Canadian Bank Loan Modifications during the Pandemic : Insight from Legal Resolution Data

Loan modification is typically used by Mortgage Lenders to retain customers and reduce loss of income. Loan modification has implications to Public Policy makers because it pertains to the Housing Affordability issue. On the other side, over-use of LM might have extended influence on the health of Assets and eventually the creditworthiness of Financial Institutions. Despite its importance, LM data cannot be directly observed from the financial reporting of a Financial Institution. With the help of Court of Law Legal Cases data from the province of British Columbia, we construct a ratio (Legal-to-Delinquent Ratio, LD Ratio) that compares involved loan assets sizes that Banks took to the courts for legal resolution with quarterly reported loans in 90+ days delinquency, during a two-year period from 2019 to 2021. We observe that (1) loans associated with collaterals situated in metro areas got sent for legal resolution less often than those with rural collaterals, highlighting a geographical disparity during the Pandemic recovery process where the selectivity may have exacerbated urban/rural economic gap, and (2) the dynamics of the LD ratio during the Pandemics suggests that meaningful portion of potentially default loans have been modified by Banks instead of sent for legal resolution during the last two years, a clear evidence to investigate for further insight by both the Banks and their Regulators