Tag Archives: default management

The next financial crisis: A collapse of the mortgage system

Federal Reserve

The U.S. mortgage finance system could collapse if the Federal Reserve doesn’t step in with emergency loans to offset 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.

That “could threaten the ability of a mortgage servicer, particularly nonbank servicers, to remain a going concern,” the Conference of State Bank Supervisors warned Fed Chair Jerome Powell and Mnuchin in a March 25 letter.

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 interview that he was confident that large banks would continue to extend credit to mortgage servicers for the time being.

Stillhe 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.

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Consumers could face hit to credit scores, jump in payments from mortgage deferrals

‘You’re going to get hiccups in this process; it’s never happened before,’ expert says

Details of RBC’s mortgage deferral program, obtained by CBC News, reveal the option will be available to all mortgage holders but in a way that appears to ensure the bank will not lose money in the short term and may even come out ahead. (David Donnelly/CBC)

Canadians couldn’t get answers on mortgage deferrals at Canada’s biggest bank because information and eligibility requirements kept changing almost by the hour, a source who works for RBC tells CBC News.

When the first details were eventually given out to frontline employees at RBC’s Mississauga call centre, they revealed deferrals would be available to all mortgage holders, but in a way that appears to ensure the bank would not lose money in the short term and may even come out ahead.

“Deferrals actually meant that interest accrued from each deferred payment was being added back into the principal balance of the mortgage,” said the source.

“Technically clients would then be [charged] interest on top of interest for those payments [that were] deferred,” they said.

In effect, it’s as though the bank is loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on that loan as well.

“They’re going to make more money because they’ve just loaned you more,” said Peter Gorham, an actuary with JDM Actuarial Expert Services.

“I don’t know that I want to say it’s profiting. I would say it’s not costing them a penny.” he said.

“People are increasing their debt load. If you are not desperate for the financial relief, don’t take it,” Gorham said, adding RBC and other banks are taking on increased risk from deferrals, a risk that could grow significantly if the COVID-19 crisis runs from months into years.

When it comes to repaying the increased debt load from a deferral, there may be other complications for mortgage holders.

“This also means an increase in clients’ payments at their next renewal period due to the increase in mortgage balance,” the source at RBC said.

RBC frontline employees at one of the Bank’s call centres were overwhelmed with calls and had no information to provide customers, a source tells CBC News. (Michael Wilson/CBC)

If the client doesn’t want a bigger payment, they can extend the amortization period, the source added. But that typically requires a full credit application which may affect their credit score.

The other option is making extra payments after the deferral period ends to bring the mortgage back down as quickly as possible to its original amount.

Two other big banks have mortgage deferral polices similar to RBC’s.

In an updated set of deferral FAQs posted on its website, Scotiabank too says interest will continue to accrue.

“You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow,” the banks states on its website. Scotiabank is also offering deferrals on personal and auto loans, lines of credit, and credit cards.

On its website, BMO also states interest will continue to accrue on mortgages.

The Canadian Bankers Association issued a statement late Sunday night saying, “Customers should understand that [a deferral] is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest which would otherwise be part of the deferred payments is added to the outstanding balance of the mortgage.”

Credit card deferrals

RBC is also offering six-month deferrals on credit card payments, according to an email obtained by CBC News. But once that period ends the minimum payment would include all accrued interest from the deferred payments. Meaning the minimum payment could jump significantly.

A section of an email obtained by CBC News which was sent to RBC employees with instructions of how to respond to customers seeking a deferral on credit card payments. The email was sent on March 18 at 1:16pm EDT. (Obtained by CBC News)

Most minimum payments on credit cards are interest plus $10. But Quebec passed a law in 2017 changing minimum payment requirements in an effort to counter rising household debt by making people pay off more than just accumulated interest.

Minimum payment on credit cards in Quebec is 2.5 per cent of the balance owing and will eventually rise to five per cent.

Confusion

Last week, all of Canada’s big banks agreed to a request from Federal Finance Minister Bill Morneau to defer mortgage payments for up to six months for people suffering financially due to COVID-19.

The banks issued a joint 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 initially many Canadians looking for deferrals said, after waiting for hours on hold, they were told they didn’t qualify. One BMO customer — who is actually a former BMO branch manager — said he was told he needed a full credit check and credit application and even then the bank would not tell him their criteria for approval.

It turns out the person he spoke with may not have known the criteria themselves at that point.

By midday Wednesday, workers at RBC’s Mississauga call centre still hadn’t been informed.

WATCH | Consumer frustrated at lack of information about mortgage deferrals

Watch

Confusion surrounds COVID-19 mortgage deferrals

Many Canadians looking for relief from mortgage payments during the COVID-19 pandemic are met with a confusing process. 2:00

“Anyone calling in to RBC between 8 a.m. and noon was directed to call back ‘later’ as we had been given no direction or timeframe as to when relief procedures would be implemented, other than ‘soon,'” a source told CBC News.

On March 13, the finance minister said that he had already spoken with the CEOs of the big banks. The banks issued their statement promising to work with Canadians on a case by case basis on the evening of March 17, around 7 p.m. ET.

Canadians began calling their banks the morning of March 18.

But, as late as March 20, Canadians were still being told no information was available.

“I was on hold for 11 hours [March 19] and then five hours [March 20],” said Lindsay Gillespie, who has a mortgage and a line of credit with FirstLine Mortgages, a division of CIBC.

Canada’s Minister of Finance Bill Morneau at a news conference in Ottawa, Ontario, Canada March 13, the day he told reporters he had spoken with the CEOs of Canada’s big banks. (Blair Gable/Reuters)

“I finally got through and was told there’s nothing that can be done right now, they don’t have anything set up. I was told to call back another time,” she said.

Also as late as March 20, some RBC customers were still being told they didn’t qualify for a six-month deferral.

“We called RBC and were told that deferrals are being assessed on a case-by-case basis and that our eligibility for a deferral is limited to six weeks,” said Jeff Hecker, a principal at a Toronto Marketing research firm.

“No explanation was provided,” he said.

In a statement issued Sunday evening, RBC said “the developments around COVID-19 are moving quickly and we understand that clients have questions. Our frontline employees are doing incredible work to respond to clients quickly and effectively, and we are staying close to them to ensure they have the information they need to support clients.”

Hiccups

Some in the mortgage industry say the confusion over deferrals is understandable, given the unprecedented and rapidly changing nature of the COVID-19 crisis.

“You’re going to get hiccups in this process; it’s never happened before,” said Robert McLister, mortgage expert and founder of RateSpy.com.

 

“It’s case-by-case, it’s completely at the lender’s discretion as far as I understand it. Even though the big banks have agreed with the federal government to offer these programs, there’s no mandatory federal guidelines that I’m aware of,” he said.

McLister says it’s possible some people are being declined mortgage deferrals because they can’t prove their income has dropped.

“But generally speaking if you are in legitimate need and you’re about to default on a mortgage payment the lender is going to work with you,” he said.

Source: CBC.ca – Aaron Saltzman – March 22, 2020

Senior Reporter, Consumer Affairs

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Frustrated Canadians looking for mortgage deferrals from big banks facing delays, denials

Mortgage holders say the process, criteria are unclear

With some people out of work during the COVID-19 outbreak, many are waiting for clear answers from their banks to see if they qualify for mortgage payment deferrals. (CBC)

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.”

Evan and Janna McFatridge of Dartmouth, N.S., were told their mortgage was too new to qualify for a deferral. (Evan McFatridge)

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.

When a BMO mortgage holder — who is actually a former BMO manager — called BMO to see if he could get a mortgage payment deferral, he was told it required a full credit check and credit application in order to even see if he qualified. (Jonathan Hayward/The Canadian Press)

“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.

We asked:

  • 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.

Minister of Finance Bill Morneau speaks during a press conference on economic support for Canadians impacted by COVID-19, at West Block on Parliament Hill in Ottawa, on Wednesday. The federal government is rolling out $27 billion in new spending and $55 billion in credit to help families and businesses. (Justin Tang/The Canadian Press)

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.

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How divorces affect mortgages


How divorces affect mortgagesThey say about half of all marriages end in divorce—whatever the figure, complications arise when it comes to dividing assets like homes, and determining who keeps making mortgage payments.

“It’s a commercial transaction irrelevant to marital status,” said Nathalie Boutet of Boutet Family Law & Mediation. “If one person moves out and the other stays in the house, they still have an obligation to pay the mortgage to the bank, so the sooner the separating spouses make an arrangement the better because it could impact credit rating.”

According to Statistics Canada, there were roughly 2.64 million divorced people living in Canada last year—a figure brokers may not find surprising. While divorcing couples often fight over their marital home as an asset, the gamut of considerations is in fact more onerous.

“With the stress test, it’s a lot harder,” said Nick Kyprianou, president and CEO of RiverRock Mortgage Investment Corporation. “The challenge is qualifying again with a single salary. The stress test adds a whole other level of complexity to the servicing.”

Additional complexities include a new appraisal, application, and discharge fees.

“If you have a five-year mortgage and you’re only two years into it, there will be some penalties,” said Kyprianou. “Then there’s a situation of whether or not the person will qualify as a single person for a new mortgage.”

As an equity lender, RiverRock has welcomed into the fold its fair share of borrowers whose previous institutional lender wouldn’t allow one of the spouses to come off title because they were qualified together.

If one spouse is the mortgage holder and the other is not, Boutet explains how the law would mediate.

“Let’s say she owns the house and he moves in and pays her something she would put towards the mortgage but it’s still below market rent, she’s effectively giving him a break,” she said. “Would part of his rent go towards a little equity in the house because he helps pay the mortgage? Or is he ahead of the game because he pays less than he would to rent an apartment? What they have decided in this case is that a percentage of his payment will be given back to him as compensation for helping her out with her mortgage and he will never go on title.”

Boutet recommends that cohabitating couples, one of whom being a mortgage holder, should have frank discussions at the outset about where the rent payments go.

“Sometimes the person who pays rent has a false understanding of paying the mortgage. They have a misunderstanding of what that money is going towards.”

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Walking Away From A Mortgage in Canada

If you are over-mortgaged and facing negative equity in your home, can you walk away from your mortgage in Canada?  We explain what you can do when you can’t pay off the entirety of your mortgage loan after a sale or bank foreclosure.

How does a mortgage shortfall happen?

If you’re a homeowner and your mortgage is higher than the equity or the market value of your home, you are by definition, underwater. Meaning, if you sold your home today, you are not likely to get the full mortgage paid out by selling. Put another way, you have negative equity in your home.

Causes of a mortgage shortfall:

  • Price decline: you bought at the peak with a high-ratio mortgage, and the market dropped. For example, you bought a condo or a house for let’s say a million dollars with 10% down. The market subsequently flattens, and the list price is now $800,000, so you’re underwater by $100,000 plus selling costs, real estate commissions and potential mortgage penalties.
  • Debt consolidation: our typical homeowner client has more than $50,000 in unsecured debt. If you consolidate this through a second, or even third mortgage and the market softens, you can easily find yourself with less equity in your home that the total of all your mortgage debt.
  • Negative investment cash flow: you may have purchased an investment property and are funding the rental shortfall via a secured line of credit. If the market does not increase sufficiently to cover your accumulated cash loss, you may find yourself facing growing negative equity.

Canada has full recourse mortgage laws

A theoretical shortfall is not a real shortfall. You don’t have to sell. If you can keep your mortgage payments current, and expect that the market will return before you intend to sell you can hold tight.

If you are in default your lender will begin proceedings to collect. If you do not respond and cannot catch up on missed mortgage payments, your bank or lender will likely begin proceedings to sell your home through a power of sale.

If you sell with a shortfall, or your bank forecloses, you still owe your mortgage lender any deficiency between the money realized from the sale and the balance owing on your mortgage.

Should you sell your home for less than you borrowed and find yourself unable to repay the shortfall, in Ontario, your lender can pursue you to collect the difference, as they have full recourse:

Full recourse means that a lender can pursue you if your house is underwater and you sold your home, and there’s a shortfall … your mortgage lender can come after you legally for that debt in Canada.

How do I deal with an unsecured mortgage shortfall?

Like any debt, you are expected to make payments on it. If you are unable to pay back this shortfall, your creditors will pursue legal actions like a wage garnishment. In the case of CMHC, while it may take some time, they can also seize your tax refunds.

In Ontario, any mortgage shortfall after the sale of your home becomes an unsecured debt. Initially, your mortgage lender was a secured creditor. However, because the security, your home, has been sold, there is no longer any asset attached to the debt, and they are now an unsecured creditor.

If your mortgage was subject to insurance because you had a low down payment, your first step might be to draw on your CMHC Insurance. In this case, CMHC pays your original lender. However you still owe the debt, it’s just that now CMHC is now your creditor.

The good news is you have options to deal with mortgage shortfall debt:

  1. Make a settlement offer through a consumer proposal,
  2. File for bankruptcy to eliminate what you owe faster and get a fresh start.

The best place to start is to speak with a licensed debt professional about your relief options.

I think the big myth buster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff.

For a more detailed look at how to deal with mortgage shortfalls and how lenders can pursue you to recover a mortgage shortfall in Canada, tune in to today’s podcast or read the complete transcription below.

Source:  Hoyes.com (Hoyes – Michalos) By 

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Can you walk away from your home?

The fluctuating housing market can make purchasing a house a bit of a gamble. If you buy when prices are high and the value of your home goes down, most homeowners can just wait it out. Houses are long-term investments and eventually with time you know the market will rise again.

“If you bought at the market high and prices drop, you could be underwater on paper, which means you owe more than the home is worth. If you’re not planning to sell and you can meet your payments, you don’t lose,” says Scott Terrio, manager of consumer insolvency for debt relief experts Hoyes, Michalos & Associates. “It becomes a problem for someone who discovers they can’t carry the mortgage payment plus all their other debt, especially if they’ve lost a job, dealt with an illness or they’ve simply run out of credit.” In those instances, it may make fiscal sense for the homeowner to abandon their mortgage and walk away. The home goes into foreclosure — the home is turned over to the lender, who attempts to recover their investment by forcing the sale of the home and using the money to pay off most of the debt.

If you have lots of debt and you’re not meeting your payments, can you simply choose to pack up your belongings and walk away from your high-priced mortgage?
If you have lots of debt and you’re not meeting your payments, can you simply choose to pack up your belongings and walk away from your high-priced mortgage?  (CONTRIBUTED)

This happened frequently in the U.S. during the financial crash in 2008; lenders were forced to absorb the unrecovered debt. Could this happen in Canada? It’s not quite as simple here. “In Ontario and most other provinces, there are full recourse rules, which means you can’t walk away from your mortgage obligation without recourse from the lender, who can pursue mortgage shortfalls in court,” explains Terrio. However, homeowners can file a proposal or bankruptcy, which makes any shortfall unsecured (like other debt such as student loans, payday loans, car loans, line of credit and credit card debt). “Once a proposal or bankruptcy is filed, you can’t be sued for any shortfall, which is the difference between what you owe and what the lender can get for the house.”

What is the difference between filing a proposal and filing for bankruptcy? They’re both solutions to resolve debt and provide legal protection from creditors (for example, creditors stop wage garnishments). In bankruptcy, you surrender certain assets in exchange to discharge debt. When you file a proposal, you make an offer to settle debt for less than you owe.

“Proposals are filed more frequently with our clients now than bankruptcy,” explains Terrio. While you have to make a better offer to your creditor than what they would get if you filed bankruptcy, “it has less impact on your credit long-term and you can keep your belongings, which makes it a very realistic and favourable option for many.”

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Late payments set to rise on Canadians’ $599-billion of credit card, non-mortgage debt, Equifax predicts

‘We will start to see delinquency rates inching up a little bit, and debt probably slowing down,’ as Bank of Canada starts raising interest rates, credit agency says

Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country’s largest credit reporting firm.

Regina Malina, senior director of analytics at Equifax Canada, predicts late payments on the country’s $599 billion (US$455 billion) of credit card, auto and other non-mortgage consumer debt will begin to move “modestly higher” by the end of this year.

“Our prediction is that we will start to see delinquency rates inching up a little bit, and debt probably slowing down,” Malina said last week in an interview.

The delinquency rate — which measures the number of payments on non-mortgage debt that were more than 90 days past due — was 1.08 per cent in the first quarter, up slightly from the fourth quarter but still close to the lowest level since the 2008-09 recession.

The Toronto-based analyst declined to estimate how high delinquencies will climb, saying it depends on the pace of interest rate increases and what happens in the trade battle between the U.S. and Canada. She cited the experience in Alberta, where delinquency rates rose in some instances 20 per cent or 30 per cent on a year-over-year basis after the oil-price collapse. Such an extreme case, however, isn’t what Equifax is predicting. “It will only happen if we start seeing deterioration in employment numbers,” she said, adding delinquencies should remain “still very low,” and “they’re just going to start inching up a little bit, probably not double digits.”

CHANGE COMING?

Household credit has ballooned to unprecedented levels in Canada, as in many other developed countries, amid historically low interest rates. That hasn’t posed too many difficulties so far, because the economy and the labour market have generated solid growth, allowing people to handle servicing costs. But with the Bank of Canada intent on raising rates and the U.S. and Canada engaged in a tit-for-tat tariff fight, that could change.

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. The 56 per cent who did so in the first quarter matched the fourth-quarter number and was down from as high as 59 per cent last year. It’s a small but important detail, according to Malina.

“The changes aren’t big, but when they’re consistent and we see it for two or three quarters, we start to believe it,” she said. “Given that less people are making their credit card payments in full, and those people are usually people with lower delinquency rates, we might be seeing overall delinquency rates deteriorating.”

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. Elise Amendola/AP Photo file

Consumer debt including mortgages was $1.83 trillion in the first quarter, up 0.4 per cent from the end of 2017 and 5.7 per cent from the same quarter a year earlier, Equifax said.

Excluding mortgages, Canadians carry an average of $22,800 each in debt. Some other highlights from the report include (all figures exclude mortgage debt):

Those between the ages of 46 and 55 have the highest average debt loads, at $34,100.

That age group is also seeing the largest increase in debt, year-over-year, at 4 per cent.

Of nine cities listed, Fort McMurray, Alberta, had the highest average debt levels, at $37,800, as well as the highest delinquency rate, at 1.72 per cent.

Vancouver and Toronto saw the highest rate of debt accumulation in the first quarter, with 5.2 per cent and 5 per cent growth from a year earlier Montreal is the least indebted city, with average debt loads at $17,300 Ontario and British Columbia have the lowest delinquency rates, at 0.95 per cent and 0.84 per cent. Nova Scotia, at 1.74 per cent, had the highest.

Source: Bloomberg News Chris Fournier

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