Toronto mortgage brokers report rise in power of sales

There are early signs of rough times ahead in the GTA real estate market, with some Toronto mortgage brokers reporting a rise in the forced sale of homes by private and alternative lenders.

“It’s happening at breakneck speed,” said Toronto broker Ron Butler. “It’s just a strange set of events that have come together to create this vast increase in sales power.”

While it may conjure up images of deeply discounted homes in the Florida suburbs during the 2008 financial crisis, a power of sale is different than a foreclosure. Under the power of sale the borrower still owns their home, but the lender steps in to force the sale of the property, often because the borrower cannot keep up with their mortgage payments.

Seven interest rates hikes last year have renewed fears and social media chatter about Canadians slipping behind on their mortgages. Mortgage delinquency rates remain very low, but it takes months for defaults to occur now to show up in those statistics.

“Whatever you see going on right now today is something that started nine months ago,” Butler said.

“This is just the very beginning of the problem; we’re not going to see the real impact of the problem until May, June, July.”

Toronto mortgage broker Vince Gaetano said his brokerage has already had three clients who have served with notice of power of sale from private and alternative lenders this week.

“I’ve been doing this for 30 years. I haven’t seen this much in recent history,” he said. “I don’t think it’s a coincidence, I think it’s a sign of the times,” he said.

Butler said they are coming mostly from private lenders, also known as Mortgage Investment Corporations (MICs), which pool money from investors and lend it to real estate borrowers. Some of these lenders have struggled in the current high-rate environment.

“The combination of that and the drop in house values ​​in Ontario has motivated many of the private lender organizations, or simply individuals who do private lending, to say, ‘I gotta call in the mortgage,’” he added. Most of these are one-year mortgages, and if lenders can’t pay out in full at renewal, “they’re just simply saying, ‘well we have to get the money back, so we’re going to put you into power. of sale.’”

The other group facing forced sales are people who have mortgages with alternatives or “B lenders,” who are struggling to keep up with skyrocketing interest rates if they’ve had to renew. These are lenders that cater to individuals who might not qualify with the big banks.

In these cases, “the increase in payment was so substantial as to become almost unmanageable,” Butler said.

Peppered with colorful all-caps copy like “HELP!!! MISSISSAUGA POWER OF SALE **MUST SELL IN 30 DAYS!!!” and “POWER OF SALE* BACK ON MARKET — DEAL FELL THROUGH!!!” power of sale ads are hard to miss on sites like Kijiji and HouseSigma. One three-bedroom, four-bathroom Brampton townhouse was sold as a power of sale for $919,000 in December 2022, after it was bought in 2021 for $1,260,000.

Butler estimates that only around 2 to 3 per cent of homeowners with mortgages in Toronto and Vancouver have either private or alternative lenders. “But it’s still meaningful,” he added. “There’s nothing quite as impactful on a marketplace as too many people who have to sell.”

Seamus Benwell, a specialist in housing research for the Canada Mortgage and Housing Corporation, said that despite rising interest rates, data from the third quarter of 2022 shows that mortgage delinquency rates in Canada are “at an all-time low” at 0.14 per cent nationally, and just 0.07 in Ontario and 0.06 in Toronto.

“The bottom line number is that we’re not seeing mortgage delinquencies increase,” he said. But, like Butler, he notes that mortgage delinquencies are a lagging indicator that tends to show up later. This is because of the 90-day time frame but also because Canadians tend to sacrifice whatever else they can before their homes, such as payments on credit cards and car loans.

“We’ve started to see some increases in delinquencies in those products, especially credit cards, over the last five or six months,” he said. “That could be a sign of future difficulties, that Canadians are sort of struggling to keep up with all their payments.”

Rebecca Oakes, vice-president of Data & Analytics at Equifax Canada, which also measures mortgage delinquencies, said their numbers also show very low rates. But they are also seeing a slight uptick in credit card and auto loan delinquencies.

With rising interest rates and inflation, and some people with variable rates hitting their trigger rates, “it still might take them a few months until that starts to really come through in a delinquency rate,” Oakes said. About half of variable-rate mortgage holders with fixed monthly payments have already hit their trigger rate, meaning they are no longer paying off the principal in their home, just the interest, according to a November Bank of Canada report.

Shubha Dasgupta, CEO & Co-Founder, of Pineapple, a digital mortgage company, said he doesn’t see an alarming increase in sales power at this time. But he is seeing “more than the norm.” This is “more on the private side” and a lot of it is “more so against property value declines.”

For example, if a lender lent $800,000 on a $1-million home that is now worth $900,000 they may not want to renew that mortgage. “But that borrower doesn’t have another option, so what that private lender does is move it to default and power of sale,” he said.

Fellow Toronto brokerage Denise Laframboise has not noticed an increase in power of sales. She has found though, a lot of fearful clients worry about the rising rates.

“I do think it’s going to get worse for a lot of people,” she said. Laframboise encourages these individuals to look at options when they come up for renewal, perhaps a longer amortization period, or going with a one- or two-year rate instead of locking in for five.

Gaetano suggests mortgage holders talk to their lenders if they’re having trouble with payments, and to start thinking ahead now if they’re coming up for renewal soon.

“It’s going to be a bumpy ride,” Gaetano said. “This is not going to end well for many people that bought in the last two years.”

It’s easy to point fingers and try to find a “boogeyman” who is at fault, he added. But it’s clear that record-low interest rates were not sustainable.

“I think FOMO (fear of missing out) took over and people got drunk at low rates,” he said.

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