Understanding Tin Foil Hats

Never judge a man by the fact that he may be wearing a tin-foil hat. Rather seek to understand the reasons why. We found one such item that, either downplayed or completely absent from the mainstream, may drive some to question true reality from the reality that the masses are fed.

As a collection agency specializing in accounts receivable management we are watching with keen interest the unfolding of events with respect to the following four phenomenon and their impact (or lack thereof) on Canadian credit markets.

Impaired Mortgages Soar at Canadian Banks

A new accounting framework adopted by Canadian banks is sending impaired loan numbers soaring. TheInternational Accounting Standards Board (IASB) released a new standard, improving accounting transparency in a few key areas. The standard, known as IFRS-9, became mandatory for members starting January 2018. Despite only being around for a short time, it’s having a big impact on impaired mortgage numbers at the Big Six banks.

IFRS 9 Standardizes Reporting

The International Financial Reporting Standard 9 (IFRS-9) makes it easier to compare numbers around the world. This round of improvements focuses on the measurement of financial instruments, hedge accounting, and impairment of loans. All really exciting improvements, if you get your rocks off to accounting standards. Sadly, today we’ll just be looking at the impairment of loans portion. Specifically, around the impairment of residential mortgages.

Canada’s “Special” Accounting System

You’ve probably heard Canadian banks have some of the lowest impaired mortgage rates in the world? That’s because we used our own special method to account for them. In Canada, loans securitized by a private insurance company, aren’t considered impaired until 180 days of non-payment. Loans securitized by the government backed Canada Housing and Mortgage Corporation (CMHC), aren’t considered impaired until 365 days of non-payment. That’s a lot of time to screw up on payments, list your home, and even make a profit during a bull market. A large part of why impaired mortgage dollar volumes appear lower than they are.

Under IFRS-9, that changes. All loans, except for credit cards, are automatically considered impaired after 90 days of non-payment. That includes CMHC’s obscenely long 365 day window, for accounting purposes at least. This is already making dramatic changes to the numbers banks are reporting.

Canadian Banks See Impaired Loans Rise Up To 136%

Dollar volumes of impaired residential mortgages spiked in the first quarter of 2018, at the Big Six Canadian banks. National Bank of Canada (NBC), the smallest of the Six, has seen impaired dollar volume jump 111.84% compared to the same quarter last year. CIBC came in second, with an increase of 29.89% to the same quarter last year. TD was the only Big Six that saw the dollar volume of impairment fall.

It could be that borrowers started defaulting at a faster clip, but that’s a big spike. More likely, IFRS-9 adoption is at work. Including more insured loans in the impairment numbers, puts a new class of losses on the books. The jump in the last quarter makes a lot more sense, when you understand this.

Not a lot changes for the borrowers that defaulted, now included in the numbers. They’ll still be treated mostly the same way, with a few exceptions on renewals. Don’t expect a sudden flood of foreclosures due to this specific change.

We do get a little more insight going forward though. Exuberance for Canadian real estate has been built on opaque data. As transparency improves, we’ll get a more data points on how markets are actually performing. It’s much harder to add spin to numbers that are publicly available.

Contributed by: Daniel Wong http://www.betterdwelling.com/