The Donald wins. As with Brexit, markets never imagined voters could be that thick. Volatility envelopes the globe, unfortunately inflated by concern about a European banking contagion. The US dollar soars as money flees into to safe havens. Commodity prices drop. Oil sinks. The Canadian dollar and economy along with it.
Suddenly spending $1.2 million on a semi with a crappy reno two blocks from a homeless shelter doesn’t look that swift. With the foreign-buyer tax in place in both Vancouver and the GTA markets were rolling over anyway. Now sales swiftly decelerate. The financial mood changes as abruptly as the weather. Your spouse get a layoff notice. And you’ve got a mortgage renewal. What now?
Hmm. While the above is fictional, it’s not out there. The anti-establishment, anti-bank, anti-corporate, anti-global, anti-trade, anti-foreigner meme swirling around western society these days is enough to propel a German Shepherd into high office. People do dumb things just to spite others, or to see what happens. This may be one of those moments.
Anyway, what could a mortgaged homeowner whose equity is starting to melt away expect? Did you see the following comment posted here last night from a banker blog dog?
“We started pulling bureaus on all mtg renewals 2 months ago. If your beacon is under 600 you pay .25 extra so this has already started to increase rates only in a very small number of cases but as we begin the inevitable sharp increase in unemployment and losses, the number of mtg renewals needing the extra charge will increase dramatically.
“If you do not have at least 20% equity at renewal time and a good credit score you can be asked to make a lump sum payment to reduce the mtg principal down and/or increase the mortgage payment to shorten the amort, and if you cannot do either, then die. Those dumb enough to have bought with 20 down you will be sent a letter asking to find another lender and you pay a high open mortgage rate until you do.”
Seriously. Have all those Millennials (and others) gobbling up houses and condos over the last three years with 5% or 10% down and mortgages they didn’t lock up for five years considered what might lie ahead? Of course not. Real estate always goes up and makes everybody rich, plus ‘the government’ would never let interest rise because we’d all be screwed.
In reality, your lender has no obligation to renew any home loan once the term expires. Nor is it required to renew under the same terms and conditions. Our banker dog’s quite correct – the institution can demand a lump sum payment, more interest, higher monthlies or slash the amortization period, murdering your cash flow. If this happens during a market correction, you might end up being not only underwater (owing more than the property is worth), but required to find a pile of cash so the mortgage will be renewed – at that higher rate.
And what if you decide to walk?
That’s a really bad idea. Miss a payment or two and the bank will call you. Miss one or two more and you’ll get a demand letter from the lender’s lawyer, telling you to immediately cough up the money, plus some extra for the letter. If you don’t, the bank can foreclose, seize the property then sell it for market value. If that doesn’t cover the outstanding mortgage amount, you’ll be responsible for the shortfall, plus the bank’s costs.
But wait, I hear the moisters cry, isn’t that why we paid all that money for mortgage insurance? To insure us?
Nope. All those premiums forked over by homeowners went to finance insurance which protects the bank against a default. It does not benefit the person in financial distress – who’s still liable for the mortgage amount, plus costs. The lender will come after you first before it files a claim.
(By the way, did you know it’s possible to default on a mortgage even while you’re making payments? If you let your house insurance lapse because you can’t afford it, or skip property tax payments or even let the place run down since you lack the dough to maintain it – you’re likely in default. Check that mortgage doc you never read.)
As I said, the scenario above is fictional. But you can be sure there will be something that comes along which causes Canada’s two remaining delusional housing markets to roll, leading to a meaningful correction and banker repression.
For example, did you see what TD said the other day in its quarterly economic forecast?
“Our baseline forecast is for a gradual softening in overall Canadian housing activity over the next two years. To the extent that yields stay at current levels, or decline further, upside risks to our baseline forecast would materialize.”
Now, combine a Trump win with his repeated calls for the Fed and Janet Yellen to jack interest rates (which will begin happening anyway on December 14th) and there’s something else to worry about.
The point is, the status quo may not be for much longer, if America is Great Again. Just sayin’.