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Bank CEOs weigh in on “vulnerable” mortgage clients

Steve Huebl

Mortgage Industry News

January 10, 2023

Canada’s Big-Bank CEOs weighed in this week on the current state of their mortgage clients, including those they consider “vulnerable” in the event of a recession.

None were quite as forthcoming as Scotiabank’s new President and CEO Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.”

These are borrowers that have a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.

“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.

However, he added this represents a “manageable-type situation for us on mortgages.”

RBC is also keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.

“We look at incomes, we look at the stress of inflation on expenses in a household and we monitor cash flow to interest payments, as you would in any corporation,” RBC President and CEO Dave McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”

Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.

Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”

For clients that start to have difficulties making their payments, mortgage lenders have a number of options to first try and assist borrowers before the situation progresses to the point of them needing to sell their home.

“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.

In terms of clients with cash flow challenges in addition to a collateral problem, where the sale of the property wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group, but one the bank is actively monitoring.

“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing.”

Overall mortgage arrears remain at record lows

The latest data available show mortgage arrears remain at record-low levels. Since arrears are a lagging indicator (requiring at least 90 days of missed payments), the latest data available from the Canadian Bankers Association is from September.

Even so, there were just 7,305 Canadian mortgages in arrears out of over 5.1 million, representing just 0.14%. In the midst of the pandemic in 2020, the arrears rate was nearly double.

Given the sharp rise in interest rates over the course of 2022, and growing expectations of a recession in 2023, most mortgage lenders have been preparing for arrears to trend higher.

Over the last several quarters, all of the big banks have increased their provisions for credit losses—in other words, setting money aside for bad loans.

Even so, TD Bank President and CEO Bharat Masrani doesn’t believe the next recession will be comparable to, say, what was experienced during the Global Financial Crisis of 2007-08.

“I am not suggesting there’s a 100% chance [of] no recession,” he said during Monday’s conference. “When rates go up so much, is there a slowdown to be expected? Yes.”

But when looking for indicators of what to expect in terms of mortgage arrears and loan losses, he said you have to look at employment.

“The job market has been remarkably strong and continues to be strong,” he said.

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