadly speaking, if Buddy’s housing costs (mortgage, utilities, insurance and taxes) exceeds 32% of his gross income, and if he will be paying those costs for more than 25 years, then it’s bad good debt.

On the other side, when Buddy’s sister Buddy-Lou takes out a two-year loan to help her pay for a gently used Honda Civic, that loan is technically bad debt since the car is going to depreciate. However, borrowing this money makes more sense than borrowing for a new car and it certainly makes more sense than leasing a new vehicle. (We’ll save that discussion for another time.) Assuming she takes care of it, Buddy-Lou’s car will still have value for years after the loan is paid off. Sure, it would be nice if she had the money in her bank account to buy that Civic when her old car died, but it would also be nice if George R. R. Martin didn’t kill off all of the best characters in Game of Thrones. Life happens. The loan needs to be manageable, without putting pressure on Buddy-Lou’s ability to save for her future. If that’s the case, it’s good bad debt.

It’s important to understand there is a big difference between accepting that you likely will incur some debt as you go through life and accepting debt as a way of life. It’s also a good idea to occasionally remind ourselves that even good good debt, like a properly structured mortgage is debt nonetheless and, as such, the interest you are paying on it isn’t doing you any favours. All debt, good, bad or anything in between, costs money and we should always be on the lookout for ways to pay it off as quickly as reasonably possible.

As a nation, we have become far too comfortable with personal debt. Today’s low interest rates are certainly a contributing factor, but the “keeping up with the Joneses” syndrome plays a part too. In some circles, it has become acceptable, even fashionable, to rack up mountains of high-interest credit card debt and then borrow more money to make the payments. Do not buy into this thinking. Pun intended. Credit card interest rates are anything but low, with many cards charging up to 29.99% interest. Even a “low interest” credit card will charge you around 12%. If you’re carrying a balance on your cards and you’re struggling to pay it down, you should transfer the balance to a low interest line of credit while you work it off. That would at least be better bad debt.

There is an inherent danger in describing debt as good. Sure, some types of debt are obviously better than others but that’s not the same thing as being good. Maybe we should further refine the two traditional definitions of debt into “bad debt” and “responsible-debt-that-I-thought-about-carefully-before-I-took-on-but-I-still-need-to-eliminate-as-quickly-as-reasonably-possible debt.” Because really, the only good debt is no debt at all.

Source: Money Sense – Robert R. Brown is a personal finance speaker and the author of Wealthing Like Rabbits. Follow him on Twitter @wealthingrabbit

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Retiring with a mortgage? Why you might want to think twice about that

When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business fantasizing about retirement. To me, it’s simple: if you have debt of any kind, you keep working until it’s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.

That said, I recognize there’s a large segment of the population not fortunate enough to have a paid-for home, corporate pensions or financial assets like RRSPs and TFSAs. I personally know seniors who still rent and have no financial safety net. Some may have to resort to payday loans just to get by until the next month’s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.

Doug Hoyes, president of Kitchener-based bankruptcy trustees Hoyes Michalos & Associates Inc., profiles senior debtors every two years in his Joe Debtor study. The data are shocking. He defines seniors as 60 or older, so many are baby boomers either in retirement or on the cusp of it. (The oldest boomers, born in 1946, are now 70, while the youngest boomers, born in 1964, are 52 and presumably still working full-time.)

Senior debtors make up 10 per cent of Hoyes’ 2015 study, up from eight per cent four years ago and owe an average of $69,031 in unsecured debt, higher than any other age group. Nine per cent borrow against their income — often pension income — by resorting to payday loans.

Payday loans are, in my opinion, almost usury — defined as debt instruments charging more than 60 per cent in interest a year. However, because the loans are only a few weeks in length (literally, until the next payday), the lenders can charge up to $21 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546 per cent, Hoyes says.

Fifty three per cent of these senior debtors live alone and often cite illness or injury as a cause of their financial troubles. Among bankrupt seniors, nine per cent had payday loans. In some cases, their adult children are making financial demands and they’re too embarrassed to admit they have few alternative resources.

At the other extreme are the fortunate, wealthy boomers with paid-for homes, large defined-benefit pensions and maxed-out registered and even non-registered (taxable) investments. For them, says Emeritus Retirement Solutions president Doug Dahmer, the biggest expense will be tax, something that must be planned for well in advance. In this case, borrowing may turn out to be tax efficient.

Then there are the rest of us: perhaps with no large company pensions, modest financial assets and a home with only some equity in it, which may be a tempting source of future funds in retirement or semi-retirement.

This middle group is often torn between paying down the mortgage before retiring, or capitalizing on low interest rates to take a chance on building their financial nest eggs in the stock market.

Last July a CIBC poll found that, on average, Canadians expect to be debt free by age 56, although some are indebted well into their sixties. Even in the 45-plus cohort, more than 68 per cent are in debt, including 31 per cent who still have mortgages. In 2013, CIBC found 59 per cent of retirees were in debt.

But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. “There’s no harm in having debt if it’s for an appreciating asset. If you’re in your home for the long term and borrowing at low interest rates, it’s not a big problem. The problem is when you run out of cash flow to service the debt.”

Interest rates are near 60-year lows: posted five-year mortgage rates are under three per cent at most financial institutions (and under four per cent for 10 years). Of course, unless you lock in, there’s no guarantee rates won’t rise to more uncomfortable levels.

In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people’s retirements at risk. It was written in response to another CIBC poll that found 72 per cent of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6 per cent annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.

Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples’ net worths. This tempts some to tap into their home equity in retirement in order to overcome their past failure to save. As boomers become net sellers of homes instead of driving up prices, BMO said home prices could fall by one per cent per year. Downsizing, renting or moving to a small town are all ways to access some of the equity in your home.

Still, Hoyes has seen enough senior debt to argue against taking on more. “Low interest rates are great as long as you can make payments, but what if you lose your job, get sick or divorce? The fact moderate interest rates are only three per cent is irrelevant if there’s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it’s hard: you can’t control the price of gas or car insurance.”

Personally, I like to have enough Findependence that you reach what Dahmer terms the “Work optional” stage. It’s about being in control of your days, Hoyes says, “If you have debt when you retire you are not in control of your day.”

And of course, medical expenses can creep up. It’s not as bad here as in the United States, where medical costs can have catastrophic consequences, but “In Canada medical expenses are insidious,” Hoyes says, “It’s a lesser amount, but creeps away and boomers are more likely to get whacked.”

One option, if available, is to work part-time in retirement. An analysis by Toronto-based ETF Capital Management found that if a retiree earns just $1,000 a month extra in consulting income or a part-time job, a nest egg’s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.

This may or may not be “optional” work. BMO found 29 per cent of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes “Plan B,” one that 41 per cent of Canadians are considering.

But avoid reverse mortgages, Dahmer counsels. He says it’s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you’re still working and the bank thinks you’re a good credit risk.

Dahmer thinks flexible use of debt through a line of credit is a sound strategy for smoothing spending in peak years, especially if your main income is from registered assets. “You’re far better off paying 2.5 to 3.5 per cent in interest for a few years than forcing yourself from a 33 per cent to 42 per cent marginal tax bracket, not to mention Old Age Security being clawed back.”

The savings can be in the hundreds of thousands: “Retirement is the one time in life that strategic tax planning can make a significant difference. That’s because of the many different places you can source cash flow from, each with its own distinctive tax implications.”

Source : Financial Post Jonathan Chevreau | March 22, 2016 | Last Updated: Mar 23 6:56 AM ET

Jonathan Chevreau is the founder of the Financial Independence Hub 

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Fixing Your Credit After a Bankruptcy to Apply for a Mortgage

When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn’t think he had a chance to even get a credit card.

Charlie’s bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.

It didn’t take long for him to realize that his financial life was not over. Within a couple of months, he’d gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you’re considered an even better risk than someone who still has a mountain of debt because you can’t file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.

Many people think, That’s exactly what got me into trouble in the first place, so I’m going to avoid plastic in my life forever. That’s a huge mistake if you want to buy a house. You need to rebuild yourcredit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history.

With my help, Charlie’s credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today’s rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.

The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don’t have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.

Fix Your Credit Report

The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.

When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.

In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.

But as a negative mark ages on your credit report its impact on your credit score becomes less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.

You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.

Rebuild Your Credit History

While you’re working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.

You’ll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they’re not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.

You also may be able to get a retail credit card. Don’t go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.

Monitor Your Credit Score

As you’re rebuilding your credit score, you may want to monitor your progress. If your score continues to go up, you’re on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you’ll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.

Six months before applying for a mortgage, don’t take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.

Source: AOL Real Estate – Lita Epstein Mar 4th 2011 

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Maple Bank Siezed by OSFI and Cut Off by CMHC

Maple Bank

Maple Bank, a niche securitization player in Canada’s mortgage market, looks like it’s going down.

Banking regulator OSFI has taken control of the bank’s Canadian operations according to the Financial Post, which quotes OSFI Superintendent Jeremy Rudin as saying, “We are guided by our mandate, which is to protect the depositors and creditors of the Canadian branch and have taken this step to safeguard their interests.”

On top of that, CMHC has terminated Maple as an approved issuer of mortgage-backed securities (MBS). CMHC made this statement:

Effective immediately, Canada Mortgage and Housing Corporation (CMHC) has suspended Maple Bank GmbH – Toronto Branch as an Approved Issuer of National Housing Act Mortgage-Backed Securities (NHA MBS). The suspension is the result of restrictions placed on the operations of Maple Bank GmbH by Germany’s Federal Financial Supervisory Authority (BaFin) that affect its ability to fulfill its obligations as an Approved Issuer.

CMHC provides a timely payment guarantee of interest and principal to NHA MBS investors. CMHC’s guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch are not impacted by the suspension.

Here is a good summary from Handelsblatt about what triggered Maple’s woes → Link.

 

maple bank chart

Maple Bank is probably not coming back. National Bank has already written off its 25% stake. That’s disappointing for the mortgage market because, while Maple was a small player in the MBS market, it was still a player. And in a market where MBS spreads have widened significantly in the last year, the market needs all the liquidity it can get. (MBS spreads refer to the extra yield that mortgage investors demand on top of safe government bonds.)

According to sources, Maple bought mortgages from a handful of non-bank lenders. It also provided warehouse facilities (i.e., short-term capital to fund mortgages until they’re sold to investors). Lenders would take funded mortgages, package them up, sell them to Maple and then Maple (as a former CMHC-approved issuer) would issue MBS and/or sell those mortgage pools into the Canada Mortgage Bond (CMB) program. This provided cheaper funding for lenders than simply selling their mortgage commitments to big institutional buyers.

Based on CMHC data, Maple was ranked 21st out of 82 MBS issuers in terms of market share, with $3.49 billion of MBS outstanding out of $441 billion industry-wide.

“Losing any funder is never good,” said one lender executive who preferred not to be quoted. “All of their mortgages were originated in the broker space.” That leaves big securities firms like TD Securities, RBC Dominion Securities, National Bank Financial and Merrill Lynch as the main buyers of broker-originated mortgages. “If it’s just big players left, it’s not positive for consumers,” he added, noting that less competition raises funding costs for bank challengers.

Side story: On an unrelated positive note, we hear that Laurentian Bank is now going to be a player in the securitization space. That is very welcome news for broker lenders. More from Bloomberg.

None of this should cause investors in Canada’s MBS market to lose confidence. What sunk Maple Bank was unrelated to Canada’s housing or securitization markets. CMHC is now managing its MBS to ensure investors get paid as expected. The housing agency sent CMT this statement today:

Canada Mortgage and Housing Corporation’s (CMHC) guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch is not impacted by the suspension, therefore there is no impact on MBS investors.  Furthermore, this suspension will have no impact on homeowners or mortgage holders.

CMHC has taken control of the NHA MBS and related mortgage cash flows and provides a timely payment guarantee of interest and principal to NHA MBS investors.

CMHC has previously had four issuer defaults in the early 1990s. No MBS payments to investors were ever missed and CMHC did not incur any losses on these previous issuer defaults.

We’re told by other sources that CMHC has never lost money by guaranteeing NHA MBS, even when issuers default. That’s thanks in part to the excess spread that’s earned between the mortgage interest (paid by borrowers) and the MBS interest (paid to investors). 

“The [MBS] trades themselves are fine; but with Maple now essentially closed for business…whoever was using them will have to find alternative funding…” said one capital markets pro we spoke with. Fortunately, all lenders who relied on Maple have backup funders, we’re told.

As for small Canadian depositors, the fallout is limited. Maple’s latest annual report notes: “The Toronto branch specializes in lending businesses, in particular the acquisition of mortgage loans for securitization, and deposit taking.” According to OSFI, however, Maple Bank is a foreign bank “authorized under the Bank Act to establish branches in Canada to carry on banking business in Canada.” Foreign banks cannot generally “accept deposits of less than $150,000” in Canada.

Maple’s last report noted that its “securitization business grew significantly” through 2014. And now it’s gone; just like that.

Source: Canadian Mortgage Trends  February 10, 2016  Robert McLister  

Maple Bank

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CBC FORUM House keys sent to the bank? Your thoughts on mortgage defaults

The federal government is worried about Albertans making strategic defaults on their mortgages.

 

Some Albertans are walking away from their mortgages by putting their keys in the mail and sending them back to the bank.

It’s a phenomenon known as jingle mail — sparked by a combination of high debt and lost jobs — and was a big problem in Alberta back in the 1980s.

As a result, the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada’s banks, say experts.

We asked what this means to you: Does your mortgage keep you awake at night? What would make you send your house keys to the bank? Any personal mortgage anecdotes you want to share?

You weighed in via CBC Forum, our new experiment to encourage a different kind of discussion on our website. Here are some of the best comments made during the discussion.

Please note that user names are not necessarily the names of commenters. Some comments have been altered to correct spelling and to conform to CBC style. Click on the user name to see the comment in the blog format.

Many chimed in with their own mortgage advice.

  • “Sending house keys back to the bank seems very irresponsible. The banks are not going to absorb the costs — customers will be on the hook in the end.” — EOttawa​
  • “People who buy the McMansions in the hopes that someday they will become part of the upper class are the ones who should worry. Big risks have serious consequences. Good luck with it.” —Chris K
  • “No, it doesn’t keep me awake for the simple reason that we bought a home well within our means with a mortgage way lower than what the banks said we could borrow … It’s a question of common sense and priorities.” — docp

There was some discussion on who should be blamed.

  • “Lots of blame and finger pointing to go round. Bottom line, as many others have said, it falls on personal responsibility to make good decisions and sometimes circumstances outside our control force us to make tough decisions to survive — like using ‘jingle mail’ in Alberta.” — Don Watson

Several commenters even had their own jingle mail stories.

  • “My ex-husband and I returned the keys to the bank when it became clear that he was unable to maintain the mortgage payments on the home he had bought before we were married. This happened in the first year of marriage and it was a terrible blow to him. Later he declared bankruptcy.” — LinneaEldred
  • “We purchased our home within our means and have been able to keep up with the payments. We lived in Fort McMurray for four years, after they went through the downturn of the economy in the early 80s. Folks were turning in their keys then and walking away. People still don’t learn from past mistakes.” — Leslie Riley​

There were even some thoughts on the future … or lack of it.

  • “I have a mortgage and I also have a full-time job, yet I still worry about the future of my mortgage. I don’t believe that we need to point out the fact that even if you were or are smart about your money, you cannot predict your future.” — Samantha R.

You can read the full CBC Forum live blog discussion on mortgages below.

Can’t see the forum? Click here

Source: By Haydn Watters, CBC News Posted: Feb 09, 2016 12:26 PM ET

 

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Are young homeowners doomed if housing prices drop?

A new study from the Centre for Policy Alternatives suggests Canadian homeowners under 40 will take a major financial hit if real estate prices come crashing down, but experts say most will be able to weather the storm without foreclosing just by staying put and being patient.

Young Canadian homeowners are in for some tough times if the housing market comes crashing down around them, a new study suggests, but realtors and economists say there’s no reason to panic.

​​A report released last week by the Canadian Centre for Policy Alternatives suggests that one in 10 homeowners under 40 will be underwater on their mortgages — meaning their debts will be greater than their assets  — if real estate prices crash as expected at some point in the near future.

Right now, real estate prices are overvalued by anywhere from 10 to 30 per cent, according to Bank of Canada estimates. Eventually, most analysts say, the market will correct itself and prices will go down, either due to declining incomes, rising interest rates, or a combination of both.

When that happens, homeowners under 40 will be disproportionately affected — not because they stand to lose more actual dollars, but because they are debt-strapped and will see a bigger drop in their net worth, the study argues.

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Canadians in their 30s carry debt worth an average of four times their incomes, according to the Centre for Policy Alternatives. That means they stand to lose a much bigger percentage of their net worth if their homes lose value. (Joe Raedle/Getty Images)

“Their entire net worth is wrapped up in their home when they’re in their twenties and thirties. They’re early on in a mortgage, so … almost everything they’ve paid has gone into interest,” John Andrew, a real estate professor from Queen’s University in Kingston, Ont., said.

“And the other thing is that they’ve leveraged this to the hilt. So it’s a triple whammy, those three factors.”

‘Not a big deal’

Families in their thirties could lose an average of $60,000 if there is a correction of 20 per cent, and that would represent an average of 39 per cent of their net worth. People in their twenties would see their net worth reduced by 45 per cent in the same situation.

It all sounds scary, but young homeowners do have one thing their older counterparts do not — time. 

“Even if you’re underwater, it’s not a big deal, because as long as you live in this house and you pay your mortgage, that’s fine,” Benjamin Tal, deputy chief of CIBC’s World Markets, told CBC News.

Benjamin_Tal

CIBC’s Benjamin Tal says young homeowners shouldn’t panic about a potential drop in housing prices because they have the luxury of being able to wait it out. (CIBC)

“Of course, it’s difficult to be underwater. It’s not a very good thing to experience. But from a practical perspective, as long as you have a job and you have income, I really don’t see a situation in which you should panic.”

Andrew agrees. Asked what advice he has for young homeowners, he said: “Don’t panic. Yes, your net worth may have declined significantly, but until you go and sell your house, if you’re in the market, you’re in the market.”

Interest rates hikes an ‘urgent issue’

Both Tal and Andrew say the bigger issue at play here is the possibility that interest rates on mortgages will rise, triggering the anticipated drop in housing prices.

“I’m pretty sure we’re not going see a collapse in home prices until we see a rise in interest rates,” Andrew said.

And while most young homeowners can withstand a housing market crash by staying put and waiting it out, not everyone can afford to pay a bigger monthly mortgage. 

“If you can’t keep the house because you can’t afford the extra $350-$400 a month in mortgage payments, now you’ve got a really serious and urgent issue,” he said.

‘The economy will slow down’

Soaring interest rates and declining housing prices can also impact the economy at large.

“You have a situation in which more young people, young families, spend more money on their housing as opposed to anything else. So you don’t go to restaurants, you don’t take vacations — you just finance your mortgage,” said Tal.

“And if you don’t [spend money], the economy will slow down, and that will make things even worse because it means that unemployment starts to rise, and therefore some people actually won’t be able to pay at all.”

That’s particularly bad news in Canada, said economist David Macdonald, who authored the Centre for Policy Alternatives study.

“We’re already seeing weak growth in Canada,” he said, “and this would add to that slow growth.”

What’s the solution?

In his study, Macdonald recommends the government look at adopting U.S.-style policies to help young Canadians weather the storm.

That could mean giving unemployed homeowners some leeway on their mortgages, or allowing those in extreme circumstances to walk away from their mortgages without taking a huge hit to their credit scores.

But these are solutions for later down the road, when prices start dropping, he says.

In the meantime, Tal said young and prospective homeowners should make sure they have enough wiggle room in their budgets to comfortably make monthly mortgage payments even if rates rise by a couple of percentage points. 

“If they cannot do it, they should buy a smaller house,” he said.

Or, not buy a house at all.

‘There’s nothing wrong with renting’

Studies like this one might put you off buying at all, and that’s a perfectly reasonable option, said Andrew, especially in high-cost cities like Toronto, Vancouver and Calgary, where a housing market crash would hit hardest.

“If you look at a lot of world-class cities around the globe, there’s nothing wrong with renting. If you lived in New York City, you could easily rent your entire life and you wouldn’t feel inadequate about it.

“We’ve got this kind of Canadian hang-up,” he said. “There’s this sense that if you don’t own your own home … you’re not a success. And I think that’s changing.”

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Homeowners in big, expensive cities like Vancouver stand to lose the most if housing prices drop. That’s why some analysts say it might be better for city-dwellers to rent. (Robert Giroux/Getty Images)

Renting means avoiding the hidden costs of home ownership, like maintenance and property taxes. What’s more, you can up and leave whenever you want.

“Certainly for young people, as long as you’re saving some money, as long as you’re putting a significant amount away monthly and working toward that long-term goal, there’s absolutely nothing wrong with that.”

Source: CBC Sheena Goodyear, CBC News Posted: Nov 16, 2015 5:00 AM ET

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