Posthaste: The risk of forced home sales is rising in Canada, warns economist

financialpost.com:

A chill has settled over Canada’s housing market and the big fear of any downturn is that heavily indebted homeowners will be forced to sell, fuelling a downward spiral.

Capital Economics says it is now seeing signs that those risks are rising.

The focus of the economists’ concern is mortgages refinanced with non-bank lenders.

Chartered banks must ensure that borrowers meet mortgage stress tests, but alternative lenders are less regulated.

Statistics Canada data show that the share of non-bank mortgages in the second quarter was no higher than in late 2021, before the Bank of Canada began raising interest rates, said Capital. The share of non-bank mortgages in arrears was also well within normal ranges.

But Capital says a closer look shows reason for concern. Recent data show a big rise in the number of insured mortgages being refinanced with non-bank lenders for the first time.

This is significant because homebuyers need default insurance in Canada when their loan-to-value ratio is more than 80 per cent, and it often means they have stretched their finances to purchase the home.

“These borrowers are therefore more likely to fall afoul of the stress tests when mortgage rates rise,” said Stephen Brown, Capital’s deputy chief North America economist.

“The rise in insured mortgage refinancing with alternative lenders suggests many borrowers are no longer able to pass the stress tests at their original provider.”

So far the numbers are small, he said. In the second quarter, 3,784 insured mortgages were refinanced for the first time with alternative lenders, about 4.3 per cent of refinancings at non-bank lenders and about 0.5 per cent of all refinancings.

Capital says there are likely to be more insured mortgagors who will