# Negative Equity Mortgages



## lostamonkey (Dec 2, 2014)

Sorry in advance if this is a stupid question.

Let's say there is a housing crash and properties lose 30% of their value over a short period of time across the board. This will result in some people having negative equity (Mortgage Principal Value>Market Value) on their properties. When mortgages need to be extended/renewed, will banks allow people to continue paying into their mortgages with the same payment schedule even though they have negative equity? Will banks require people to pay the difference between the principal value and the market value out of pocket?


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## heyjude (May 16, 2009)

I am not a banker......but I am aware of one situation in which the owners had missed a payment or two. When the mortgage was due for renewal, the bank declined. The home was in negative equity, the owners could not come up with the money to pay it off, and they lost the home. 

The situation might have been very different if they had paid the mortgage like clockwork.


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## birdman (Feb 12, 2013)

Financial institutions are under no obligations to renew a mortgage and I would expect the decision would normally be subject to some negotiation and dependent on the borrowers net worth, credit history, employment, and the province of jurisdiction. The F/I will no doubt want to improve their situation with perhaps a co-signer or guarantor, lump sum reduction, additional security, shorter amortization, family loan for reduction, etc. Alternatively they could ask the borrower to list the home and work with them to effect a sale. From my experience, the last thing they want to do is start a foreclosure if there is no equity. Normally if this would happen the borrower would stop paying and the F/I would start legal action and by the time the smoke all cleared and the property sold they would be out probably $50-$100.000. R/E fees, legal fees, interest, less than expected sale price, and probably 6-12 mos selling period, etc would be the culprits. Also, if this happens and the F/I presses too hard it becomes "their" problem as opposed to the borrowers. In any event, that what we would have done before I retired 12 yrs ago!


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## Mortgage u/w (Feb 6, 2014)

The only way your lender will know definitely if your mortgage is greater than you house value is if they re-evaluate your property. Since no lender does that, the renewal will proceed as usual.

Should you want to re-negotiate your mortgage at the time of renewal, then your mortgage will be viewed as a new one and subject to regular and standard underwriting guidelines.

So in general, the answer to your question is, no; the bank will not ask you to come up with the difference should the market crash 30% overnight. If your mortgage is in default, then there will be multiple scenarios that will play out. It will not be as simple as pay up or get out. Look at the USA crash for example.....a similar situation happened. The banks were stuck with a bunch a properties in foreclosure which they paid for more than they were worth. If you keep paying, banks will be happy. But if you bring in the keys, they are in trouble.


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## none (Jan 15, 2013)

First. no one really knows so you're just getting everyone's best guess.

I would hope that at a minimum the owner would have to cough up CMHC insurance. As a taxpayer, I'm getting pretty sick and tired of paying other people risk exposure.


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## Just a Guy (Mar 27, 2012)

If anyone remembers the 80's the scenario is indeed possible. If market values tumble as a whole by 30%, the banks don't need to reappraise to get worried about underwater loans...

Logic would say, that it's not in their best interest to call in loans that are making regular payments, even if they are underwater, since they can't unload the property and regain their money...however CMHC protects the banks, so they really aren't at risk...as long as CMHC remains solvent.

Someone high up could realize that CMHC can't actually afford to cover all the defaulted mortgages if markets dropped 30% and May decide to cash in before others to get the money before it runs out...causing a panic amoungst the competitors, and a rash of foreclosures that don't make sense...

Not saying this will happen, but I've seen stupider things in my time.

If no one panics, they may be content to collect until the market recovers...but no one can predict what they'd do.

The point is they *can* refuse to renew, they *can* force you to pay a lump sum, they *can* foreclose...what they *will* do, we'll find out.


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## CharlesF.Donahue (Jan 7, 2015)

lostamonkey said:


> Sorry in advance if this is a stupid question.
> 
> Let's say there is a housing crash and properties lose 30% of their value over a short period of time across the board. This will result in some people having negative equity (Mortgage Principal Value>Market Value) on their properties. When mortgages need to be extended/renewed, will banks allow people to continue paying into their mortgages with the same payment schedule even though they have negative equity? Will banks require people to pay the difference between the principal value and the market value out of pocket?


The Mortgage needed to be paid. Loosing the house is because of unpaid and negative equity.


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## Retired Peasant (Apr 22, 2013)

In the early 80's, lots of people walked away from their houses in Calgary.


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## sags (May 15, 2010)

My sister had her mortgage renewal refused, when her condo was worth less than the mortgage.

The lender was a US lender who was getting out of Canadian business though.

She couldn't get a mortgage anywhere, based on the value of her home, so her son bought the property from her and rents it back to her.

I think there was some discussion on CMF of these small lenders leaving Canada and refusing to renew mortgages awhile back.


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## james4beach (Nov 15, 2012)

Well in the US just six years ago, it was happening all the time: people walked away from their homes. They took all the door knobs and faucet handles, left the keys in the mailbox and told the bank it's their problem now

Leveraged wealth: easy come, easy go


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## sags (May 15, 2010)

james4beach said:


> Well in the US just six years ago, it was happening all the time: people walked away from their homes. They took all the door knobs and faucet handles, left the keys in the mailbox and told the bank it's their problem now
> 
> Leveraged wealth: easy come, easy go


Yea, but a homeowner can't just walk away in Canada, especially with the new collateral mortgages.

They could declare bankruptcy, if they met the criteria, but that is a rough road to follow.

Given the price some people pay for homes today, bankruptcy still may be their best option if prices drop 30-40%

30% of a small mortgage..............maybe liveable.

30% of a jumbo mortgage............a life altering event.


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## Just a Guy (Mar 27, 2012)

In some provinces you can still walk away.


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## sags (May 15, 2010)

Oh didn't know that.............some may have to.

Calgary home prices are down 13% from January 2013 and commercial office vacancy rates are skyrocketing.

Fort McMurray landlords are advertising $1000 a month bachelor apartments and the company that houses workers in dorms is closing sites and laying off 1000.

The effects of lower oil prices are starting to ripple through the economy.

A local deli and pastry owner was interviewed, and he said his corporate lunch business has vanished...............


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## james4beach (Nov 15, 2012)

I could be wrong, but my sense is that the Alberta nouveau-riche are big fans of high leverage.

The minor drop in Calgary home prices (say 10% to 20%) shouldn't really hurt anyone. But with leverage, it can kill.

We see people posting on these forums about how they have large mortgage debts but are still aggressively investing in stocks, including the company they work for. Ouch, triple-whammy on the way down. These are some seriously leveraged people; they're going to feel intense pain in the economic slowdown.

People don't grasp this leverage concept. But when you have a massive mortgage but you're still out there buying stocks and other assets/toys, you are in a leveraged position. I worry for Alberta.


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## carverman (Nov 8, 2010)

sags said:


> Yea, but a homeowner can't just walk away in Canada, especially with the new collateral mortgages.
> 
> They could declare bankruptcy, if they met the criteria, but that is a rough road to follow.
> 
> ...


This happened in Toronto in the 80s. There was a major real estate devaluation because of the recession. 

Some people that bought houses with high mortgages lost their jobs, and couldn't afford to pay any more. 

Many just walked away from their houses, for some the banks foreclosed as a last resort, but my understanding then was that depending on the mortgage, the banks had the option to sell the home for whatever the market price was at the time, then try to sue the former home owner for the difference... if they walked away.


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## Just a Guy (Mar 27, 2012)

Alberta is one of the provinces what doesn't allow recourse mortgages, though CMHC may still be allowed to go after you if you are insured...I'm not sure.

Since I've never been in the situation, I've never looked into it.


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## birdman (Feb 12, 2013)

No walking away here in BC. If I lived in Alberta maybe it would be an idea to get the maximum mortgage and invest any other surplus funds you may have. If prices dropped 40% just walk away and keep your investments. Just an off the wall comment!


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## sags (May 15, 2010)

I see the mortgage payments on what I would call "big" mortgages............$300,000 and up, and they are pretty close to the mortgage payments we were paying for many years.

The difference is the interest rate.

We were paying 7.99% (the lowest rate we ever paid), and our payments were $1300 a month on a $150,000 mortgage.

Today, people can pay a whole lot more for a home and have an equivalent payment.

If interest rates rise, people will be in big trouble at renewal time...........regardless of if their home falls in value.

For their sake, I hope interest rates remain low for a long time, but sooner or later a generation of home buyers are going to get caught in rising rates.


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## none (Jan 15, 2013)

That's the ultimate consequence of a 'soft landing' many people lose a lot of money buying on the slow market down instead of a few losing a pile.


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## lostamonkey (Dec 2, 2014)

This is surprising to me because I haven't seen it at all in the mainstream media. Can you please link to some related new stories?


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## Just a Guy (Mar 27, 2012)

By the time things hit the mainstream media, it's already happened. That's one of the reasons I stopped reading the news, it's way too dated. 

What exactly would you like more information on?


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## lostamonkey (Dec 2, 2014)

Low oil prices leading to layoffs in Alberta.

I figured it might happen but I didn't know that it had already started happening?


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## Just a Guy (Mar 27, 2012)

Probably more speculation at this point...winter is a slower period to begin with, and the mega projects won't stop unless there is a long term drop...hiring in the spring may not be as brisk, but that's a ways off yet.

I don't think the panic has set in yet...hasn't been long enough. Someone may blink before spring.


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## Causalien (Apr 4, 2009)

Just a Guy said:


> Probably more speculation at this point...winter is a slower period to begin with, and the mega projects won't stop unless there is a long term drop...hiring in the spring may not be as brisk, but that's a ways off yet.
> 
> 
> I don't think the panic has set in yet...hasn't been long enough. Someone may blink before spring.


One of my acquaintance who became an oil worker posted a drawer full of $$$ qnd got a lot of new followers around october. I call that the top.


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## Feruk (Aug 15, 2012)

Almost every owner/operator company has announced a budget reduction for 2015. I've seen anywhere from 20% down to 75% reduction (MEG). Layoffs are already rampant in the EPC world and will likely spread big time into owner/operators when their hedging starts to expire. I suspect March is when the bloodbaths will begin (end of Q1 drilling programs). Something major has to move the oil price back up, and so far I see no candidates.


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