Alberta and Saskatchewan are the only two Canadian provinces that allow underwater homeowners to leave keys for the bank and “walk away” from their mortgage obligations without further recourse or damage to their credit rating. But this option is not available for those who bought with less than 20% down and bought taxpayer-backed mortgage default insurance to complete the purchase. Insured borrowers are typically sued by CMHC or Genworth to recover any shortfall between the resale price of the home and the outstanding principle, interest, admin and legal fees. On a default, compound interest costs and fees tend to escalate quickly eating up any equity the owner may have once had in the house. Foreclosure sales also tend to be depressing of market values even for those who are maintaining their payments. See: Surviving foreclosure in Alberta: “I thought I could do it”. Alberta offers a cautionary tale for the perils of highly leveraged, over-valued real estate across Canada:
A recent survey by Manulife Financial found a third of respondents would have difficulty making their monthly payments after three months if the family’s main earner lost his or her job. One in six said they would have trouble making mortgage payments if interest rates rise…Another survey earlier this year by Ipsos Reid found nearly half of Canadians were $200 a month away from being unable to pay their bills and other debts.
Human life is full of great risk. Health problems, accidents, breakups, job losses and economic downturns are all regularly recurring events. The mean reversion of over-exuberant asset prices that have been enabled by debt is not random, bad luck, but rather a normal, foreseeable part of the credit cycle. The longer the rising phase, the deeper or longer the mean reverting phase. Wise people plan for the downturns, foolish people hope they won’t happen.