Monday, September 28, 2009

When it comes...

"There is no doubt an eerie parallelism (exists) between the Canadian situation today and that in the States before the bust... The crucial question in my mind is: when housing prices start to fall, is a Canadian with no or negative equity (assuming he/she still has a job and the ability to pay) more likely to A) walk away (if there are no legal ramifications); B) keep paying thereby turning himself to a debt slave virtually for life; or C) declare bankruptcy? This may determine the velocity of the downturn - a crash versus a protracted deflation. Any feedback would be much appreciated."

This question was asked in response to Saturday morning's post.

We promised to address it today and as fate would have it, Garth Turner touched on this with his post on Saturday night. You can read his full post here.

In a nutshell, in all of Canada (except Alberta) Canadians will be in a significant bind.

Canadian mortgages are known as “recourse” loans, which means the bank has full recourse to collect not only on the debt, but the costs of the debt. If you execute a standard mortgage document, and miss mortgage payments during the term, or fail to fully pay it off at the end of the term, or do not refinance it satisfactorily, then the lender can legally gain title to the property, and sell it. Then they will sue you for the difference between the mortgage amount and the sale proceeds. You will also be sued for costs, including all legal activity, real estate commissions and taxes, and if you cannot pay this amount, banks will get a court order to garnishee your wages for what will probably be the rest of your miserable life.

This will happen even if your mortgage was CMHC insured.

It means that Canadians will, en mass, pursue the only alternate option: Personal Bankruptcy.

By declaring personal bankruptcy, the bank gets the house and you get a black mark that lasts for seven years. It will mean no credit cards, no loans, no new mortgage, no new car, no running for political office. It will mean difficulty finding almost any white collar job and even hassles trying to rent.

But it will get you out from your mortgage obligation.

The problem is that it's not an immediately implemented solution.

In British Columbia the foreclosure process can be A drawn out affair and then the bankruptcy process will take even more time to wind it's way through the system.

And because so many people will be forced to pursue this option (rather than simply handing over the keys to your home to the bank as in the United States), once it gets going the sequence of events could plunge BC real estate into a morass that compounds and intensifies the collapse (just look at how the collapse in confidence froze up the market this past winter).

When it comes to pass one thing will be certain.

It will be ugly.


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1 comment:

  1. If the house worths less than the reminder of the mortgage at the end of a 5 year term, is it likely that the bank would finance it ? (assuming credit history is good, enough household income). Thank you.