June 21, 2022
Canadian lenders are only writing off a smaller share of mortgages, but the losses are bigger. The average loss from bad mortgages increased sharply in Q1 2022, shows Equifax data. A smaller share of mortgages are producing write-offs, now at a record low. However, that might change fast as the size of the write-offs rises in value very quickly.
Canadian Losses From Bad Mortgage Debt
The average loss from bad mortgage debt is straightforward as the name suggests. It’s the loss a lender expects to write off as unrecoverable after the borrower sticks them with a loss. It’s rare for a mortgage to get to this point. People sometimes miss payments, sure. They don’t often miss payments, not sell the place they can’t afford, and go down with the ship though. Typically a lender reaches out and tries to find a way to keep the interest payments flowing, uh… keep borrowers in their home.
Losses are even more rare during a real estate boom when liquidity is high. Why ride a late payment into default if you can sell the home and lock in gains? It’s the same concept surrounding mortgage delinquencies. Strong markets aren’t absent from borrowers that experience financial difficulty. However, they can usually sell faster than they need to default. It’s when liquidity begins to dry up that it becomes problematic and selling fast enough isn’t possible.
Due to the liquidity relationship, mortgage losses can help pinpoint market shifts. When the market is beginning to boom, losses get smaller and write-offs shrink. As losses begin to rise and the share of mortgages written-off rise, liquidity might be drying up. In the former scenario, investors would likely watch for further signs to buy into the market. In the latter, they would likely want to consider disposing any peak-lifecycle assets.
Canadian Lender Write-Offs Made The Biggest Jump In 10 Years
Losses incurred from bad mortgages are rising, and they’re rising to the highest level in the past 2 years. Outstanding balances written off as a loss reached an average of $71,000 in Q1 2022. This is up 14.5% from the previous quarter and 4.4% higher than last year. It might not sound like a big number in this environment but this is the outstanding balance to see a loss incurred, not the value of the home. It’s rare for lenders to incur any losses at all, but we’ll come back to that point.
The sudden quarterly jump in the size of loss was the largest seen in at least a decade. A 14.5% increase is very large, even when we consider the trend has been mostly sloped lower. An average write-off of $71,000 is the highest average since Q1 2020, during the Before Times.
It might sound bad (or not), but this is a typical and more healthy level compared to the recent bubble metrics. It may spark some concerns regarding how fast the normalization has occurred. Not the end of the world and relatively small, but rapid normalization can overshoot fast.
Canadian Lenders Are Writing Off A Smaller Share of Mortgages
Average losses might be climbing but the number of mortgages incurring a loss fell to a record low. The share of mortgages producing write-offs fell to just 0.04% in Q1 2022. This is down 0.01 points from the last quarter, and down 0.02 points from last year. It hasn’t been this low in bureau data going back at least 10 years, and is likely a new record low. We’re looking at less than half the rate seen in the Before Times of Q1 2020.
The size of the average loss is rising but the share of mortgages producing write-offs fell. The former is a little odd, considering Q1 2022 had seen record home price increases. One would think when buyers are paying tens of thousands more per month, the market would be very liquid. Inventory-starved markets don’t usually see increases, right?
A smaller share of mortgages producing write-offs makes a lot more sense for the quarter. However, larger write-offs tend to precede a rising share of write offs.
June 27, 2022