Jingle mail rears its ugly head in Alberta again
Federal government worried about Albertans making strategic defaults on their mortgages
One of the big bads from the 1980s is starting to emerge again in Alberta.
Jingle mail — the act of walking away from an underwater mortgage by mailing your keys back to the bank — is a peculiarity of the Alberta residential market and an act of desperation. However, a combination of high debt and lost jobs make it an option in a province going through a significant economic reckoning.
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It's enough of a concern that the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada's banks.
CBC Forum on mortgages
"Sending house keys back to the bank seems very irresponsible. The banks are not going to absorb the costs — customers will be on the hook in the end." — a comment from EOttawa on the CBC Forum chat on mortgages. Read the full discussion here.
"We're slowly starting to see it in Grande Prairie and Fort Mac," said Don Campbell, senior analyst with the Real Estate Investment Network.
"People saying that we can't make a go of it and mail the keys to the bank. In the big cities, not so much because the average sale prices haven't really dropped much, we haven't seen the pain yet. But Calgary is getting pretty tight."
Bruce Alger, an insolvency trustee at Grant Thornton in Calgary, said he is dealing with one such case and has heard of more.
"It's when you see high-end home prices drop 20 per cent below the peak," said Alger. "I think there are people considering walking away and I've talked to one or two myself."
Why Alberta is different
Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those are loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).
'People saying that we can't make a go of it and mail the keys to the bank.' - Don Campbell, Real Estate Investment Network
If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.
Jingle mail was an enormous problem in Alberta in the 1980s, when mortgage rates were hovering around 20 per cent and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. It also played a role in the U.S. housing crash.
Ottawa watching situation
Alberta's housing market is also being watched closely by the federal government. In the spring and fall of 2015, the Department of Finance commissioned two reports on the state of the housing market in Alberta. CBC News obtained those reports through an access to information request.
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The analysis of the housing market showed that between 2001 and 2011, there was overbuilding in Alberta, resulting in too much housing stock on the market. However, as people continued to move to Alberta from other provinces, much of the excess supply was bought up.
That movement of people into Alberta slowed by more than 50 per cent last year. There is the risk that Alberta's population could start to fall if the oil downturn persists.
Not Alberta bound
In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating.
That's the scenario that the Finance Department is worried about now.
"These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices," read one of the reports obtained by CBC News.
Prices need to drop 20%
So far, it is a problem in parts of Alberta where prices have dropped 20 per cent or more. Fort McMurray and the luxury housing market in Calgary have both seen prices drop that much from the highs of 2014.
Joel Semmens, a realtor in Calgary with Re/Max, said that while the average home price in Calgary is only down by a few per cent, homes worth more than $1 million have seen their value drop by much more.
'You're going to have a big black mark on your credit bureau for the next six to seven years.' - Dan Heon, Canadian Mortgage Team Alberta
"In the million-dollar plus markets, I was quite active in January," said Semmens. "I had four higher end sales last month, all four transactions, the values were off 20 per cent to get a buyer to the table, in order to get a deal to stick."
"If you took out your mortgage say the summer of 2014, just before everything started to come unglued, you would have purchased right at the peak," said Alger.
He uses the example of a home bought for $1.8 million, with 20 per cent down and a roughly $1.4-million mortgage.
"There are lots of houses in that price range in the newer, higher end suburbs and the appraisals have been coming in at less than the $1.4 million on the mortgage."
There are also many luxury homes sitting vacant, available for rent, carrying mortgages in excess of $2 million.
Goodbye credit rating
The one main difference between now and the 1980s is that now credit bureaus have access to mortgage information. If you make a strategic default, it will follow you.
"You're going to have a big black mark on your credit bureau for the next six to seven years" said Dan Heon, a broker with the Canadian Mortgage Team. "So just handing the keys back and saying, 'I'm going to move to Saskatchewan where the jobs are,' and think that you're going to start your life up again and borrow money, it isn't going to happen."
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