Avoiding the Cliff: If six-month payment deferrals end as planned in September, tens of thousands of homeowners will default on their mortgages—no question about it. CMHC calls this the looming “deferral cliff,” and analysts want to know what the government will do about it. If Australia is any guide, deferrals could very well be extended. The Aussie regulator announced today that it’s providing capital relief to banks (i.e., not forcing them to recognize deferrals as being in default and put up more capital) to allow banks to extend mortgage deferrals another four months. The extensions are not automatic, they’re only for people who need them, and require a credit assessment of each borrower. Australia’s not alone in its decision. Last month, UK’s regulator prolonged deferrals until October 31. Given international regulators often follow one another during crises, and given we haven’t heard of any great alternatives, our money is on the Canadian government also facilitating extensions.
A Trillion in the Hole: Emergency income subsidies like CERB “have prevented mortgage defaults” and “helped avoid a rise in distressed sales,” avoiding “longer term damage to the economy,” says the Finance Department. But the price tag is extreme. Pandemic support programs will skyrocket Canada’s debt past $1 trillion for the first time ever. Critics charge the government with out-of-control spending (with well over double the bailout expenditure of the average G20 country, relative to GDP). All is good until record government debt issuance swamps demand, the surging money supply causes inflation and/or credit rating cuts boost Canada’s borrowing costs, opponents argue. The fact that our debt-to-GDP ratio is below other G7 countries, and the fact we’re years away from this all catching up with us, will only encourage more free spending in Ottawa. To be fair, however, the alternative (letting consumers and businesses go insolvent) isn’t appealing either. “We decided to take on that debt to prevent Canadians from having to do it,” said the Prime Minister today. For now, the market is shrugging off Canada’s soon-to-be 13-figure debt. The government’s 5-year bond yield, which guides fixed mortgage rates, rose a scant 3 bps on the news.
TD Cuts: The comfy green chair lender lowered its special 3-year fixed rate from 2.54% to 2.49%. By comparison:
Discretionary 3-year rates at most big banks are at least 20 bps lower than that.
Getting By on CERB: Here’s what the government estimates people with mortgages spend each month on shelter, food and communication — as compared to the $2000/month CERB benefit. It’s broken down by thirds of the population and, disturbingly, the bottom and middle class aren’t that far apart. (Source)
Random Fact: “Canadian banks fund uninsured mortgages mainly through deposits (~90%) and covered bonds (~10%),” says Fitch.