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RED DEER OUT
RED DEER, Alta. Feb. 9, 2016/ Troy Media/ – I was a humble-yet-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 eventually being bought down to a luxury rate of 12.5 per cent, with help from then-Premier Peter Lougheed. It was one of few times that I was happy we had a nice, socialist Conservative government, willing to give us our tax money back, every month.
I remember being sent on assignment to nearby Innisfail, where the oil price crash at the time had caused a large number of new homes on one 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 being repossessed 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 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 lose is your equity – and your credit rating for a few years.
Back then the saying went like this: If you owed $50,000 and couldn’t pay, you had a problem – but if you owed $1 million and couldn’t pay, the bank had a problem.
That’s still true today, you just 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 Fort McMurray.
As early as last spring, the Financial Post revived the term “jingle mail” to lead 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 rental accommodation costing far less than a mortgage payment, the question was asked: At what point do you simply give your house back to the bank?
The answer: 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 anchor on the bottom of a sea of endless bank payments.
Suppose you’re a skilled professional in Fort McMurray and just got laid off. Your home cost $750,000 – you bought near the peak and it won’t sell for that anytime soon. The average drop in house prices there is around $125,000.
If you have a 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 (based on 20 per cent down on an uninsured, 2.8 per cent mortgage over 20 years).
It would be the same in Calgary, but there we’re talking about homes with an initial purchase price well above $1 million. With a mortgage in distress, it’s the same problem, just 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 if that happens, 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.
Greg Neiman is a freelance editor, columnist and blogger living in Red Deer, Alta. Greg is also included in Troy Media’s Unlimited Access subscription plan.
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