Broker: Naiveté driving growth in collateral charges

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New numbers suggesting brokers are increasingly comfortable putting clients into collateral charge mortgages speak either to their naiveté or myopia, said a broker with longstanding concerns about that increasingly popular product.

“Probably what’s happening here is that the brokers that are sending these deals don't know or aren’t thinking about the long-term consequence of the readvanceable mortgages for their clients,” Larry Frondall, a broker and underwriter for several MICs, told MortgageBrokerNews.ca. “It’s short-sighted.”

The comments come on the heels of the new D+H market report, suggesting TD grew its share of broker business by nearly two percentage points. The country’s second biggest bank now restricts its offerings to collateral charge mortgages, a move that drew a firestorm of criticism from brokers late last year.

While those feelings may have subsided for some, Frondall isn’t among them.

"With readvanceable mortgages, the lenders are doing it to offer the client something else down the road,” the industry veteran said. “The problem is that the need for that something down the road doesn’t come about until the client hits some trouble and then the bank is unwilling to readvance the funds.

“The fact that the lenders has registered the loan for the full value of the property – or even for more – means that the borrower is unable to go elsewhere for a much needed refinance.”

While readvanceable mortgages allow clients to re-borrow the principal they’ve paid off on their mortgage, up to 80 per cent of the value of the property, and to avoid upfront legal costs, they also allow the lender to register a collateral charge on the home usually for 100 per cent of the value. That effectively means the mortgage must be entirely discharged in order for a borrower to transfer it to a new lender at renewal or for refinancing.

Most mono-lines and banks – as well as private lenders – 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.

None of that should encourage brokers to do more of those types deals, said Frondall.

Not all brokers agree, pointing to HELOCs.

While, they aren’t for all clients, “they do have a place in the broker arsenal of products,” said Gord McCallum, owner of First Foundation Residential Mortgages in Edmonton. “It’s important that the broker really understand the client needs in order to determine if the HELOC is appropriate.”

 

  • Source? on 2011-11-19 4:40:21 AM

    CMP:

    Where do you see this: "TD grew its share of broker business by nearly two percentage points."??

  • David Larock on 2011-11-19 5:08:10 AM

    Not sure if CMP will let me offer a link but here is a blog post I wrote on collateral mortgages that breaks it down for anyone wanting more info: http://www.integratedmortgageplanners.com/blog/buyer-beware/fixed-rate-collateral-mortgages-good-for-banks-not-for-customers/

  • John Tenpenny, Editor, CMP on 2011-11-19 5:23:22 AM

    Source?
    The full quote in the story is: "The comments come on the heels of the new D+H market report, suggesting TD grew its share of broker business by nearly two percentage points."

  • Kevin Power, President Power Mortgages Inc. on 2011-11-19 6:34:07 AM

    I have been expressing major concerns about the lack of disclosure and limitations that are imposed by these mortgage products.I have never sold them and refuse to support lenders who offer them, particularly branch fulfillment requirement lenders. The statement that additional costs of having new documents drawn is not that simple. The lender has to agree to it and why would they do that? These products were designed for customer retention and they will not do anything that will allow that to happen.

    You have to refinance and that is very difficult to now do because of the 85% cap on refinances.

    Also not being able to place secondary financing after these products is troublesome, beacuse of the readvance clause.

    Latest twist on the TDCT Collateral Charge is the interest rate charged when in default is Prime Plus 10%.

    These Collateral Charges are a nightmare waiting to rear its head.

  • Liz on 2011-11-19 8:44:30 AM

    No institution will transfer a collateral charge. I believe the comment states most will not. It is impossible to transfer a collateral mortgage. It must always be a refinance. Statistics show that most consumers refinance their mortgage anyway approx. 3 1/2 years in to the term.

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