Can US-style Housing Crisis, ‘Jingle Mail’ Hit Canada’s Banks?

Dismantling the old saw that it can’t happen in Canada.
This comes up constantly in discussions on the current house price bubbles in some cities in the US and Canada, and whether a US-style crisis could happen in Canada: The housing bust in the US during the Financial Crisis was marked by banks receiving ‘jingle mail’ from homeowners who saw the value of their homes plunge and their equity turn negative. These folks didn’t feel like paying the mortgage anymore and just turned in the keys to the bank though they had jobs and could have made their mortgage payments.
These ‘strategic defaults,’ it is said, won’t happen in Canada. Therefore, there will not be a US-style housing crisis and financial crisis in Canada. In won’t happen in Canada, they say, because mortgages are ‘recourse,’ and in the US they’re ‘non-recourse.’ We hear this constantly. But it’s wrong.
I’m not a lawyer, and this is not legal advice. For legal advice, pay a lawyer. I’m just trying to shed some light on a tough issue – while dismantling the old saw that a US-style housing bust and financial crisis cannot happen in Canada.
In the US of A:
States vary in how much recourse mortgage lenders have, and it’s not that clear-cut whether they’re ‘recourse’ or ‘non-recourse.’ A working paper by the Richmond Fed in 2010 on defaults in recourse and non-recourse states classified 11 states as ‘non-recourse.’ That’s good enough for our purposes.

This post was published at Wolf Street on Apr 25, 2017.