I was a humble-but-brilliant news
photographer back in 1980s Red Deer. With my wife at home with our
young children and about three years left in a locked-in mortgage at
8.75 per cent, I was far luckier financially than I was smart.
Mortgage rates had crept past 15 per
cent and would head north of 20 per cent before dropping and
eventually being bought down to a luxury rate of 12.5 per cent by
then-premier Peter Lougheed. It was one of few times that I was happy
we had a nice, socialist Tory government, willing to give us our tax
money back, every month.
I remember being sent on assignment to
nearby Innisfail where the current oil price crash had caused a large
number of homes on a certain street to be posted with For Sale
signs.
We were told that most of those homes
were now owned by the banks. Either that, or in the process of of
repossession from so-called “dollar dealers” — people who
bought homes with underwater mortgages for a dollar, to rent them out
and collect as much money as possible in the months it took for a
bank to foreclose.
Dollar dealing quickly became illegal
in Alberta, but another fine Western practice still exists: jingle
mail. And news reports tell us we're seeing it again.
In Alberta and in Saskatchewan (but
with a few more restrictions), you can still get an uninsured
mortgage. You need to put at least 20 per cent of the home's value
down in cash but if something unthinkable happens (like, say, a
business cycle) you can pop the keys into an envelope, mail it to the
bank and walk away.
All you'd lose was your equity, and
your credit rating for a few years.
Back then the saying was that if you
owed $20,000 and couldn't pay, you had a problem, but if you owed a
million dollars and couldn't pay, the bank had a problem.
That's still true today, but you do
have to increase the figures a bit.
Alberta mortgage providers surely don't
want to see that problem again, because the dollar figures today are
much, much higher than in 1983-84.
In some Alberta real estate markets,
home values are in steep decline. That includes the upper end of the
Calgary market and decent parts of remote oil-dependent towns like
Ft. McMurray.
As early as last spring, the Financial
Post revived the term “jingle mail” leading its story in
Grande Cache. A townhouse bought four years earlier for $175,000
(how's that for cheap?) had dropped to a resale value of $75,000,
tops, in a newly-depressed market.
With a mortgage of $150,000, and
possible rents far cheaper than a mortgage payment, the question was
asked: at what point do you simply give your house back to the bank?
The answer was: it depends if you're
willing to declare bankruptcy on an insured mortgage. But if that
mortgage was of the special Alberta non-recourse type, the line where
it made sense to abandon ownership for renting had passed on that
house long ago.
Suppose you're a welder who may need to
move to where the jobs are — and you make decent money while you
are employed. You might find a mortgage to be a dead-weight financial
anchor on the bottom of a sea of endless bank payments.
Suppose you're a skilled professional
in Ft.McMurray and just got laid off. Your home cost $750,000 — you
bought near the peak, and it ain't gonna sell for that anytime soon.
The average drop in house prices there is around $125,000.
If you've got the non-recourse
mortgage, that price drop is perilously close to 20 per cent of the
home's value — the point where jingle mail becomes an option for
people who can no longer make monthly payments of $4,000-plus, as
would be the case on the home in this example. (I got the figures on
an online calculator: 20 per cent down, uninsured, 2.8 per cent
mortgage over 20 years).
Same deal in Calgary, but were talking
about homes with an initial purchase price well above a million
dollars and a mortgage in distress. Same problem, bigger figures.
Which is why I don't think a
long-threatened interest-rate hike from the Bank of Canada is going
to happen any time soon. Because in that scenario, the banks that
over-loaned into over-heated housing markets (Calgary, Vancouver,
Toronto) would be in big, big trouble.
They prefer the jingle of interest
payments. Not the jingle of keys in the mail.
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