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What you need to know about COVID-19: September 25, 2020
Back in May, when COVID-19 was tightening its grip on the throats of the Canadian economy and housing markets, Evan Siddall, CEO of the Canada Mortgage and Housing Corporation (CMHC), spoke to the federal Standing Committee on Finance on actions the corporation had taken to alleviate financial stress on Canadian homeowners, including the mortgage deferral program.
“We acted quickly to help Canadians who are having difficulty paying their mortgages or rent due to income loss because of COVID-19,” said Siddall. “In co-ordination with private mortgage insurers, we are offering temporary deferral of mortgage payments for up to six months.”
Siddall estimated nearly 20 percent of mortgage holders will have elected to defer payments by September, calling it a potential deferral cliff.
Initial reaction to Siddall’s projection of 20 percent were scoffed at by economists, but according to alternative lender Equitable Group Inc., loan balances on COVID-19-related payment-deferral plans peaked at 20 percent at the end of May, but have declined significantly since then, to six percent as of July 17.
“Our general feeling is that many of our customers called looking for a deferral just out of an abundance of caution in an uncertain economic scenario,” said Equitable president and CEO Andrew Moor during a conference call for analysts and investors.
The Canadian Bankers Association says since the rollout of the COVID-related mortgage deferral program, approximately 760,000 Canadians opted to defer or skip mortgage payments, representing about 16 percent of the total number of mortgages in bank portfolios.
The bulk of those deferrals happened during the early days of the COVID threat, says Justin Thouin, co-founder and CEO of LowestRates.ca .
“We’re hearing from our bank and broker partners that there has been a steep drop in mortgage deferrals since banks and lenders originally began announcing such programs in March during the start of the pandemic,” says Thouin. “However, there is still a large number of Canadians who are requesting deferrals.”
Last week, CMHC announced it was investigating ‘new tools’ to prevent the deferral cliff.
“As the end of the initial six-month deferral period from the beginning of the pandemic approaches, we recognize the need to continue to monitor this diligently and potentially develop new tools with our partners to help Canadians during this unprecedented pandemic,” CMHC said in a statement to The Financial Post. “This work is ongoing and we will provide Canadians with updates as they become available.”
In an email, a CMHC spokesperson said it was premature for the agency to discuss specific outcomes of their ongoing conversations with lenders and other mortgage insurers.
“As we continue to approach the end of the initial six-month window for deferrals, there is a lot of uncertainty about what will happen to those who cannot make their mortgage payments,” says Thouin. “Speaking to brokers and bank partners, we know that the home is often one of the last assets that Canadians will stop making payments on. They’ll default on credit card payments, car loans and personal loans first.”
In June, the Canadian Credit Union Association (CCUA) consulted with CMHC “regarding next steps and policy recommendations to assist homeowners facing hardships due to COVID-19,” said CCUA on its website. “To inform our discussion, we surveyed credit unions to understand their views on existing CMHC default management tools, and their recommendations to improve and expand them.”
The survey found some CCUA members think the six-month deferral repayment period is too short and would like to see it extended, because they view COVID-related challenges as being long term.
Concerns were also expressed about those on deferral who have lost their jobs and will still struggle to make mortgage payments when the repayment period ends. Added to that was the concern of whether mortgage holders will be in a position of making higher payments, as deferred payments are tacked onto their monthly bills.
A solution recommended by some CCUA members was, instead of increasing monthly payments, increase the amortization period by the number of months the mortgage was deferred.
In response to CCUA, CMHC said in a statement, “Extended amortization is an available tool for borrowers who cannot afford a higher monthly payment. Keep in mind that deferred payments must be resolved either at the end of the deferral period or loan term. If the deferred amounts are capitalized to the loan balance, the loan can be re-amortized to reduce the increased payments, rendering payments more affordable. Extending amortization is an option available to decrease the mortgage payments to an affordable level.”
In terms of an extension, CMHC told CCUA, “At this time, there are no plans to extend the deferral period. If the borrower cannot be helped with the existing default management tools (stable source of some revenue), then there are few options as there are no government programs currently available.”
Clearly, unusual times call for unusual measures, such as new government programs. Even if a small percentage of the 760,000 mortgages on deferral become delinquent, the Canadian housing market will crash, taking the economy with it.
“Unless the economy improves or the deferral program is extended, we could see a wave of mortgage defaults start at the end of the year and continue into 2021,” says Thouin. “Such defaults would no doubt hurt home prices in Canada, something that has so far been avoided with the deferral program.”
Copyright Postmedia Network Inc., 2020