The Art of the Dollar Deal

January 1982, the Alberta economy was running full speed ahead. By spring it crashed as if it had run into a brick wall. Many of the companies that were in oil and gas exploration had already closed their doors and left the province, the canary in the Alberta coal mine. The construction industry laid off most of their workers. Businesses closed. House prices fell 40% almost overnight. What had happened?

It was the definition of a perfect storm. Since 1973, when OPEC withheld their oil from a world that had become dependent on it, the non OPEC countries searched for non OPEC sources of oil. After they found it, lots of it, OPEC lost control of their grip on the market and responded by flooding the market with cheap oil to drive out the more expensive oil, such as the Alberta variety.

Ottawa and Alberta had been feuding about whose oil it actually was. Ottawa demanding that Alberta oil had to be sold domestically for lower prices, Alberta thinking they should get world prices. The result was the NEP, National Energy Policy, and the general feeling in Alberta that Pierre Trudeau was the anti christ.

The world recession that so far had not affected the Alberta economy had also resulted in a perplexing phenomenon called “stagflation”, continually increasing inflation in the absence of economic growth. Normally inflation is caused by increased economic growth, not by recessions. The traditional method for fighting inflation was to increase interest rates, but 70’s inflation just kept inflating so the USA and Canadian central bankers kept raising interest rates, which by 1982 had resulted in 19 to 20% mortgage interest rates, high enough to get a money lender arrested for loan sharking in previous times.

Alberta’s extremely rapid growth between 1975 and 1981 had also resulted in an equally rapid growth of house prices. The house that could have been had for $50,000 in 1975 had risen to over $100,000 in 1981. This was not helped by builders making new homes more upscale, and expensive. The new home buyer was faced with prices approaching $150,000 along with 19% interest rates. But no worries, by now young married couples in Alberta were both working full time, the women’s movement having made their point that there was no shame in women having careers.

Those who had paid 1950s or 60s prices for the homes, along with 6% mortgage rates were seeing the homes they had maybe paid 10 or 20 thousand for now worth 6 figures. Some took advantage by re mortgaging their homes for their new inflated value and and buying more houses, which they could rent to those who did not think it was a good idea to buy a house right now, or did not have the hefty down payment. Typically these entrepreneurs would rent a house for the mortgage payment and taxes, wait a few more months until they had accumulated enough inflated ‘equity’ which they could use to borrow and buy another house, and so on.

When the party ended in 1982, there were new home buyers without jobs but massive monthly payments, wiped out speculators, and anyone else who had financed a house for more than the house could be sold in order to buy grown up toys like boats, RVs and motor bikes. Many who had recently come to Alberta left the province. The result was a drastic drop in house prices that would have been even worse if the banks had put all the foreclosed homes they now owned on the market.

The person who could no longer pay their mortgage, or was unwilling to pay because their house was too far underwater had several options. They could stop paying their mortgage, which would over the appropriate length of bureaucratic process result in foreclosure and eviction. Or the home owner could call it quits, move out and mail the keys to the house to their bank, along with a note, Dear bank, the house is yours, you’re welcome. This was possible in Alberta because there is provincial legislation that does not allow a bank to do more than take back mortgaged property. It would not help the ex mortgagee’s credit rating much, but they would be debt free.

A more creative solution to dumping a house worth less than the mortgage was the dollar deal. At the time, it was possible to transfer a mortgage to another person, making them fully responsible for the mortgage without the bank being more than notified of the change. This had been a good way to buy or sell a house without having to go through credit approval or to transfer an older lower interest rate mortgage to a buyer. The dollar deal took to the next step, absolving one self from debt by selling the underwater house to someone for a dollar, transferring the mortgage to the dollar dealer, usually an illegitimate business person, who would then be the one the bank would have to foreclose on, previous owner believing they were now debt free with an undamaged credit rating. The person who sold their house for a buck paid rent to the new owner, the dollar dealer, if they wanted to stay in the house until the bank succeeded in foreclosing.

Edmonton Journal, December 1986 real estate want ads

The Province and the banks have since closed this particular loophole by making the person who originally was approved for a mortgage still be responsible for it if they transfer it to another person. It is unlikely anyone benefited from this arrangement other than the dollar dealer. Many Albertans learned that bankruptcy could be a blessing in disguise, but did they learn? The eighties ended in Alberta with bumper stickers telling God that if he sent another oil boom, they would not piss it all away this time.

It would take about twenty years, by the early 1990’s it was possible to buy a perfectly acceptable smallish older house in an unfashionable Edmonton neighborhood for about the same price as a well optioned out four wheel drive pick up truck. Banks were still selling off properties they had foreclosed on in the 1980’s. Mortgage interest rates, which the oracles of the eighties had predicted would never ever fall below 10% again, passed that mark and continued to fall. None of this would made much difference to the Edmonton housing market until oil prices began to rise again.