Avoiding the Cliff: If six-month payment deferrals end as planned in September, tens of thousands of homeowners will default on their mortgages—no question about it. CMHC calls this the looming “deferral cliff,” and analysts want to know what the government will do about it. If Australia is any guide, deferrals could very well be extended. The Aussie regulator announced today that it’s providing capital relief to banks (i.e., not forcing them to recognize deferrals as being in default and put up more capital) to allow banks to extend mortgage deferrals another four months. The extensions are not automatic, they’re only for people who need them, and require a credit assessment of each borrower. Australia’s not alone in its decision. Last month, UK’s regulator prolonged deferrals until October 31. Given international regulators often follow one another during crises, and given we haven’t heard of any great alternatives, our money is on the Canadian government also facilitating extensions.
A Trillion in the Hole: Emergency income subsidies like CERB “have prevented mortgage defaults” and “helped avoid a rise in distressed sales,” avoiding “longer term damage to the economy,” says the Finance Department. But the price tag is extreme. Pandemic support programs will skyrocket Canada’s debt past $1 trillion for the first time ever. Critics charge the government with out-of-control spending (with well over double the bailout expenditure of the average G20 country, relative to GDP). All is good until record government debt issuance swamps demand, the surging money supply causes inflation and/or credit rating cuts boost Canada’s borrowing costs, opponents argue. The fact that our debt-to-GDP ratio is below other G7 countries, and the fact we’re years away from this all catching up with us, will only encourage more free spending in Ottawa. To be fair, however, the alternative (letting consumers and businesses go insolvent) isn’t appealing either. “We decided to take on that debt to prevent Canadians from having to do it,” said the Prime Minister today. For now, the market is shrugging off Canada’s soon-to-be 13-figure debt. The government’s 5-year bond yield, which guides fixed mortgage rates, rose a scant 3 bps on the news.
TD Cuts: The comfy green chair lender lowered its special 3-year fixed rate from 2.54% to 2.49%. By comparison:
Discretionary 3-year rates at most big banks are at least 20 bps lower than that.
Getting By on CERB: Here’s what the government estimates people with mortgages spend each month on shelter, food and communication — as compared to the $2000/month CERB benefit. It’s broken down by thirds of the population and, disturbingly, the bottom and middle class aren’t that far apart. (Source)
Random Fact: “Canadian banks fund uninsured mortgages mainly through deposits (~90%) and covered bonds (~10%),” says Fitch.
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I think they’re have to extend both deferrals and covid welfare. If you live payday to payday and have no job and no cheques coming in from Ottawa, you stop paying you bills and start selling your home.
The middle third of workers might as well be the lower third. They are no further ahead with their bigger home and car payments. It’s getting impossible to get ahead in this country. The tax burden is stifling. We need new leadership that invests in growth instead of handing money out to buy votes.
“To be fair, however, the alternative (letting consumers and businesses go insolvent) isn’t appealing either.”
– I’m sorry but why is it not appealing? This is called letting the market decide. People will lose their house, businesses will fail AND life will go on. We are throwing away 100s of Billions of dollars so that politicians (of all parties) don’t lose their jobs. This is not sustainable.
Frank, Appealing means attractive and pleasing. Few find it attractive and pleasing to see hundreds of thousands of families forced out on the street, with all the broader economic ramifications that go with that. There’s a large multiplier effect every time someone loses their job, loses their house, loses their business, defaults on unsecured credit, etc. Without Ottawa stepping in, unemployment and defaults could be far more drastic and prolonged, leading to more damage than the cost of intervention.
All that said, by objective benchmarks you’re right, the government is being exceptionally loose with taxpayer money. One could argue that more people and businesses need to be allowed to fail, but I haven’t seen anyone put forth data to justify how many. Hopefully this overnight shutdown of the economy is a once in a lifetime event and politicians will reign in their spending soon, but it’s hard to be optimistic about that.
Canada is an extremely unfair country for honest and hard-working Canadians. As a single mother immigrant, I made extra-ordinary effort to earn my living and raised my children while earning in 6-figures and paying heavy income taxes. The way the Canadian government enables and promotes the ideology to finance capable procreating men and women and their multiple children for their free-lavish living on my income tax is disgusting. The government is extorting and punishing honest people while rewarding and encouraging the worthless. I left Canada and live in the US happily.
I agree that government has been so loose. I know a lot of people around me who didn’t have a job but are receiving the free $2,000. There had to be more a strict rule for eligibility And amount.
I understand that government should step in and help those who are in real need. But not as loose as they are. Wasting tax payer’s money to buy future votes will not end up well!!!
Also when you talk about defaulting on the mortgage, I agree with those who suggest, this should happen, to some extent. Everyone with a family and mortgage must have at least 6 to 10 months Of their expenses in savingS. Not letting people fail has resulted in ridiculous house prices. A lot of people who purchase a house can’t really afford it. Look at the house prices in GTA, they are at all time high!? Are people really in need???? If yes how come prices keep going uppppp and upppp!!!?
Hi AJ,
Unfortunately there’s a lot more free spending to come. Wait for Mr. Trudeau’s throne speech.
As for letting borrowers fail, it’s hard to argue with your logic, so long as the extent of defaults is not catastrophic in extent.
But politicians get elected largely on economic performance. So they’re spending OPM (other people’s money) to, in at least small part, inject the economy with temporary adrenaline and keep their jobs.
All that said, we’re fortunate the government came to the plate with some kind of rescue package. The deeper an economic hole, the harder it is to climb out.
If money were no longer money, they would become worthless. The basic money principle is that you pay for what you bought either in lump sum or installments with interest. If you violate that principle for long enough period, your money will become worthless. What they should have done instead is to clearly indicate that the possibility of an extension is very low, so as to encourage distressed homeowners to sell their property while the market is still good and they can retain some cash for use during the pandemic season, with other support from the government. However, to qualify for the support, they cannot be homeowners, because comparatively, they are still in better shape than those who have not owned a home. This will create a healthy but not crumbling supply of available units to the market, and allow it to soft land.
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I think they’re have to extend both deferrals and covid welfare. If you live payday to payday and have no job and no cheques coming in from Ottawa, you stop paying you bills and start selling your home.
The middle third of workers might as well be the lower third. They are no further ahead with their bigger home and car payments. It’s getting impossible to get ahead in this country. The tax burden is stifling. We need new leadership that invests in growth instead of handing money out to buy votes.
“To be fair, however, the alternative (letting consumers and businesses go insolvent) isn’t appealing either.”
– I’m sorry but why is it not appealing? This is called letting the market decide. People will lose their house, businesses will fail AND life will go on. We are throwing away 100s of Billions of dollars so that politicians (of all parties) don’t lose their jobs. This is not sustainable.
Frank, Appealing means attractive and pleasing. Few find it attractive and pleasing to see hundreds of thousands of families forced out on the street, with all the broader economic ramifications that go with that. There’s a large multiplier effect every time someone loses their job, loses their house, loses their business, defaults on unsecured credit, etc. Without Ottawa stepping in, unemployment and defaults could be far more drastic and prolonged, leading to more damage than the cost of intervention.
All that said, by objective benchmarks you’re right, the government is being exceptionally loose with taxpayer money. One could argue that more people and businesses need to be allowed to fail, but I haven’t seen anyone put forth data to justify how many. Hopefully this overnight shutdown of the economy is a once in a lifetime event and politicians will reign in their spending soon, but it’s hard to be optimistic about that.
Canada is an extremely unfair country for honest and hard-working Canadians. As a single mother immigrant, I made extra-ordinary effort to earn my living and raised my children while earning in 6-figures and paying heavy income taxes. The way the Canadian government enables and promotes the ideology to finance capable procreating men and women and their multiple children for their free-lavish living on my income tax is disgusting. The government is extorting and punishing honest people while rewarding and encouraging the worthless. I left Canada and live in the US happily.
I agree that government has been so loose. I know a lot of people around me who didn’t have a job but are receiving the free $2,000. There had to be more a strict rule for eligibility And amount.
I understand that government should step in and help those who are in real need. But not as loose as they are. Wasting tax payer’s money to buy future votes will not end up well!!!
Also when you talk about defaulting on the mortgage, I agree with those who suggest, this should happen, to some extent. Everyone with a family and mortgage must have at least 6 to 10 months Of their expenses in savingS. Not letting people fail has resulted in ridiculous house prices. A lot of people who purchase a house can’t really afford it. Look at the house prices in GTA, they are at all time high!? Are people really in need???? If yes how come prices keep going uppppp and upppp!!!?
Hi AJ,
Unfortunately there’s a lot more free spending to come. Wait for Mr. Trudeau’s throne speech.
As for letting borrowers fail, it’s hard to argue with your logic, so long as the extent of defaults is not catastrophic in extent.
But politicians get elected largely on economic performance. So they’re spending OPM (other people’s money) to, in at least small part, inject the economy with temporary adrenaline and keep their jobs.
All that said, we’re fortunate the government came to the plate with some kind of rescue package. The deeper an economic hole, the harder it is to climb out.
If money were no longer money, they would become worthless. The basic money principle is that you pay for what you bought either in lump sum or installments with interest. If you violate that principle for long enough period, your money will become worthless. What they should have done instead is to clearly indicate that the possibility of an extension is very low, so as to encourage distressed homeowners to sell their property while the market is still good and they can retain some cash for use during the pandemic season, with other support from the government. However, to qualify for the support, they cannot be homeowners, because comparatively, they are still in better shape than those who have not owned a home. This will create a healthy but not crumbling supply of available units to the market, and allow it to soft land.