Tumbling home values boost mortgage defaults in Calgary

[mykalberta]

I can't speak for anyone else, but here is my situation as I know of it.

I have a mortgage, signed at an amortization peroiod of 25 years. I have a 10 year fixed rate at 5.15

Now, I am likely in a different position as my place is worth about 80k more than what I paid for it if I go by a unit sale last month in my buidling, same floor plan, lower level.

Are I not tied to that mortgage. Or is there some manouvering that can be done when you go for renewal - similar to Titan's thread.

For me per say it doesnt matter, no matter what the value of my place, if I can make the payments I will make the payments as I didnt buy the place to make money, I bought it to stop losing playing the renting game. I only decided to buy if I could make the payments at the current salary. I have increased salary since then so payments are no problem.

[Finner]

Originally Posted by Wookie

I don't think so. In fact a mortgage doesn't even go on your credit report. I'm pretty sure you can just walk... then go buy another house.

Possibly part of the reason we're seeing this.

"hmmm, my house "a" ($80,000) is now worth 20% less than my mortgage ($100,000), I'll walk away, get house "b" for ($80,000) and save $20,000 or wait even longer and pay $70,000.

As far as i know that USED to be the case. Mortgages now do show on credit reports. If you default i believe it does reflect as a bankruptcy.

For example I know when people hand in there car keys because they can't make payments on the loan, it does show as a bankruptcy on file.

[Wookie]

Originally Posted by Finner

As far as i know that USED to be the case. Mortgages now do show on credit reports. If you default i believe it does reflect as a bankruptcy.

For example I know when people hand in there car keys because they can't make payments on the loan, it does show as a bankruptcy on file.

I applied for a overdraft recently because I was going travelling and was not organized enough to sort out my bills before I left. That way I could just not worry about things for a few weeks until I got home. On the phone with the RBC guy he said "doesn't matter about mortgage, it won't show on credit report"

[fredr123]

Originally Posted by mykalberta

I have a question.

Would people who default on a mortgage, then have to declare bankruptcy?

Originally Posted by Wookie

I don't think so. In fact a mortgage doesn't even go on your credit report. I'm pretty sure you can just walk... then go buy another house.

Possibly part of the reason we're seeing this.

"hmmm, my house "a" ($80,000) is now worth 20% less than my mortgage ($100,000), I'll walk away, get house "b" for ($80,000) and save $20,000 or wait even longer and pay $70,000.

Here's an example of how this could work in a foreclosure situation, using Wookie's numbers from above.

Your lender would start an action for foreclosure in the Courts. There will no doubt be a clause in your mortgage that makes you responsible for legal fees and all other costs in the event of default on a solicitor-client basis. This means if you defend the action in Court you will pay your own lawyer's fees (if you have counsel) AND your lender's counsel's fees.

Interest, don't forget, continues to accrue.

What basically happens in a foreclosure is that the Court orders the sale of the property, sometimes to the lender, sometimes to the public. Whatever proceeds are obtained from the sale of the home is applied against the outstanding mortgage arrears.

If you have equity in your home (i.e., there is less owing on your mortgage(s) than what you could get if you sold the home) then the Court will often give you six months (sometimes less) to redeem the mortgage. This gives you six months to find alternative financing or to sell the place yourself and pay off the outstanding mortgage.

If you do not have equity in your home (as in Wookie's example) the lender will usually apply to have a one day redemption period as delaying the sale of the home when there is already no equity in the place will just put the lender in a worse position.

In the no equity situation, there is usually going to be a deficiency. (i.e., the proceeds of the sale of the home will be less than the outstanding mortgage, fees, costs and interest). In that situation, the lender will be looking to obtain judgment for this deficiency. A deficiency judgment is a personal judgment against the people who signed the mortgage. You will be personally liable for that judgment and it can and will be registered against you and show up on your credit history.

If there is a judgment against you, you wouldn't necessarily have to declare bankruptcy. That would be up to you. But if your obligations exceed your resources then you may have to consider bankruptcy as a viable option.

So in Wookie's case, if you walk away from house A you will most likely end up owning $20,000 plus legal fees, closing costs and interest to the mortgage company.

[Slava]

^ Obviously a great post, and thanks for the insight. The only thing that I would add is that in a tightening credit market no bank is going to give you a mortgage to buy another house when you just defaulted on another.
(I guess there could be one...but how stable is that institution and how enormously high will that interest be?)

[SeeGeeWhy]

How does one purchase houses that are going under foreclosure?

I imagine that most of the good ones get sold pretty quickly - and likely privately...

[Deegee]

Originally Posted by Finner

As far as i know that USED to be the case. Mortgages now do show on credit reports. If you default i believe it does reflect as a bankruptcy.

For example I know when people hand in there car keys because they can't make payments on the loan, it does show as a bankruptcy on file.

I've seen credit reports show mortgages from British Columbia reported on bureaus, but nothing from alberta. A foreclosure goes on your public record where a bankruptcy would go, but it is not listed as a bankruptcy.

If you hand the car keys over, then it is listed as a "Voluntary Surrender", which is listed under that particular trade. It is not listed under public records where one would find a bankruptcy. Do keep in mind the lender can still seek a judgement for the remaining balance of whatever they sell the vehicle for. Costs of selling will also be your responsibility.

As a related side note on reading credit bureau reports, Ontario lien's show up on credit bureau reports under public records which usually makes you think "oh no that's bad", but it's nothing bad at all, even though it falls under a spot generally reserved for bad things. =b

[Claeren]

Originally Posted by SeeGeeWhy

How does one purchase houses that are going under foreclosure?

I imagine that most of the good ones get sold pretty quickly - and likely privately...

You can get lists, you can also try to buyout people who are about to be foreclosed on before the bank actually does it (potentially assuming the mortgage plus perhaps some cash right from the owner).


But I wouldn't get too excited, Calgary's (and Canada's) real estate market is going to keep on plummiting into next year. Not sure why you would want to buy in right before 15%-30% drops?

(Putting it another way, if people who owned these homes or the banks saw light at the end of the tunnel and the chance at increasing home equity anytime in the next couple years the houses themselves would not be available.)



The thing about foreclosure rates is that they tend to grow exponentially as dropping prices reflect longer timelines in which people bought homes. -18% (like we have seen already) puts only higher leverage 2007 buyers underwater. -25% starts to put all 2007 buyers underwater and many higher leverage 2006 and 2008 buyers. More than -30% starts to put most 2006-2008 buyers underwater and some 2005 buyers. etc etc.

Prices are going to drop at least 30% total. That is only 12% more than they have already, and would be a lot less than similarily dropping markets around the rest of the world. (And I am not sure why Calgary should drop less than any other place on earth - England, Spain, USA, etc etc - especially after following their exact home-price-bubble path on the way up).

In fact the only reason a lot of the first foreclosures are speculators is that they are more aware of just how much they are underwater. There are a lot of everyday people out there in Calgary that SHOULD be declaring bankruptsy and/or having their homes repossessed but are either thinking they 'should do the right thing' and spend 40 years paying off a loan the bank should never have given them in the first place or are just blissfully unaware of how bad it is for them.



Claeren.

[SeeGeeWhy]

Originally Posted by Claeren

You can get lists, you can also try to buyout people who are about to be foreclosed on before the bank actually does it (potentially assuming the mortgage plus perhaps some cash right from the owner).


But I wouldn't get too excited, Calgary's (and Canada's) real estate market is going to keep on plummiting into next year. Not sure why you would want to buy in right before 15%-30% drops?

(Putting it another way, if people who owned these homes or the banks saw light at the end of the tunnel and the chance at increasing home equity anytime in the next couple years the houses themselves would not be available.)



The thing about foreclosure rates is that they tend to grow exponentially as dropping prices reflect longer timelines in which people bought homes. -18% (like we have seen already) puts only higher leverage 2007 buyers underwater. -25% starts to put all 2007 buyers underwater and many higher leverage 2006 and 2008 buyers. More than -30% starts to put most 2006-2008 buyers underwater and some 2005 buyers. etc etc.

Prices are going to drop at least 30% total. That is only 12% more than they have already, and would be a lot less than similarily dropping markets around the rest of the world. (And I am not sure why Calgary should drop less than any other place on earth - England, Spain, USA, etc etc - especially after following their exact home-price-bubble path on the way up).

In fact the only reason a lot of the first foreclosures are speculators is that they are more aware of just how much they are underwater. There are a lot of everyday people out there in Calgary that SHOULD be declaring bankruptsy and/or having their homes repossessed but are either thinking they 'should do the right thing' and spend 40 years paying off a loan the bank should never have given them in the first place or are just blissfully unaware of how bad it is for them.



Claeren.

With a baby on the way, I want to get a good house in a good location at a good price (one that is sustained by my salary alone, which gives that statement a point of reference).

The market may keep going down, but my house is the place I live, not my retirement plan.

Foreclosures are just one more supply stream that could have that "hidden gem" in it. Because really - there is a lot on the market, but not a lot that is meeting my purchase criteria.

Your points are well taken for those who are looking to invest in real estate, though.

[fredr123]

Originally Posted by SeeGeeWhy

With a baby on the way, I want to get a good house in a good location at a good price (one that is sustained by my salary alone, which gives that statement a point of reference).

The market may keep going down, but my house is the place I live, not my retirement plan.

Foreclosures are just one more supply stream that could have that "hidden gem" in it. Because really - there is a lot on the market, but not a lot that is meeting my purchase criteria.

Your points are well taken for those who are looking to invest in real estate, though.

That's why we purchased when we did, notwithstanding the market was pretty much at its peek. The current real estate market conditions sting a little but I can take comfort in knowing I have a nice roof over my head to raise my offspring... for now at least.

[metal_geek]

Originally Posted by SeeGeeWhy

With a baby on the way, I want to get a good house in a good location at a good price (one that is sustained by my salary alone, which gives that statement a point of reference).

The market may keep going down, but my house is the place I live, not my retirement plan.

Foreclosures are just one more supply stream that could have that "hidden gem" in it. Because really - there is a lot on the market, but not a lot that is meeting my purchase criteria.

Your points are well taken for those who are looking to invest in real estate, though.

Do yourself a favour and rent a nice safe roof with a baby on the way. The place you buy today could easily lose what your entire next years salary will be in the comming months..

The same "Gem's" will be there next year this time and substantially cheaper. Rent a place and consider the 50 or 60k you don't lose this year your new child's education fund..

[Sylvanfan]

I would like to know stats on assumed mortgages being turned back onto the original mortgagee. About a year and a half ago one of my wife's co-workers and her husband were going to jump the real estate bandwagon and went to a few of those get rich quick in real estate work shops. When we were putting our place up for sale they tried to convince us to put a big mortgage with as little down as possible on it and let them assume the mortgage. Looking back now that type of strategy would have been good for those people....put most of the risk on someone else so you can walk away a year later if it doesn't work. Thankfully I knew what an assumed mortgage was what the risks were and wouldn't do it. But I wonder if a few other people who didn't really understand the risk have been burned...and worse...if they spent that extra money in the mean time.

[Red]

Interesting developments. Getting quite bad in calgary. In fact, I think the price drops are being underplayed.
When you look at the listings you can see where some houses are not selling even with a 25% lower price over the peak. That's almost 100K on an average home.

Dug up an old thread on this, anyone want a mulligan?

Old thread