The federal government has placed the Albertan real estate sector in its sights after the recent upsurge in so-called strategic defaults, which have actually weakened the market according to observers.
Last observed in the 1980s when mortgage rates hovered around 20 per cent, strategic defaults—also known as “jingle mail”—involve escaping from an in-the-red mortgage by sending the keys back to the funding bank. These actions are usually done out of desperation by those who are saddled with unmanageable high-end properties while coping with job loss and astronomical debts.
According to experts, this development is responsible for the spike in loan losses among Canadian banks, and is showing no signs of stopping as of the moment.
“We're slowly starting to see it in Grande Prairie and Fort Mac. People saying that we can't make a go of it and mail the keys to the bank. In the big cities, not so much because the average sale prices haven't really dropped much, we haven't seen the pain yet. But Calgary is getting pretty tight,” Real Estate Investment Network senior analyst Don Campbell told CBC News
Experts noted that this is a uniquely Albertan phenomenon, as the area is the only province in Canada that offers non-recourse residential mortgages on a wide scale. This mortgage type allows defaulters to lose their homes but walk away without any personal liability, which would otherwise merit a court seizure of assets elsewhere.
In the ‘80s, nearly 500,000 residents left their Albertan estates for greener pastures without hurting their credit ratings—a situation that experts fear might make a repeat performance.
“These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices,” a Finance Department report warned.