-
New Mortgage Rules
Frank and Susan Williams bought a house near Hamilton, Ont., this month, they followed a time-honoured tradition of using leveraged financing.
With mortgage insurance they only had to put down 5% of the $270,000 purchase price. They went with a closed variable rate at 2.25% and amortized the loan over 35 years. The deal was initiated with a mortgage broker, with Bank of Nova Scotia providing the financing.
"It's a three-bedroom bungalow. That was attractive to us. We have a dog and we like to do things in the backyard. We did not have the type of money we thought we'd have to put into a house. We said let's just bite the bullet and get this over with," Ms. Williams says.
And getting it over with was probably a good idea. First, they were in a rent-to-own arrangement and had to exercise their option to buy before August 2010. And second, based on pending federal rules for government-backed insured mortgages that come into effect on April 19, the Williams would probably not have qualified for the variable-rate mortgage. In fact, as recent arrivals from the United States and its housing crisis, their credit history might not have passed any stress test.
"We really came from the United States with nothing. Everything we had disappeared with the housing crisis. In areas that had bad loans all the houses just hit bottom. We were expecting US$250,000 out of our house but we got nothing," Ms. Williams says. They walked away from the whole mess.
But while the Williams might have had good reasons for leveraging to get their dream home -- they are firsttime buyers in Canada -- the new federal rules governing mortgages have been widely misunderstood. In fact, the biggest fear among the young and house-less is fear itself.
Under current mortgage-lending rules, buyers with a down payment of less than 20% of the purchase price must purchase mortgage insurance, with the most common source being Canadian Housing and Mortgage Corp. The new rules affect only customers that are required to purchase the insurance.
Under the new rules, all buyers requiring mortgage insurance will have to meet the "ability to pay" for a higher, more expensive five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and a shorter term.
"It's not just first-time homebuyers who are affected. It's anyone who wants a variable mortgage rate now who doesn't have one already, they now have to qualify at a higher interest rate. Some of them won't qualify.
And that's fine so they'll just take a fixed rate. It's not the end of the world," Ms. Wynhofen says.
Bernice Dunsby, director of home equity financing at the Royal Bank, says the new rules might even help save first-time buyers from themselves.
"We believe the new measures will have a small impact on mortgage growth, if any. First-time buyers should not be any more concerned about these changes. In fact, I believe the changes will actually help first-time homebuyers to ensure that not only can they afford their home today but in the future, especially if interest rates rise," says Ms. Dunsby.
more
-
Banks Foreclose ( part 2 )
But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.
"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said. He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.
"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said. Ticking time bomb
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers.
It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.
"I told them, 'Hey, you guys released the title,'" he said. "As far as I know, I'm off the hook."
He wasn't. Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.
Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.
Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.
"He had no idea what he was doing," said Zaretsky. "All the lender had to do was go to court to convert the confession into a deficiency judgment."
Lenders are also very inconsistent. One of Zaretsky's short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.
Strategic defaults
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.
"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."
If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug
"We don't favor any short-sale contracts that leave any deficiency that can be pursued," he said.
more
-
Banks Foreclose
As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right? Wrong.
Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.
"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."
Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called "liar loans" where they didn't have to verify their income.
Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances -- like unemployment or a job transfer -- can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.
"After the banks foreclose, it's very common now to have large deficiencies with houses not worth the balances owed," said Don Lampe, a North Carolina real estate attorney. Lenders mostly declined comment. Although Corey's lender, BB&T did indicate it was pursuing more deficiency judgments.
"They follow the rise and fall of foreclosures," said the spokeswoman, who would not discuss Corey's account. Can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.
"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."
In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.
Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.
more
-
Shopping for Mortgages
Stephen Dupuis, chief executive of the Toronto-based Building Industry and Land Development Association, said the study by the mortgage brokerages confirms conservatism is still ruling the housing market.
He said first-time buyers, the most vulnerable to any change in rates, continue to overwhelmingly get long-term fixed-rate mortgages. While rates may be much higher in five years, he said the income of first-time buyers tends to climb by the time they get their second mortgage.
"There has been a massive overreaction," Mr. Dupuis said, about calls to shorten amortization periods and increase down payments.
Mr. Dupuis added that while 2009 purchases in the Toronto area rebounded sharply from 2008 lows, sales are still well off levels reached in 2007. The same is true for much of the country.
There is little doubt any move to tighten regulations will have negative consequences on the market, said Benjamin Tal, senior economist with CIBC World Markets. He estimates at least 25% of the new purchases would be affected by a change in the down payment.
"The industry is fighting back and asking the government to look at the data before making any decision," Mr. Tal said, referring to the latest salvo fired by the mortgage brokers.
---------
FINDINGS
- Eighty six per cent of these home buyers chose fixed rate mortgages.
- Among borrowers who chose fixed rates, a significant number opted for longer terms
- less than 5% chose terms of two years or less.
- Twenty per cent took three year terms, 5% four years, leaving 70% with a fixed rate for five years or more.
- The vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their Gross Debt.
more
-
Shopping For Mortgage
The housing industry fired back yesterday at comments from Ottawa that the sector might be overheated with a new report that shows Canadians have become conservative in their mortgage choices, leaving little chance for delinquencies.
The Canadian Association of Accredited Mortgage Professionals surveyed its members, who issued more than 40,000 mortgages totalling $10-billion during 2009, and found 86% of loans went into fixed-rate mortgages. Of those, more than 70% had fixed rates for longer than five years.
Jim Murphy, chief executive of the Toronto-based group, said the report's results show the risk in the marketplace "is clearly manageable." He left little doubt about one of the reasons his group compiled the research.
"It was done in response to some of the musings at yearend by first the Finance Minister and then governor of the Bank of Canada," Mr. Murphy said.
Mark Carney, the Bank of Canada governor, has warned about rising levels of household debt, which is reaching record levels. He has said consumers may be failing to account for higher interest rates in the foreseeable future, leaving households "increasingly vulnerable" to any economic shocks.
Shortly after Mr. Carney's remarks, Jim Flaherty, the Minister of Finance, was asked by reporters whether he was considering tightening mortgage requirements.
"If we had to we could, and it is something that we are watching and monitoring. But so far there's relative stability in the sector," Mr. Flaherty said.
The CAAMP survey addressed the overall debt concern and found "the vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their gross debt service ratios are far below allowed maximums, even at the higher interest rates that are used to qualifying them for their mortgage."
Mr. Murphy said his group's report has been forwarded to the Minister's office which continues to look at whether it should apply any brakes to the housing market. About 18 months ago, the government did limit the maximum amortization period to 35 years and demand consumers have 5% down on all government-backed loans.
more
-
Booming Housing Market
A red-hot housing market fueled by cheap money has helped Canada climb out of recession, but fears are growing that it could be a bubble much like the one that brought the United States to its knees.Household debt is climbing as buyers use record low rates to stretch for previously unaffordable homes in markets like Toronto and Vancouver, where prices hit record highs. Sales have gone through the roof and bidding wars are common.
Yet even as the central bank warns Canadians to plan for higher rates, analysts say factors including housing supply, demographics and lending practices make a US-style crash unlikely.
"I don’t think we’re in a bubble. What we’re seeing is a monetary policy that is working very efficiently," said Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce.
"There is a bit of overexposure, yes ... but a more reasonable scenario is it’s a redistribution of activity -- namely, what we are doing now is stealing activity from the future," he said. "There is almost an urgency to buy a house right now."
The market’s dynamism was highlighted by a report on Tuesday that showed existing home sales jumped 73 percent in November from a year earlier, while the average price rose 19 percent nationally.
There is no doubt that housing prices in some Canadian markets are rising quickly, and that more homes have changed hands this year than even when the market was at its peak in 2007.
But many analysts are wary about calling it a bubble, which would imply that home values have increased too fast to unsustainable levels relative to incomes and other economic elements.
more
-
Facing Foreclosure ( part 2 )
Few of the low-income borrowers who were targeted by alternative lenders gave much thought to where their mortgage money was coming from.
"The way we understood it, as long as our mortgage was paid, they would just renew it. The joke was on me," said Joyce Marentette, a cook in Chatham, Ont., who was also told last year by Xceed that she would have to find other financing, when her three-year term came up.
The problem is more acute in depressed areas such as Southwestern Ontario and parts of Alberta, where there are fewer private financiers and property values have sagged, industry insiders say.
Mortgage brokers in Ontario cities such as Windsor, Chatham and St. Thomas say they regularly receive frantic phone calls from homeowners who are shocked to receive a letter explaining that their mortgage won't be renewed.
"We're not talking about a scoundrel that brought it upon himself. ... These are people that didn't do anything wrong," said Joel Katz, a Windsor mortgage broker. Mr. Katz said he believes the issue isn't on the government's radar because this type of lending accounted for such a small segment of the market compared with the United States. "The problem wasn't as big here, and there are people who are getting stepped on and overlooked."
But exactly how many people are being "stepped on?" Public records in Canada are so scarce, it's impossible - even for lawmakers - to know for sure. Ottawa relies on Canada Mortgage and Housing Corp. for data, but because none of these subprime players insured their mortgages through CMHC, the public agency knows very little about their state of their books. One source close to the Finance Department said officials at the Crown corporation figure that stranded borrowers account for only "a tiny sliver" of the country's homeowners.
Paul McGill, president of mortgage provider N-Brook and spokesman for the mortgage lenders lobby, argues Ottawa is understating the problem. He said he has supplied federal officials with data showing that $1.7-billion of healthy mortgages could be stranded and that these borrowers lack high enough credit scores to qualify for loans from more conservative lenders.
Mr. McGill said federal officials responded by asking mortgage lenders to supply extensive borrower details such as marital status and garage dimensions. Mr. McGill said the requests would have cost too much time and money to fulfill. Lenders have scaled back their proposal to call for a $1-billion Ottawa-backed fund that could renew stranded mortgages. He said Ottawa has not been supportive.
In response to questions, the Finance Department issued a statement saying: "The government is monitoring housing and mortgage markets in order to ensure they remain stable, strong and competitive."
Far away from the push and pull in Ottawa, Ms. Matthews has put her house up for sale. A handful of prospective buyers has wandered through, but she has received no offers. A few weeks ago, she received a letter from Xceed's lawyers, explaining that she owes the company nearly $128,000. This means that, despite paying Xceed about $40,000 over the past three years, she now owes $1,000 more than she originally borrowed.
When she opted to buy her first home, she had to get over the hurdle of her low credit score. An unpaid student loan had caught up with her. She had no down payment, and paid a 9.15-per-cent interest rate with Xceed.
"I just thought they were my foot in the door," she said.
Ivan Wahl, Xceed's CEO, said his company has identified 1,100 borrowers that his company will maroon over the next three years. For those people "it is an absolute disaster," he said. Despite his sympathy, he says he is contractually obligated to pay Xceed's investors, which means demanding full payment at renewal time. "The government certainly should step up to the plate to provide some facilities for people who got caught in the crunch."
Ms. Matthews said she doesn't expect the government to do anything for her, and is reserving her frustration for Xceed. She said the companies involved should be giving their customers more warning about their inability to renew. She received a warning letter 3½ months before her mortgage matured.
"If I knew it was going to end like this, I never would have done it."
more
