House Prices and Insolvencies
House prices and insolvencies have been negatively related for decades but perhaps the tide is starting to turn. Even bankers are waiting for a correction in housing markets, after all with the average house price in London (Ontario) now close to $650,000 who can afford to enter the marketplace:
People who are already homeowners can move up, incrementally, in this market, but even they are taking on mortgage debt to do so. House prices have increased week over week so selling without looking for a replacement home until after the deal has closed could leave you out of the market.
For many years, homeowners would make assignments into bankruptcy and still stay in their homes, house prices moved slowly and after contemplating notional (selling) costs there would have been nothing left for the creditors if a sale were forced. That view has changed but should it have?
There are two driving forces one is a court case referred to as “LePage” the Appeals Court Judge agreed with the CRA that the equity that built up in the bankrupt’s property following his bankruptcy filing and prior to his discharge, should be considered “after acquired property” and vest in the trustee for distribution among the bankrupt’s creditors. This was a shift in the way that real property had previously been valued and dealt with in a bankruptcy. Up until that decision, the view was that the bankrupt’s assets ought to be valued at the time of entering the bankruptcy, not exiting the proceeding.
The other driver is that the fact that many homeowners have been suddenly and unexpectedly enriched by the booming housing market. This has led many homeowners to consolidate unsecured, and other, debts into their mortgage or secured line of credit. It has been reported that bank mortgages are up by 42% and secured lines of credit are up by 60%. On top of that of course is a rise in private mortgages that are not as widely reported through media outlets.
If the current trend continues debt levels will continue to redouble every few years until the debts are completely untenable. Canadian consumer debt is the highest in the world and fewer Canadians are resorting to insolvency proceedings to find a solution. In 2020 we saw the lowest number of insolvency filings in about twenty years with only 99,000 filings across the country. Contrary to the previously cited link’s misinformation, that is about 1/3rd less than were filed in 2009, during the banking crisis.
An important question is “how can homeowners find a work around that will allow them to keep their home in spite of the apparently high amount of equity?” The answer, we believe, lies in filing proposals instead of bankruptcies. Bankers, as noted in the opening paragraph, are well aware of the possibility of a correction or even a crash in housing markets. They would also prefer to be seen as good corporate citizens rather than vindictive collectors. In filing a proposal there are no hard and fast rules regarding how much you must repay. Some suggestions are it must be at least 20% of the debt owed but that is not the case for all proposals, there is no “one size fits all”. The terms are negotiated with, and agreed upon by, the creditors.
Many years ago I took Segments I, II & III of the OREA (Ontario Real Estate Association) programme, at that time our class was advised that in Canada, the average homeowner sells and moves house every four years. Bankers surely have good up-to-date statistics on those transitions. When a proposal is filed it is usually for a five-year (60 month) term. That leaves plenty of time for transitions in the market, sales, refinancing and corrections.
Our office has had some success helping people file proposals that allowed them to keep their homes, and the equity, because the alternative might leave them destitute, but with the following provisions: 1. should they sell their home prior to the completion of monthly payments; or 2. should they refinance their home and be able to add more money to the mortgage prior to the completion of the proposal, they will either pay the creditors in full (if sufficient funds are available) or pay another substantial amount into the proposal.
Call us to find out more about filing consumer proposals 519-646-2222