The much hyped mortgage deferral cliff is nearing. At the height of the pandemic, Canadian banks provided nearly 795,000 homeowners with some form of mortgage payment flexibility. In other words, at one point or another, 16% of all mortgages outstanding received a payment deferral.

It only takes a small fraction of those deferrals to push the delinquency rate meaningfully higher. Remember, research from National Bank suggested that if 5% of those deferrals failed to resume payments it would lift the 90-day arrears rate from 0.24% to about 0.95%. That would bring the default rate close to the Bank of Canada’s “pessimistic” scenario for the second half of next year.

That default rate would be similar to the early 1980s when just over 1% of mortgage borrowers went into arrears, also known as 90-day delinquencies, ultimately dragging the real estate market down with it. That period remains the highest era for delinquencies to date.

Now that the recent wave of mortgage deferrals are expiring, we are starting to get a glimpse behind the curtains from some of our banks. Home Capital Group, Canada’s largest alternative lender, has shrunk their number of loans in deferral by 97% as of the end of October. The company had granted a two-month deferral period, in which the number of mortgages in deferral reached 9903 in April, and has now plunged to just 335 mortgages in deferral.

Media reports also circulated a similar story for First National, where reported mortgage deferrals reached as high as 14% and have since plunged to just 0.7%. A miraculous success story.

However, what the media failed to report was that just because borrowers are coming off deferral it does not mean financial vulnerabilities have subsided. In fact some of these borrowers are failing to keep up. At Home Capital Group, the percentage of total mortgages 90 days or more past due climbed by 40% from last quarter to 0.52% of their mortgage portfolio. At First National, there was a 45% increase in mortgages that are 90 days or more past due. Sure, mortgage arrears are growing off a very low base, but regardless, the upwards trend will no doubt continue to grow as the rest of deferrals expire.

While there is positive news on the vaccine front, providing some light at the end of the tunnel, we are not out of the woods just yet. It appears policy makers are opting for another round of economically destructive lockdowns, which will ultimately set the timeline for a recovery further back. According to the head of the Canadian Federation of Independent Business, thousands of businesses have shut down and are effectively bankrupt, but are holding off on a formal filing on the faint hope they can outrun their debts long enough to survive the pandemic. This only increases the likelihood of more borrowers falling behind on mortgage payments as there will be no additional industry wide extension of the mortgage deferral program this time around.

Three Things I’m Watching:

1. Year to date, Canada’s admissions of permanent residents has collapsed by 45%.

2. Rolling lockdowns are back as COVID cases spike across Canada.

3. Economic pain has yet to materialize. For the 12 months ending in September, 2020, business insolvencies were down 19.2 per cent compared with the 12 months ending in September, 2019.

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