"Jingle Mail" Makes Comeback In Canada As Underwater Borrowers Mail Keys Back To Banks

We’ve spilled quite a bit of digital ink documenting the trials and travails of Alberta, the heart of Canada’s dying oil patch and ground zero for the pain inflicted by 14 months of crude carnage.

At the risk of beating a dead (or at least a “dying”) horse, you’re reminded that violent crime is soaring in the province, suicide rates are up by a third as is food bank usage, and as for unemployment, well, Alberta lost 19,600 jobs last year - the most in 34 years.

While it’s not entirely clear where things go from here, it’s a good bet that the situation will deteriorate further given that, at last check, WCS was trading just CAD1 above the marginal cost of production. In other words: Canada’s producers aren’t profitable and thanks to the plunging loonie, the BoC doesn’t look particularly likely to help them.

That means more job losses are in the cards and the prospects for the increasingly profitable repo business look better than ever. We've also documented the soaring cost of homes in Canada, on the way to noting that just about the last thing you want to have is a collapsing economy, a propery bubble, and record high household debt. 

That's a recipe for disaster and sure enough, we're starting to see the first signs that the market is beginning to crack as Albertans begin mailing the keys to their underwater homes back to the bank. "A combination of high debt and lost jobs make [jingle mail attractive] in a province going through a significant economic reckoning," CBC writes. "It's enough of a concern that the federal government is watching the Alberta market closely." 

As they should be. The wave of job losses occasioned by the rout in oil markets has put already leveraged households in a tough spot. Now, the pressure is apparently more than many homeowners can bear. 

"People [are] saying that we can't make a go of it and mail the keys to the bank," Don Campbell, senior analyst with the Real Estate Investment Network told CBC. "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."

Yes, it's "getting pretty tight" in Alberta and that's problem for banks. Here's why (again from CBC): 

Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those are loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).


If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.


Jingle mail was an enormous problem in Alberta in the 1980s, when mortgage rates were hovering around 20 per cent and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. It also played a role in the U.S. housing crash.


In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating.


That's the scenario that the Finance Department is worried about now.


"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," read one of the reports obtained by CBC News.

In other words, if you're an Albertan O&G worker who was just laid off thanks to Saudi Arabia's war of attrition with the US shale complex, you can simply walk away from your mortgage with no consequences. 

Obviously, that's bad news for Canada's banks and underscores the following assessment we presented just three weeks ago: "...as Canada's depression worsens, expect overburdened households to simply fold up under the pressure. That's when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation's housing bubble once and for all and as the world discovers how exposed Canada's banks are to the country's levered up families."

"I had four higher end sales last month, all four transactions, the values were off 20% to get a buyer to the table, in order to get a deal to stick," Joel Semmens, a realtor in Calgary with Re/Max said. 

Expect that negative sentiment to spread quickly in a market that is clearly showing signs of froth. We close with still more commentary from a CBC Op-Ed regarding Calgary's "hollowed out" downtown:

The heart of our city is hollowing out.


Gone are thousands of downtown white collar office jobs, as oil and gas companies cut employees and slash entire departments.


To a Calgary eye, cranes symbolize good times. A darkened office floor is an economic black eye.


I think it's tough for people to come to work every day and see empty office space. For a lot of people, particularly young people, they haven't been through such a dramatic recession before. 


I would say the more seasoned people have probably a little bit more tolerance for it, because they have seen it before. Calgary had significant growth in the late 70's, from a downtown office space perspective. In some ways, it was almost harder in the 80's, because all of a sudden you have extra capacity added on in a rapid rate and then contracted very quickly. This is definitely different than 2009 where office space was threatening to be as high as it was today. 


The big buzz word these days is "diversification." Do you think we're capable of diversifying to the point of making up for the jobs lost, if not short term, then in the long term? If so, in what sectors?


In terms of occupancy of these buildings, do you think they may sit for vacant for years on end?


I think is going to be slower absorption that it has been, in the last five years, but I think there's no need to panic at the stage. 

Right. There's no need to panic.