If not, arrears could double to a rate higher than the Great Recession in 2009
Housing markets in Canada are on the mend. Sales data from the Greater Toronto Area showed considerable increases in sales and prices in August. With the mortgage deferral programs set to expire in September and October, housing market recovery might lose steam or even face significant challenges.
Earlier in March, the uncertainty about the resumption of economic activity and the public health impacts of COVID-19 was high. Many borrowers, who were uncertain about their jobs, opted for mortgage deferral as a precaution. By mid-April, 600,000 borrowers had applied for mortgage deferrals. At its peak, over 700,000 mortgages had been in some form of a deferral representing 16 per cent of borrowers.
Evan Siddall, President and CEO of the Canada Mortgage and Housing Corporation (CMHC), alerted that by October, the financial system might approach the debt-deferral cliff, when loan forbearance programs end and borrowers must start making payments again.
Canada’s housing future need not be so bleak as heading to a cliff. Already, federal institutions are taking steps to allow deferrals to last until December. The Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that regulates the banking sector, advised the financial institutions that unlike the six-month deferrals granted until the end of August, those given in September will be entitled to special treatment for up to three months. The regulator will not treat the deferred loans as past-due and hence not subject lenders to stringent capital requirements.
COVID-19 has hurt the economic fortunes of renters more so than homeowners. Economic data revealed that job losses were more pronounced for part-time workers than those working full-time jobs. As the economic engine restarts, most full-time workers, who are more likely to be homeowners, are expected to be able to meet their financial obligations, including meeting housing and shelter costs. Hence, the majority of those who opted for mortgage deferral as a precaution, are expected to exit the program without going into arrears.
A fast economic recovery, therefore, can prevent mortgage markets from approaching the deferral cliff. Also, continued support from the government and lenders can help expedite the economic recovery. For instance, anticipating a slower recovery, Australian authorities announced in July that mortgage deferrals could last for up to 10 months. In the U.S., the Federal Housing Finance Agency (FHFA) announced an extension of the moratorium on some foreclosures and evictions till December of this year.
The quasi-government housing agencies in the U.S., Freddie Mac and Fannie Mae, have instructed the lenders to continue offering relief to borrowers for up to 12 months that may include forbearance and waiving late fee penalties.
In Canada, those borrowers who would need more than six months to resume making mortgage payments could still have the option to defer payments by an additional four months. Canada Guaranty Mortgage Insurance Co., one of the three mortgage-default insurers, advised in March that the six-month mortgage deferral did not “remove the existing ability to defer up to four months throughout the life of the mortgage.”
Mortgage deferrals and Canada Emergency Response Benefit (CERB) have helped Canadian housing markets to avoid huge spikes in mortgage arrears. A recent analysis by economists at Bank of Canada and Ryerson University have shown that without mortgage deferrals, mortgage arrears would have reached an all-time high of 1.3 per cent in the fourth quarter of 2020, up from the pre-pandemic rate of 0.25 per cent.
Mortgage deferrals and other support measures have flattened the arrears curve. If the deferrals are not extended, the economists forecast the arrears to reach 0.53 per cent in the second quarter of 2021, which will be twice the pre-pandemic rate and higher than the arrears rate during the Great Recession in 2009.
The six-month deferral deadline was set in March with considerable uncertainty about how long the recovery would take. Realizing now that the labour market recovery will take slightly longer, a prudent approach would be to try matching the expiry of deferrals and emergency benefits with the labour market recovery.
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