Mar 28, 2020
THE NEW REALITY: PRIVATE MORTGAGE LENDERS’ RIGHTS AND REMEDIES - Part II of a Series
Over 1,000,000 Canadians applied for EI assistance as of last week. This nearly doubles the number of unemployed Canadians. Ontario was particularly hard hit - with unemployment reaching new highs. These stats do not bode well for Ontario’s private mortgage lenders.
It’s now common knowledge that Canada’s mortgage insurers have authorized insured lenders to give mortgagors a principle and interest (P&I) holiday of up to six months. This will undoubtedly help with homeowners’ cash flow, and will most certainly avoid many a mortgage default come April 1/20. But it may also come as a surprise to private mortgagees - many of whom hold mortgages that are subordinate to the CMHC and Genworth insured first mortgages, that this P&I holiday is just a deferral. All unpaid P&I instalments must be capitalized monthly, and interest on overdue interest will accrue. The effect of this P&I deferral will be to erode the mortgagors’ equity in the property. And this equity erosion will directly impact in a very real and very negative way the value of the private mortgagees’ security.
I anticipate that at least two other factors will come into play. With business shut downs, high unemployment and social distancing - which appear to be the new normal – likely to continue for months, rather than days/weeks, there has to be a dip (correction? or crash?) in residential real estate prices that is not far off. And, needless to say, even when the Covid19 crisis resolves itself, all first mortgagees, whether or not they agreed to defer P&I payments, will inevitably see a sharp increases in mortgage defaults. Togerther with a sharp rise in the commencement of mortgage remedies and legal procedures; such as powers of sale and foreclosures.
Both of these scenarios result in private mortgagees and private chargees losing even more equity in their security. If the real estate market softens, the loss of equity is obvious. If (when) institutional first mortgagees start mortgage remedy procedures and powers of sale, the added insurance costs, property management costs and legal costs further erode private mortgage equity.
I’m certainly not the only one predicting uncertainty and volatility. We only have to look at the stock market over the past few weeks to see what kind of havoc a pandemic can cause. The next blog post to examine homeowner defaults, both monetary and non-monetary, and how they will impact on private mortgage lenders.
This blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and mortgage remedy team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.