Broker: Clients now suffering collateral damage from collateral mortgages

Broker: Clients now suffering collateral damage from collateral mortgages

Broker: Clients now suffering collateral damage from collateral mortgages

Broker fears that growth in collateral mortgages could darken their business horizons have come true, said one broker, pointing to his own impaired capacity to service clients.

“We’re saying 'no' more often now than we did in the past, and I can think of no less than six people since last year that we’ve simply had to turn away because there was nothing we could do for them,” David O’Gorman, broker/owner of MortgageLand Inc. in Markham, Ont., told MortgageBrokerNews.ca. “It’s because they’ve signed up for a collateral mortgage with the banks,  and have pledged all their equity to that bank. It makes it all but impossible for a second lender to come behind and provide a second mortgage or refinancing or even for a homeowner to switch lenders at renewal.”

Last fall, O’Gorman and other brokers raised the specter of a loss of business stemming from collateral mortgages when one of the major banks announced all new home loans would be secured by promissory note and backed by collateral – usually a first or second lien on the property. That supporting charge can be for as much as 125 per cent of the value, although, doesn’t, in fact, mean the borrower will have access to all those funds.

The collateral charges allow lenders to switch up the interest rate on a loan and lend more money to qualified borrowers after closing, without the client incurring additional legal costs. There is, however, a downside: they also limit the borrower’s ability to shop around for a new lender at renewal or to win refinance or to take out a second mortgage at another institution.

Most mono-lines and banks – as well as the private lenders O’Gorman deals with – refuse to accept the transfer of collateral mortgages, forcing homeowners to pay additional fees to register a new conventional or collateral mortgage in order to move the loan from the lending institution. 

The consequences for homeowners are tremendous, said O’Gorman, who wrote to Federal Finance Minister Jim Flaherty last November, outlining his concerns. He also challenged the motives of the bank industry, now prepared to extend its collateral mortgage portfolio.

“Lending money to people, with ‘different to the norm’ conditions and increasing the borrower’s exposure to significant loss, all the while flogging a cheap closing service, enticing the borrower to go without the opportunity of having an independent legal opinion of the documents they are signing, just plain stinks,” he wrote in the two-page letter. “We will have to wait awhile for a decision by a judge crushing the ‘one-sidedness’ of these contracts. In the meantime a significant number of consumers will make ill-informed decisions, unless consumers and/or bank regulators take action.”

A policy advisor for Flaherty did contact O’Gorman for a brief discussion, although the broker doubts the matter will move beyond that initial outreach. He’s more certain about potential negatives for the broker channel as banks continue to shift to collateral mortgages, used to help them retain clients for the full life of the mortgage and not just the first five-year term.

“This is all going to end when mortgage brokers are all working for the banks and they’ve eaten up all the business,” he told MortgageBrokerNews.ca, echoing the sentiments of more than 30 comments posted on the site last fall.  “I’ll still make a living, but I’m also concerned about making sure that people are treated fairly.”

15 Comments
  • Bill 2011-05-04 8:37:52 AM
    There's only one way to compete in this matter and that is to: HAVE ALL LENDERS, BROKERS AND AGENTS PULL TOGETHER TO EDUCATE THE GENERAL PUBLIC AT EVERY OPPORTUNITY! Canadian banks are working hard to emulate their American brothers' highly deceptive and misleading business practices in order to con the public. RBC is just the beginning; so, start fighting for your livlihood now or start looking for a different line of work. Let homeowners know that if they blindly trust their banks, (as Americans unfortunately did),they have a very good chance of ending up like American homeowners.
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  • Jason 2011-05-05 1:57:04 AM
    This is just fear and misinformation being spread by the broker community. Didn't we all get into a tizzy over an RBC employers comments against brokers, how is this different. How many status brokers with Firstline or other lenders get free legals for their clients making the whole "I can't switch my collateral charge mortgage" argument moot. The bank can also amend the collateral charge to reflect the outstanding mortgage and allow a 2nd positon lender to come into play.
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  • Larry Frondall 2011-05-05 3:09:26 AM

    In today’s market we are seeing and hearing more and more about re-advance clauses in mortgages and how they are creating challenges for many mortgage brokers and their clients.

    There also appears to be a big misconception in this regard as many brokers think that these clauses only arise when the lender registers a “Collateral Mortgage”. However, a “Re-Advance Clause’ can be added to, or present in any Mortgage.

    In addition to adding the “Re-Advance Clauses” to their mortgage documents, more and more Banks, Trust Companies, Credit Unions and other Lenders are also registering first mortgages for equal to or greater than, the current value of the home.

    The basic premise behind this process appears to be so that the Lender may “Re-Advance” future monies to the client without incurring any new legal costs or appraisal costs and are taking into consideration any Future Value that may be realized.

    To illustrate these points we have an example below that takes into consideration, both of these issues:


    John and Joan Smith (not their real names) purchased a property in December 2007 for $650,000.00. They put down $195,000.00 as a down payment and mortgaged the balance of $455,000.00 with their Lender. In this particular case, their Lender registered their mortgage for the full purchase price of $650,000.00. When the Smith’s were at the branch signing the documentation, the mortgage officer points out to them that the advantage of this is that the Lender has a “RE-ADVANCE” clause and how it will benefit them later on, should they need to take advantage of that privilege. At the time of the approval, John had been on the same job for 15 years, earning $100,000/yr, Joan had been on her job for 15 years as well, earning $50,000/yr and both of their Beacon Scores were in the mid to high 600’s.

    Fast Forward to December 2009. John has a mild heart attack and goes on LTD and gets some CPP disability benefit. Their income drops and they max out all of their credit cards. John takes six months to get back to health and returns to work to find that the pressure is too much for him to handle (probably was the cause of the heart attack to begin with) and is forced to quit that job. He finds a new job in the same industry, but at half his former income- $50,000.00.

    After six months on the new job, they go back to their Lender to take advantage of the RE-ADVANCE privilege. They are looking for an additional $50,000.00 to consolidate their credit cards. Their Lender completes a new application and finds that their credit cards are maxed out and that their Beacon Scores have now dropped to the mid 500’s. Their Lender has a minimum Beacon Score requirement, so they are declined for a re-advance.

    The Smith’s go to their mortgage broker who advises them that since they have paid down their Existing First mortgage to $395,000.00, they have lots of equity and should have no problem getting a second mortgage to consolidate all of their credit card debt and give them some breathing room and get them back on track financially.

    The broker forwards the application to a Private Lender (B) and the deal is approved in principal, subject to some “due diligence” on the part of the Private Lender (B). The Private Lender (B) searches the Land Title and finds that the First Mortgage Lender (A) has registered their first mortgage for $650,000.00, the entire purchase price from 3 years ago. This Private Lender (B) also already knows from past files that this First Mortgage Lender (A) has a “RE-ADVANCE” clause in most of their mortgages. Being pro-active, the Private Lender (B) prepares a “Non-Re-Advance” letter that they would like Lender (A) to agree to and forwards to the broker to get the client to have his representative from the Lender (A) sign-off and agree to not re-advance any further funds unless they notify the secondary Lender (B). The First Mortgage Lender (A) and their representatives refuse to sign the letter. The second mortgage approval is now dead.

    What may have started out as a favourable situation for the client at the purchase has now turned into a nightmare as the Lender (A) will not re-advance and they will not sign the Non-Re-Advance letter for the private Lender (B). Unfortunately, The Lender (A) is adding to their client’s financial stress by refusing to re-advance at this time as the borrowers no longer qualify under their parameters. The Lender (A) will however, allow the payout on a Bona-Fide sale, so long as they get their Interest Rate Differential Penalty which was quoted somewhere around $45,000.00. If you refer back two paragraphs, the Smith’s were only looking for a second mortgage of $50,000.00??

    As for the Private or Secondary Lender, many brokers and first mortgage lenders don’t see why the Secondary Lender does not just give the Smith’s their second mortgage and register behind the first of $650,000.00. They argue that the chance of them re-advancing before the second is paid off is highly unlikely. However, that is a risk that is squarely on the shoulders of the secondary lender. Try to explain to a board of directors of a Mortgage Investment Company why you registered $50,000.00 behind a first of $650,000.00, when the appraised value was only $550,000.00? What do you think they are going to say when you advise them that the lender only had $395,000.00 owing, but re-advanced without notifying us? As well, what Lawyer would register in this situation without advising the lender (mic) of the potential hazards of being behind such a registration?

    You could also ascertain that if the Secondary Lender went ahead with this deal and the property went into foreclosure, that the courts would have to deem that the Second Lender would be in priority to the re-advance, however, at the present time there does not appear to be enough “Case-Law” to establish a precedent, and I can tell you that no Private Lender or Mortgage Investment Company wants to be “First” to challenge this situation.

    Some Private Lenders have been successful in getting the First Lenders to reduce the amount that is registered on title to accommodate a second mortgage in behind them; however, this is strictly on a case by case basis and not the industry norm.
    What appears as being something very mundane and a Non-Issue for many of the Banks, Trust Companies and other Lenders could start having an effect on their clients.

    It also appears that it is difficult to arrive at a solution that is workable in all cases and will satisfy all parties.

    It does not seem to be a workable solution to ask the Banks or Trust Companies to completely forego the Re-Advance Clause as it will serve a purpose for some clients that it was originally intended for, however, perhaps the Banks need to re-think how they are utilizing this option.

    Perhaps the Banks should establish an internal policy, where, once the Bank has declined the Clients for a Re-Advance; they should have to re-register on title for the outstanding balance and/or be forced to sign-off on a NON-Re-Advance letter to allow the clients to obtain secondary financing elsewhere.

    Another issue that could arise in the future, is if the First Mortgage goes into arrears, they will not have the availability of relying on a secondary lender coming to the table and offering their borrower a second mortgage to bring them current.

    The Smith’s were advised by their Mortgage Broker that they should probably contact their Lender’s Ombudsman and see if they could work out a solution.


    Larry Frondall
    CMS Real Estate Ltd.
    Calgary, Alberta
    larry@cmsrealestateltd.com
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