It was a huge problem in the 1980s when interest rates were an astronomical 20% and folks were leaving Alberta to find work elsewhere. Half a million people left the province, and left their properties because payments were too high and mortgage balances were higher than the value of the property. So, if you couldn’t sell - what was a person to do?
Those days may be back in Alberta – sans the high mortgage rate. Job loss is the new culprit.
You may see headlines that say that “jingle mail” is back. That’s the jingle of a ring of house keys in an envelope on its way back to the mortgage lender. Anyone who needs to walk away from a situation like this has got to be out of ideas.
It’s important to weigh the consequences of a desperate act like a strategic default, which in essence is walking away from a mortgage on purpose. It may affect your credit rating for years to come depending on what type of mortgage you have, and for sure it will cause home prices to take a dive, affecting the rest of the housing market in a detrimental way.
Strategic defaults are being reported in northern cities in Alberta and while Calgary house prices haven’t dropped as much as in smaller centres, jingle mail could be coming our way and the federal government is paying attention.
Calgary luxury homes, where prices drops are hovering around the 20% mark, could be the first market segment to be hit by strategic defaults.
The issue in Alberta is this: we are the only province in the country with non-recourse mortgages. This means that those loans for which the mortgagee put down 20% of the purchase price aren’t covered by Canada Mortgage and Housing Corporation (CMHC). This means that if you mail your keys back to bank, you’ll lose your home and that’s it. There’s no other personal liability. In other Canadian provinces, the mortgage lender can go after you in a big way in court, going after all your other assets including wages if you’re working.
When all those people left Alberta in the mid-1980s, they would just mail the keys back to bank and that was it. Apart from losing their initial down payment, not even their credit rating was affected. And that could happen today for people with non-recourse mortgages, however credit bureaus in the digital age have instant access to banking information, including whether or not you made a strategic default. And because they are watching, that default will be a big mark against you for as long as seven years and there’s nowhere to hide.
Experts looking at home prices from 18 months ago, which is the time immediately before the price of oil plummeted and significant layoffs began, say those who purchased a luxury home at that time would have bought at the peak of the luxury market.
For example, an individual who purchased a home in the summer of 2014 for $1.8 million and put 20% down would have $1.4 million outstanding on their mortgage. That home likely is worth less than the mortgage balance today.
There are many luxury homes on the rental market today, some with mortgages that are more than $2 million.
Exhaust all options before mailing your keys back to bank.