Canadian Mortgage Defaults Jump 175% in 2010

According to the Canadian Banker’s Association, by mid 2010 Canadian mortgages in arrears increased 175% from just 3 years ago. Is this the start of a similar US housing meltdown with numerous Canadians at risk of foreclosure?

Well, let’s back up a few steps. Like so many media headlines these days, we may want to examine the data behind the headline a little closer before we jump to conclusions.

First of all, Canada had extremely low arrears rates a few years ago. We were in a housing boom resulting in a seller’s market. If someone couldn’t make their mortgage payment, they put a For Sale sign on the lawn in the morning and by dinner the unconditional offer took care of the seller’s arrears dilemma. Thus the Canadian Banker’s Associations’ low arrears numbers three years ago in 2007.

2007 was a very buoyant, extreme and unnatural market spike in favour of sellers. Looking further back in history, the early 90’s mortgage arrears peaked around .64% and again at .68% in 1997. Today, Canada sits around .42% with its lowest rate in the last decade of .24% in 2007. 175% increase from the low of .24% to .45% today may not be as alarming as first thought considering historical patterns.

Secondly, during a down or flat market cycle, foreclosures are always higher due to higher unemployment and slower credit markets which result in tighter lending parameters, increased housing inventory and slow housing sales. This type of market is less liquid for sellers to move their property quickly resulting in increased arrears. Good for buyers, not so good for sellers.

The current arrears in Canada are less than half of 1% and during the peak arrears years in 1990 and 1997 the rate was still less than 1%. Over 99.5% of Canadian mortgages are still in good standing today, despite current difficult economic times. So for every 2,400 homes in Canada, 1 person is behind on payments. In the US, 1 in every 371 homes are behind on mortgage payments. Default rates would have to increase 600% in Canada to equal the current US default rate.

So are we in a housing meltdown with widespread panic of homeowners on the brink of losing there homes in Canada? Well, Canada has fewer mortgages in arrears than the previous two recessions and even at those peaks, over 99% of homeowners were still making their payments on time every month. That’s normal during a recession. I suspect we’ll see the same pattern this time around as well.

The fact still remains that yes foreclosures are on the rise and yes they are likely to continue as they always do during economic downturns. Foreclosures are a trailing indicator of what has happened in the past. During an economic downturn, it typically takes 6 to 18 months once someone has lost their income and uses their savings and credit before defaulting on their mortgage payment.

If history repeats itself as it usually does and we continue to see a slow housing market for the next while, then we may see mortgage default rates increase from the current .45% to between .6% or even .7% as seen during the early 90’s and again in 1997 before retreating back. Again, still less than 1% of total Canadian mortgages.

So before you believe all the media headlines, look closely at the data, check back to historical patterns to see what may be considered normal. Then put it into perspective. We are a long ways away from mortgage default rates as seen south of the border in the USA.

And, even though we’ll likely see more defaults resulting in more foreclosed homes on the market in the near future, the remaining 99% will weather the storm just fine and they’ll get through this down turn just like the ones before.

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