Ottawa, banks take action to rescue mortgages
As banks adopt new flexibility, homeowners urged to approach them for help with loans
By Tara Perkins – Globe and Mail
As the recession deepens, Canada’s big banks and its federal mortgage insurer are moving to head off a rise in defaults by homeowners.
Ottawa is launching a campaign to urge the cash-strapped to approach their banks for mortgage relief, as the banks adopt more flexible practices aimed at preventing borrowers from falling behind on payments. The measures by the banks and the Canada Mortgage and Housing Corp., the federal agency that guarantees mortgages, signal growing concern about increasing levels of household debt.
With house prices dropping, job losses rising and the economy not yet showing signs of recovery, both the government and lenders are pushing consumers to be proactive if they think they might have problems paying their debts.
The five big banks are all taking a more flexible approach in an effort to avert mounting defaults and bankruptcies, which would increase credit losses and eat into bank profits. Toronto-Dominion Bank, for example, has been working with CMHC to determine how it can modify loans to help its customers, TD chief executive Ed Clark said in a recent interview.
“We’re working out what’s the best thing to do here,” he said.
The consumer outreach effort, which is scheduled to be rolled out by the CMHC later this week, will attempt to reach homeowners through the Web, newsletters, media, other government agencies and credit-counselling organizations.
It’s a more informal approach than that of banks and policy-makers in the United States, where the situation is dire. This month, the U.S. administration released details of a formal $75-billion (U.S.) loan modification program to help ailing homeowners. It gives mortgage lenders an incentive to modify existing mortgages, and sets standard industry practice for modifications.
Such action is required, the U.S. government said, because as many as six million families are expected to face foreclosure in the next several years, and millions more are likely to have difficulty making their mortgage payments.
In contrast, the Canadian effort is attempting to head off problems before they happen. The structures of this country’s banking and mortgage markets are vastly different from the U.S., making foreclosures much rarer. The most recent statistics from the Canadian Bankers Association show that 0.29 per cent of mortgages held by the largest banks were in arrears in October, up from 0.26 per cent a year earlier, but much lower than the level through most of the 1990s.
“We are really trying to say to our clients and customers: ‘Don’t wait until you have a problem. If you think you might have a problem, why don’t you come talk to us and we can then sit with you and try to get ahead of the problem and do some things?’ and we’re open to doing things to help get people through it,” Mr. Clark has said.
Some banks are already seeing an uptick in the number of homeowners seeking more flexible mortgage arrangements. “There are more people talking to us about how we can help, and in some cases it may be because they are facing difficulties,” said Wendy Hannam, executive vice-president of personal banking and distribution at Bank of Nova Scotia.
For those at risk of falling behind on their payments, “we are preparing materials for our front-line team to give them some guidance on additional tools that they can consider to help customers out,” Ms. Hannam said.
While the deals that are struck will lighten customers’ loads, they could also benefit the banks. Lenders are better off forgoing a small bit of revenue in the short-term than allowing the situation to escalate to the point where a customer’s debts are thrown into the banks’ pile of rising loan losses.
In past recessions, banks have also adopted similar flexible approaches to mortgage payments. CMHC said it wants homeowners to know that they have options if they’re having difficulty making their mortgage payments.
Lenders might offer a range of potential solutions, including: converting a variable interest rate mortgage to a fixed rate to protect the borrower from a sudden interest rate increase; offering a temporary short-term deferral of payments; offering payment flexibilities; extending the term, or amortization, to lower the monthly required payment; negotiating a special, unique, payment arrangement, or adding already missed payments to the mortgage balance.
“It really comes down to looking at each situation on its own merit,” said Rick Jaques, vice-president of personal and commercial banking for Bank of Montreal in the Windsor area, where auto-related job losses have hit hard. “Another item that I would throw in is the option to skip a payment, that has come up in several instances.”
Instead of waiting for struggling mortgage-holders to come to the bank or miss a payment, Mr. Jaques said he is “proactively going out and calling our customers and trying to let them know what it is we can do, finding out where they’re at, and if there’s a way we can help.”
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