What would you do if you had this client?

by |

CMHC is at it again – or is that co-ops that are at it again.

Just this week, the board for yet another co-operative complex – Village Canadien Housing Co-op in St. Vital, Man. – went public in its fight to break a 50-year mortgage with the Crown corporation and avoid a $5.5 million penalty.

Brokers can understand their motivation: the co-op is paying 13.25 interest on that CMHC loan, reports the Winnipeg Free Press.

Back in 1983 when the co-op signed the mortgage, 13.25 was considered a pretty good deal since an average five-year fixed was going for 13.23.

Times, to say the very least, have changed and today the co-op wants to refinance in order to leverage its equity but also to take advantage of the current, much lower rates. It also wants to use $2.5 million for renovations, according to Linda Ferguson, president of the co-op.

CMHC says the pre-payment conditions of it contract with Village Canadien stipulates that the co-op has to pay a penalty of $5.5 million (the total interest due on the mortgage when it matures in 2028). Ironically, the current remaining balance on the mortgage is only $4.5 million.

Village Canadien’s predicament is not that unique. For instance in Ontario, the 78-unit Mondragon co-operative housing complex in Brampton, was asked to fork out a $140,000 in prepayment penalty to break out of its CMHC mortgage.

It too was in need of a $2.3 million renovation and retrofit and had a minimal balance owing on its principal.

Here’s a question for the most seasoned and creative brokers among you. What would you do for this client?

  • Jay Meakin on 2012-09-29 3:20:33 AM

    Would a bonafide sale waive the penalty?

  • John F. Smith (CENTUM Freeland Mortgage Group Inc. on 2012-09-29 3:28:30 AM

    Are here any prepayments permitted at all? Can they pay it down gradually with permitted prepayments over a few years? Not ideal but better than $5.5 Million.

  • Rebecca Awram, Origin Mortgages DLC on 2012-09-29 3:35:51 AM

    If it was a residential mortgage, then any contract over 5 years in length can be broken on 3 months interest penalty. I suppose that doesn't apply to CMHC!!

  • James on 2012-09-29 3:37:23 AM

    Could they utilize prepayments to retire it faster? possible to get a 2nd at a lower rate for the co-op and use funds to retire the current first faster and be in a position to refinance the whole mortgage faster. Will they allow the new funds to be added and blend current rates with their old 13% mortgage with no penalties ?

  • Scott M on 2012-09-29 4:02:35 AM

    Well...a tough situation.
    From a strict 'rules' standpoint - not much room to negotiate / move here as the conditions etc. that relate to this situation would be clearly spelled out in a long term mortgage document at inception.
    I might try to think outside the box and negotiate with lender/cmhc directly in the following manner:
    - Offer to have a higher rate than current market on the new mortgage. My thinking here is that there is still room to substantially decrease the current rate being paid, while ensuring the 'spread' moving forward that represents lender's profit is maintained or perhaps even greater than the current set up. This may incent the lender to agree if it makes sense.
    - In conjunction with above - offer to integrate part of the penalty into a new mortgage. This way, it is asking not for a total reduction of the penalty, but a partial one...and both sides stand to gain.
    Just some basic thoughts.
    The key is a 'real person' to negotiate with on the other end of this deal.
    Good Luck.

  • LanceH on 2012-09-29 5:33:50 AM

    I'd be looking closely at the terms surrounding default, 'cause if they're similar to residential, it's max 3 mos interest once the lender moves on the ppty. Have a new mtg lined up first of course.

  • Max J. Cafissi; Mtge. Broker; CENTUM One Financial on 2012-09-29 5:36:37 AM

    Here is what I suggest:
    1) Add the penalty into the remaining balance of the Mortgage.
    2) Add in the amount required for Renovations.
    3) Add the CMHC Premium for the increase in the Mortgage amount.
    4) Keep the payments at the same rate as before (ie based on the previ0ous rate of 13.25%).

    Since it appears that the previous payments were being made without difficulty, it should not be a burden on the Co-Op to keep making the same payment. This will have the effect of paying off the Mortgage sooner, the effect of the large penalty will not be felt as much, and they will have sufficient funds to do the required renovations.

  • Confused on 2012-09-29 7:52:38 AM

    They took out a 45 year fixed rate mortgage? Since when can you get terms that long?

  • Omer Quenneville on 2012-09-29 10:08:18 AM

    It is very simple to avoid the discharge penalty, but this is also a best guess given I don't have the mortgage documents in front of me. Default on the mortgage, and then when that bank calls in the loan, the discharge penalty is automatically waived. That simple. This is one of the benefits borrowers are losing with these nonmortgage mortgages that are being registered as a collateral charge. And by the way, because it is a mortgage and not a collateral charge, it won't hurt your credit rating. That’s another reason I don't like those collateral charges.

  • Ontario Broker on 2012-10-02 5:05:35 AM

    1)Is CMHC the insurer? Who is the mortgagee?
    2)It is my understanding that a number of “quality mortgages” are investments in CMHC’s own pension plan, is this one of those mortgage? If CMHC or their pension plan is the mortgagee & the insurer, is there a conflict of interest?
    Property is in Manitoba so we have to deal with Manitoba mortgage law, so suggestions about mortgages written for more than 5 years being open on 3 months interest, is based on Ontario law.
    3)Wasn’t there a guideline for CMHC mortgages that disappeared about 12-15 years ago, when GE Cap came along, that said open on three months interest if there is an arms-length-sale? Can you /how do you, sell a co-op building? Considerations legal fees & land transfer tax?
    4)If the lender is CMHC, or their pension plan, they should as a matter of political optics, let the co-op out with three months interest.
    5)Is the lender being unjustly enriched? Like the case of MBS’s where the lender pockets the penalty & the holder of the MBS unit just gets his/her principal back.
    6)Suggestion about going into POS, again based on Ontario law, but is there a Manitoba equivalent?
    We need many questions answered before suggestions can be useful

  • Rebecca Awram, Origin Mortgages DLC on 2012-10-03 8:20:43 AM

    Hey 'Ontario Broker', just to clarify....
    Regarding #2 in your comments, I'm pretty sure that's not actually Ontario law, it is terms of the federal Interest Act. Under it, borrowers have the right to prepay all of the outstanding debt, with three months' interest, at any time after five years from the initiation of the mortgage. However, this right to prepayment extends only to individuals, not to companies. Too bad for the Village Housing Co-op!

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions