Canadian Banks Directed to Prepare for Mortgage Default Risks and ‘Credit Losses’

A person walks past multiple for-sale and sold real estate signs in Mississauga, Ont., on May 24, 2023. Nathan Denette/The Canadian Press

The chief bank inspector has directed financial institutions to start assessing mortgages that could be at risk for default.

Superintendent of Financial Institutions Peter Routledge made the comments in a regulatory notice on March 11, saying bankers should focus on risky products, like variable rate mortgages with fixed payments, as first reported by Blacklock’s Reporter.

The notice says that mortgage holders are already facing higher payments, and others will soon face “payment shock” when they renew this year.

An estimated 2.2 million mortgages are expected to come up for renewal in 2024 and 2025, which is about 45 percent of all outstanding mortgages in the country, said the Canadian Mortgage and Housing Corporation (CMHC).

In a 2023 memo to Mr. Routledge, it was estimated about $369 billion in outstanding mortgages could be at risk.

“At present variable rate, fixed payment mortgages make up about 24 percent of current outstanding loans,” said the memo. “Before the latest rate hike, for illustrative purposes, over 70 percent of these were already projected to take over 40 years to be paid if the payment amount and interest rate at that moment would maintain forever.”

It also said that these mortgage holders were close to the “trigger point” of their loans, which is when the amount of interest owed is equal to the fixed monthly mortgage payment. At this point, no money is being put toward the principal of the loan.

“These risks can lead to more defaults and are particularly acute for borrowers with higher risk mortgage products, such as variable-rate mortgages with fixed payments,” Mr. Routledge said.

“If not managed responsibly, this risk could lead to unexpectedly elevated credit losses.”

Mr. Routledge said that the directive was “effective immediately.”

“Financial institutions must act to address the mortgage lending risks that we’re observing,” he said in a March 11 post on X, formerly Twitter.

It’s not just the major banks that could be impacted, as more Canadians have turned to private lenders over the past couple of years.

These types of mortgage loans have increased 50 percent or 2.7 percentage points from 2021 when it was 5.3 percent. In the first quarter of 2023, the number of mortgage loans that were private was 8 percent, according to Reuters.

At the same time, the share of mortgages at the big banks dropped to 53.8 percent from 62 percent. That’s a decrease of 13 percent or 8.2 percentage points.

Data from the CMHC revealed that about 1 percent of private mortgages were delinquent by the third quarter of 2023. The industry-wide rate is 0.15 percent.

One study found that 90 percent of Toronto homeowners who were forced to sell their properties because of a loan default had mortgages with private lenders, Reuters reported.