You Can Bank On It!!

In todays tough economic landscape, we are often hit with conflicting information, differing stats, and pieces and parts of data that are hard to connect. Depending of where you get your information from it can be difficult at best to put together a sense of where we are going ,and more importantly how you can you prepare your business for it. It seems that the people who were always bearish are more bearish than ever, and the folks who were always bullish are more bullish than ever. So what is a person to do? I think the answer to that complicated question is actually quite simple: Be prepared to change your opinion when the facts change.

This week I was speaking with an appraiser of mine, and he shared some interesting news. He had received a call from a realtor to get an appraisal on a power of sale. Now, the reason this was odd, was that typically the lawyer that is handling the power of sale is the person who orders the appraisal – not the realtor. While realtors like to think they are the be all and end all of importance, they really aren’t. Typically once the appraisal has been performed, the legal docs are in order, then the realtor gets involved. My appraiser thinking something was amiss reached out to the law firm. Now this law firm handles all of the power of sale files for a large chartered bank in Ontario. When the appraiser called said law firm, and spoke with the law clerk on the file, he was told ” We are so swamped with legal proceedings from X bank that we don’t have time to order the appraisal, so we make the realtor do it”. He was then told ” I have 15 new files on my desk just from this morning”. “We have never seen so many legal proceedings in my entire 18 years at the firm”.

A couple of ways think this can be read:

1. Perhaps it is a certain bank that is struggling with arrears and power of sales.
2. Power of sales and legal proceedings are ramping up.

Let’s look at both

1. It is possible that a certain bank is experiencing a much higher arrears and default rate than the general market. The bank in question was a bank that during 2020 and 2021 was extremely loose on underwriting, allowed TDS exceptions while having no GDS requirement on conventional, and would quite often give you rate discretion when needed. This bank tried to grow its market share, so it is possible that they took on some borrowers they should not have. Maybe the risk department at this particular institution was asleep at the wheel, and growth at all costs was the mantra? Maybe they lent to a certain sector that is really feeling the pinch right now ie: manufacturing in Ontario, trucking and transportation across the country, etc.? It is also possible that the bank allowed arrears to go on for so long, preferring to work out solutions where possible, that they delayed the inevitable and now the power of sales are stacking up? Either way, this particular bank is finding out in a hurry that people are not richer than they think.
2. Could the crappy economy be catching up with people? It is quite possible. I have yet to see any real data from North of the border that suggests the Canadian economy is doing well. Jobs numbers, GDP per capita, productivity, the list is endless and we have covered it all before. Now, it is at this exact juncture that real estate bulls, realtors, and people who are levered to the gills in real estate will comment with some stupid thing like ” Arrears are at an all time low, they have no where to go but up, it is not a big deal”. I know this, because I get a lot of comments like this. Ron Butler has covered this data extensively on his X channel, podcasts, and Tik Tok. To some extent it is correct – arrears were at the lowest we ever recorded due to the lowest ever recorded interest rates. When money is free it is really easy to borrow. But, and there is always a but, it isn’t the number than matters – it is the velocity that does. It isn’t if power of sales climb – that is a given, but rather the speed at which they do. Think all the way back to last Monday when the stock markets lost 5% in one day. Holy shit, remember that? Christ, within 3 hours you had economists, Profs, and almost every hedge fund calling for an emergency 75 bps rate cut from the Fed, you had holy hell breaking out in the bond market, and everyone thought we were headed for 2008 all over again. Fast forward not even 2 weeks and the stock market recovered all of the losses incurred over the 2 trading days and is now higher. It isn’t the fact the market went down – it does it all the time, but the speed at which it does it. Think of it like a car accident. If you are travelling along at 20 kms per hour and hit a pole, it will generate some mild discomfort, however if you are bopping along at 150 kms per hour and hit that same pole it will be likely fatal. The initial incident was the same, but the speed at which it occurred completely changed the outcome.

Yes, power of sales will continue to climb, and that is to be expected. This is actually positive news for me. Now, please don’t think I am dancing on the graves of people who cannot afford their homes. I am not. However, this is a much needed step in the healing of the economy, and the Canadian housing market. We need people to lose their homes. We need power of sales to come through. The housing market has not been able to find its level or value for years now due to central bank intervention and government meddling. Housing needs price discovery – just like every other asset class, and power of sales are a representation of one way of getting rice discovery. Housing was beyond inflated in Canada, and we needed to work of the bezel. If you don’t know what working off the bezel is, read my Jan 07 2024 blog post for a better explanation.

Lets remember that power of sales take 6 to 9 months to work through the system, so the deals that are overwhelming law firms today are really from late last year, and early 2024. Maybe things got better in the last 2 to 3 months and the deals will slow down? Probably not, but we gotta think positive, right? I also wonder if we are seeing record files referred for legal with a chartered bank, A lending, cream of the crop, what does this say for the less than A files? Where are the B lenders at, where are the Alt lenders at, where are the private lenders at? If A lending from the banks is starting to show cracks, then I would surmise that everything below A lending is worse. If not, then risk management is out the window, and we have not priced risk appropriately in Canada.

Do yourself a favour, and call a realtor you work with and have them pull the power of sale listings in your metro, or your area. Compare that against the number of total listings, and I think you will be surprised at the percentage. I did this for 2 areas I used to live in, and we saw a power of sale ratio at 5% in one city, and 3.5% in another. Of course those are not sold, and the power of sales may take longer to sell, so it could distort the data a bit, but last time I checked 3.5% and 5% were a hell of a long way from the .17% default rate we are always told by CMHC. If we are heading from .17% to somewhere even close to 3%, then that velocity is going to be too much speed, and when the housing market hits a pole we are all going to be decapitated. Not saying it happens, but not betting it doesn’t. There is too much debt built up in housing, and now with the employment situation deteriorating, incomes are stretched thinner than ever before.

It may not take the 2025/2026 renewal cliff to start the problems into motion. The problems may be in the power of sales that hit the market beforehand. I think it will be interesting to see if we get more bank sales once September hits, and everyone comes back from summer vacation. Add in a seasonally poor time for stock market performance in September and October ( goes to consumer confidence and consumer behaviour ) we may see listing pile up. The more people that can’t sell, the more power of sales that are forced, and round and round we go. The fall could be bumpy.

Remember that so long as someone can make the payments on their mortgage – the value of the house does not matter. The only time the value of the house matters is when you sell of refinance. Basically a liquidity event needs to happen to have the value matter. If you cannot make your payments, and the bank steps in, they create the liquidity event – and they set the price.

No matter what the next few months bring, I think it will be painful for now, but lead to the much needed reset we all need in housing. Something about short term pain for long term gain. Seeing the power of sales rise gives me hope that we are heading down the right path, and into a spot where housing can have price discovery, and we can really look to reset. If these types of power of sales continue, it will make me bullish on housing for the first time in many years. Like I always tell people – you have to change you opinion when the facts change.

For now though, we are left to wonder if power of sales will continue to rise, and at what pace. It will get worse before it gets better – you can bank on that.