In mid-2014 crude began one of its most precipitous declines on record, a plunge that has put oil-town Fort McMurray, Alberta, on the brink of depression.
From Boom to Bust
“It’s when you see high-end home prices drop 20 per cent below the peak” that people really get nervous, suggested Bruce Alger, an insolvency trustee at Grant Thornton in Calgary, to CBC News. Some people who have seen their home values sink like that are simply choosing to mail the keys back to the lender.
The extent of this so-called “jingle mail” is overblown, but it’s certainly happening more often. Arrears are still low, but they always lag economic downturns.
As for Canadian banks, they’re slowly starting to see the effects on their bottom lines. As early as last quarter, during Bank of Montreal’s quarterly conference call, Chief Risk Officer Surjit Rajpal was asked why the bank wasn’t seeing more signs of trouble in household credit given the unfolding economic situation in Alberta. He seemed somewhat perplexed himself: “That’s a really good question…And, really, there’s no one single answer that can satisfy why it is not worse than it currently is.”
Fast forward to this week’s first-quarter earnings reports and the figures have taken a notable turn south. “We did see delinquencies move up this quarter from historical lows in our residential mortgage portfolio in Alberta,” said RBC’s David McKay, who adds that RBC is “proactively working with these clients.”
One of the most concerning alarm bells is Alberta’s surging unemployment rate, a historical precursor to defaults. Now above the national average at 7.4%, it was just 4.7% two years ago.
Snapshot: Alberta, Then and Now
Not All Properties Are Equal
To get a better on-the-ground assessment, we reached out to longtime Alberta appraiser Robert Denis, president at Chalifour Denis & Associates in Fort McMurray.
“The larger, higher-priced homes have taken a bigger decrease in value than some of the smaller more affordable ones,” said Denis. “You have some properties that may have dropped 8-10%, and some of your revenue properties have decreased in excess of 20%.”
Appraisals have been come coming in under some clients’ expectations, he suggested. For those who aren’t following the market conditions, “the cut has been a little deeper than [expected].”
A Lender’s Perspective
Smaller Albertan communities that rely heavily on natural resources pose greater risk than more diversified urban centres. It has always been like that.
“As far as Fort McMurray is concerned specifically, we’ve always taken a very cautionary approach in that marketplace,” said Boris Bozic, founder and CEO of Merix Financial, one of Canada’s top non-bank mortgage lenders. “Even when things were rather robust, we were somewhat discriminating in terms of the type of business and the quality of business we accepted.”
While he says they’re not putting those clients through extra due diligence, “the room for exceptions is a little bit tighter than if you’re in the major urban centres. And I think that’s understandable.”
We’re hearing that a few lenders have been more aggressive, however, by internally scaling back maximum loan-to-values.
Advice for Brokers
Bozic says the deals being affected the most right now are refinances. “We have a higher decline ratio in that bucket of business on refinances, and I can say what’s really driving that is quite simply appraised values. There’s no getting around that because value is value, period.”
He notes that refi applications are being scrutinized more than purchases or transfers because they involve someone taking equity out of their home. His advice for brokers who may be submitting a refi in Fort Mac: “I would say to brokers more than anything else, be very, very comfortable with the values that you’re sending in.”
Tips for Homeowners
For homeowners who are caught up in the home value slide, Denis says most will do best to ride out the turbulence, if their personal circumstances and mentality allow for it.
“Depending on your employment situation, if you’re able to continue making your mortgage payments, if you’re able to ride it out, it would seem like the wise thing to do since the market will come back at some point,” he said. “Prices will go up and down as they have in the past…but we expect that there’s going to be better times ahead.”
Bozic agrees that Albertans are a resilient bunch. “They’ve had a hell of a ride and one thing I’ll say about Albertans is, they always come out stronger on the other side, and there always is an other side.”
“This too shall pass. The question of course is when…”
Steve Huebl & Robert McLister, CMT