E&O broker endorses 'collateral charges waiver'

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The growing use of collateral charge mortgages means brokers should consider asking clients to sign waivers acknowledging they were appraised of the up and, indeed, the downs attached to those controversial loans, a leading E&O insurance provider told MortgageBrokerNews.ca.

“Certainly, it is a good risk management practice to have them sign a waiver acknowledging that the broker informed them about all aspects of a collateral charges mortgage and releasing the broker of any responsible,” said Derrick Leue, president of LMS PROLINK – broker-partner for Liberty International Underwriters Liberty.

The advice effectively answers a growing number of brokers worried about possible ramifications tied to arranging collateral-charge mortgages as an increasing number of their lenders restrict abandon the convention model.

While readvanceable mortgages have the potential to help clients more quickly tap the equity in their homes and avoid upfront legal costs, they also make it harder for brokers to move that client at renewal or for a refinance given the primary lender has registered the mortgage for 100 per cent of the value of the property.

That has the potential to tie the hands of clients if their lender is unwilling to readvance the loan and they’re forced to go elsewhere for a second mortgage or refinance. There’s also concern about the arbitrary resetting of interest rates by lenders if the loan falls into arrears.

They’re complex challenges brokers fear could lead to a spike in litigation as trapped clients look to ascribe blame.

Leue hasn’t yet seen any growth in those types of cases, although “if the past is an indication, I would say that it is a possibility,” he said.

At the very least a waiver would provide a broker with the opportunity to engage the client in a comprehensive discussion on the potential pitfalls attached to collateral charges, although it’s by no means a guarantee against the kind of uptick in claims the industry attracted as private lending deals went belly up in the recession.

“At the end of the day, if they want to come forward with a claim, a waiver isn’t likely to stop a (litigation) lawyer,” Leue told MortgageBrokerNews.ca.

  • Kevin J. Power, President Power Mortgages Inc. on 2011-12-16 4:29:42 AM

    The effects of these collateral charge documents will appear when the customers financial circumstances change for the worse. Either lender will not advance more money, they go into default, the cost of borrowing goes up and the equity gets eaten up rapidly. These documents provide the lender with far, too much, power and borrowers have no idea what they signed for. Our industry should take a stand against lenders who use these documents and educate clients, borrowers, real estate professionals and real estate lawyers about the use of these documents.

    It is truly surprising the number of lawyers who do not know the effect of these "Demand Loan Documents" provide and the serious disadvantage that borrowers have.

  • vittorio-Alberta on 2011-12-16 6:02:31 AM

    collateral mortgage has been around for many years, ATB has used collateral mortgage from the very beginning. My worry is when the lender automatically reg. the appraised value of the property on the title. To me, that is a bigger worry. If the client has a collateral mortgage, and only the mortgage amount is reg, than the client equity in the home should be protected. If the client is looking for a 2nd mortgage such as private, the client most likely is not able to get a mortgage from his bank, and it could mean that he has poor credit. My understanding is that as long as the 1st mortgage company has not register higher than mortgage advanced, than the 2nd mortgage should be fine. Lets face it, this is not going to change and banker have way to much powers and any changes they want to make, the government is going to do. it is to bad, because there was nothing wrong with the old system.

    It is true if the client can go back to his bank and get a re-advancement, but that usually means that their credit is good enough to do that. also that means that broker already knows this and he/she has already secured other credit where he can payout the 1st and 2nd mortgage.

  • Ted Evans - Verico Lending Logic on 2011-12-16 7:45:55 AM

    The Collateral Charge mortgage doesn't help the client that requires extra funds to pay off some bad debt and can't be qualified with their existing lender. Also, they wouldn't be able to put a small 2nd mortgage behind the collateral mortgage because it's registered to the full value of the property. Therefore, the clients would have to break their great rate 1st mortgage for a less desirable rate mortgage because their poor credit wouldn't qualify for anything better. Costing the client more money in the long run with the 1) penalties to break the mortgage. 2) getting a higher interest rate on the new first mortgage. I really hope lenders re-think registering ALL mortgages as a collateral charge mortgage!

  • Jason on 2011-12-17 7:19:15 AM

    The reality is that collateral charges would not be an issue if brokers would stop churning their book. I do not understand how any broker can justify doing a refinance for a customer, having them incur a 10K plus penalty for a rate change of 50bps or less. Mortgages funded through brokers have a shorter life span than ones through the branch, and with every refi there are costs to the lender. That they make this move to try to reduce the costs makes 100% business sense. When are brokers in this country going to wake up? Stop churning your book, if you cannot lead generate new business then maybe you should not be in the business in the first place.

  • Ottawa Broker on 2011-12-17 11:04:52 AM

    Churning your book is not all bad if the broker does the due diligence of working the numbers. One of the reasons my clients like dealing with me is I don't ignore their mortgage until renewal. If we can work the numbers and there is a significant savings, (including penalty) why shouldn't a client change lenders. Would you stay with a bad return on a stock or sell it and buy new stock that gives you a better return? The questions is, are brokers doing the numbers or just selling rate. I offer an annual review to my clients each year, the same way a financial advisor does. If the numbers work to refi, they work. If they don't, I recommend they stay with their cuurent lender. It is what makes my clients value me and my knowledge more than their banks.

  • Omer Quenneville on 2011-12-18 1:49:35 PM

    If these collateral mortgages are so wonderful, why do banks slip clients into them without a proper explanation. Im a realtor and a mortgage broker and I go to the clients bank with them and I am shocked with what these people do without explanation. Including breezing over bad insurance policy and having the clint sign. If the devil is a corporation it would be a bank. We as mortgage brokers can either be the saving grace or be the devils helper.

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