26 May

WHY DOES CMHC’S EVAN SIDDALL THINK CANADA IS HEADED FOR A ‘DEFERRAL CLIFF’?

General

Posted by: Moreen Perimal

In comments delivered to the Standing Committee on Finance on Tuesday, Canadian Mortgage and Housing Corporation CEO Evan Siddall laid out a potentially bleak scenario for the country’s homeowners. Siddall told parliamentarians that by September if Canada’s economic recovery fails to generate enough momentum, 20 percent of mortgages could be in arrears.

“A team is at work within CMHC to help manage a growing debt ‘deferral cliff’ that looms in the fall, when some unemployed people will need to start paying their mortgages again,” Siddall said during the Committee’s videoconference. “As much as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.”

It was one of many disturbing claims made by Siddall, who also told the Committee that the nominal house price in Canada could fall by as much as 18 percent over the next six to 12 months, with the most significant losses expected in oil-driven economies like Alberta and Saskatchewan and overheated markets like Toronto. If prices fall by 10 percent, Siddall said first-time buyers could lose as much as $45,000 on a $300,000 home.

But the deferral issue didn’t seem to phase him.

“Canadians do an excellent job of paying their mortgages, even when they’re underwater, so our loss forecasts are not extreme,” he said in an exchange with Progressive Conservative MP Pierre Poilievre. When asked by Poilievre for CMHC’s potential loss forecast, Siddall estimated that it could be as high as $9 billion.

According to DLC’s Dr. Sherry Cooper, Siddall’s claim that 20 percent of mortgages could be delinquent by September borders on the ridiculous.

“It’s kind of bizarre to me,” she says. “Most economists are finding fault with it.”

An arrears rate of 20 percent would necessarily mean that the Bank of Canada’s efforts to ensure the availability of credit and the federal government’s pumping of billions of dollars into the economy to prevent business closures and forced bankruptcies will accelerate the rate at which Canadian mortgages are turning sour.

“The Bank of Canada estimates that the delinquency rate could move up from .25 percent to .8 percent. And now we’re talking about 20 percent delinquency rates?” Cooper says. “Give me a break.”

When asked if there was a possibility that Siddall was referring to deferrals when he used the word “arrears,” Cooper was doubtful.

“No, he’s a brilliant guy,” she says, despite the unlikelihood of his prediction.

“It’s not going to happen. The highest delinquency – which is what ‘arrears’ is – rates we’ve ever seen in history are nowhere near [the projected 20 percent],” she says.

Centum FairTrust owner Jimmy Hansra agrees with Cooper’s assessment.

“The government has been pretty proactive in terms of providing as many programs as they possibly can to weather the storm,” he says, adding that there’s “no way” Siddall’s arrears projection is accurate.

“Even his comments about CMHC seeing housing prices falling by 18 percent I think are overblown, too,” says Hansra. “Nobody knows what’s happening with house prices.”

Hansra isn’t preparing for the kind of worst-case scenario Siddall laid out. Instead, he says his team is readying themselves for a potential, although the still unlikely, stream of borrowers looking for refinancing or equity take-out solutions that will require private money.

“I don’t see it happening,” he says, “But if it does, I think that’s the only way mortgage professionals are going to be able to provide financing for their customers. Because if they’re not going to be able to make their mortgage payments and they have equity sitting in their home, either people are going to look to use home equity lines of credit to make those payments, or they’ll look for some sort of second or third mortgage financing.”

Hansra stresses that projections like Siddall’s, particularly when they’re made at a time with no parallel in human history, need to be taken with a few million grains of salt.

“It’s all a guess,” he says.

If CMHC did envision a 20 percent arrears rate by fall, a fair question to ask, says RateSpy founder Robert McLister, is why they are not acting now to mitigate what would be an utter catastrophe for the Canadian economy.

“I think that if the government thought there was going to be 20 percent arrears, they would take action,” McLister says. “You can’t have one in five homeowners not paying their mortgage, with a large percentage of those leading to liquidation. You know what that would do to home prices. You know what that would do to the economy. It’s not going to happen.”

Click here for the original release.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

2 May

THE TOP 7 MISCONCEPTIONS ABOUT REVERSE MORTGAGES

General

Posted by: Moreen Perimal

The Top 7 Misconceptions About Reverse Mortgages

How much do you really know about reverse mortgages?

Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free.  Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan.  But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada?  As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

  1. If you have a reverse mortgage, you no longer own your home.

Nothing could be further from the truth.  You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

  1. You will owe more than the value of your home in the end.

Also, untrue.  Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home.  In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

  1. Only people younger than 62 can apply for a reverse mortgage.

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older.  In fact, as you age you are more likely to qualify for a higher amount on your loan.  A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

  1. Failure to make payments can result in eviction.

This myth is one of the most common when it comes to reverse mortgages.  The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

  1. Arranging a reverse mortgage is very expensive.

This is also untrue.  Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee.  When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

  1. Reverse mortgages have much higher interest rates than conventional mortgages.

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive.  Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place.  For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

  1. You won’t be able to pass on your home to your children.

The idea that your children won’t be able to inherit your home is a complete myth.  Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away.  Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact me.

[1] The guarantee excludes administrative expenses and interest that have accumulated after the due date.