Deferral slope vs deferral cliff. What will happen when mortgage deferrals expire?
Let’s assume we are talking about the cohort that can’t afford their mortgage. They have lost income because of the pandemic. They either lost their job, or had their hours cut, or their rental income has gone down (I am looking at you, Toronto condos), and the mortgage now costs more than what the rental income brings in.
While people were deferring their mortgages, they were probably saving. Depending on how much they were saving, this could give them a buffer of one month, or maybe 6 months.
Once their savings run out, they can always talk to their bank and ask for another deferral period, or possibly a restructuring of your payments (extending the original repayment period (amortization)). The bank does not want your house. They will exhaust all options first before starting the process of taking your house.
If you end up not making mortgage payments, after about 3 months the bank will contact you with a petition. This is the bank basically saying that you better pay up, or this is going to court.
If they finally get to the point that they can’t make any payments, and they won’t accommodate in some way, you have about 6 months to start making payments again (the banks/courts) can shorten or extend this period). During this 6 months the owner might choose to sell.
After all that, the bank may take possession of the home and sell it. This process can take months. It must be listed, someone must make an offer, that offer needs to be accepted, then that offer must go to court………
And it is even more complicated than what I have just described. This is not meant to be a comprehensive timeline, and I am not an expert. This is simply illustrating how there is no “deferral cliff”. The insolvency stage of this real estate cycle will take years to play out. You have the deferral period (6 months usually), that can then be extended (say for another 3 months maybe), then the bank will not usually contact the owner with a petition until they have missed 3 months payments (3 months), which is followed by (6 months) for the owner to start paying or to sell, followed by a bank taking possession and selling (maybe another 3+ months). Add that up and you get up to 2 years after the initial deferral before the home is actually sold. And different people will have started their deferrals at different times (there are people entering deferrals right now), and each journey through this process will be slightly different. There is no cliff. It will be a long slope. If there are more waves of job losses, or more instances of falling rents, this slope will be extended into 2023 and beyond.
Taking a look at the housing crash in the US, we can get some insight into what might happen in Canada.
Here is a video I made about 1) The fact that insolvencies and foreclosures took a long time to play out. 2) The insolvencies started when house prices stopped going up (causing buyers who were relying on house price appreciation to become stressed). I think the rental problem in the cities (work from home, and the exodus from the cities) will be the twist during this real estate cycle. 3) That investors actually caused the housing crash, not the owner occupied market. Real Estate BOMBSHELL – Will History be Rewritten? INVESTORS Caused the US Housing Crash!: https://youtu.be/5s00W4g54QY
And in the US crash, I don’t think the “regular folk” were getting the help that people are getting this time around. CERB and such.
I wonder if the false narrative of a deferral cliff has instilled some sort of confidence in the real estate market? People are talking about how few mortgages are in deferral right now. But 1) Look at the insolvency numbers in the US crash. Very small numbers relative to the entire housing market. 2) What happened to those that are out of deferral? Are they using up their savings right now? Did they refinance their mortgage? Are they simply not paying, and therefore not showing up as in deferral? Lots of possibilities that do not necessarily lead to a positive outcome for these homeowners and investors.
The cliff didn’t show up, so that means the Canadian real estate market is bulletproof? Leave it in the comments 🙂
Keep in mind that the deferral/bankruptcy/court/etc processes will differ depending on where you live.
This video is not advice.
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