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Archive for the ‘Bankrupty and Consumer Proposal’ Category

What Happens If You Walk Away From Your Mortgage?

Friday, September 25th, 2009

A lot of people operate on the assumption that real estate loans are like car loans: if you walk away, and the lender takes the car (or house), then you are clear.

In real estate, this is WRONG!

Case in point: a former client of mine bought a place and subsequently lost his job and fell deathly ill. He owed around $275,000 on a property worth around $300,000. However, he was many months in arrears, and there was over $20,000 of legal bills mounting for foreclosure.

He wanted to know what would happen if he walked away? The bank had required him to have CMHC Mortgage Default Insurance when he bought the place so if the foreclosed, and took a loss, CMHC would cover the bank’s loss. He felt that his bank would not sue him for the shortfall as they wouldn’t have one!

However, I explained to him that if he walks away, yes, the bank takes no loss due to the CMHC insurance, but CMHC takes a loss, and they have the right to sue him for the difference. He felt this was very unlikely given that the shortfall was only going to be $20,000 when the dust cleared and CMHC was a government backed organization whose mandate was to put Canadians in homes, not sue them.

I wasn’t so sure. I counseled him NOT to walk away, and try and rent the unit out and take care of a small amount of the negative cashflow. I called CMHC and the confirmed that yes, they retained the right to pursue him, but didn’t always do it depending on the situation.

Well, he didn’t like my advice. He opted to walk away, and end the phone call, and our business relationship quickly after I told him to try and tuff it out.

I heard updates through the lender that they DID foreclose, and CMHC DID pay them out the loss.

So… the question becomes… will CMHC pursue him?

The answer after 9 months, is “Yes.”

The client called me up and gave me a copy of his letter he received from CMHC’s National Recovery Agency. The shortfall was around $25,000 and they are putting a hold on all future Revenue Canada tax returns as well as likely going after any wages he receives.

As proof of this, I’ve attached a copy of the letter he received (I’ve blanked out all identifying information to preserve his confidentiality).

So, will the lender, or CMHC come to get you if you walk away. The answer is “yes.” Just handing them the keys, and walking away does NOT guarantee you are off the hook.

Until next time, happy house hunting!

Here is a copy of the letter…

CMHC Collection Letter

If Your Are In Financial Trouble. Talk to Your Lender!!

Sunday, March 29th, 2009

The Vancouver Sun published an article today about the rising unemployment in Canada coupled with the possibility of rising delinquency. Fortunately, CMHC and the lenders are willing to work with people (hopefully in advance of problems) to resolve their financial problems. This article puts a fine point on how solid our Canadian lenders have been, and why the sub-prime problem was primarily a US creation.

This is a reproduction of a Vancouver Sun article on March 28th, 2009. Particular author credits were not given on their site, but the work is entirely theirs. I am re-publishing it without permission but with full credit to them!

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Rising unemployment and falling real estate values inevitably increase the risk of mortgage defaults. Fortunately, a foreclosure remains a rare event in Canada: Both lenders and borrowers view it as a desperate measure of last resort.

But the recession is taking a toll on jobs. Canada’s unemployment rate rose to 7.7 per cent last month from 7.2 per cent in January, while the rate in British Columbia stands at 6.7 per cent, up from 6.1 per cent. Since the peak last October, Canada has lost 295,000 jobs.

Meanwhile, the average resale home price nationally has dropped by 9.2 per cent. That’s good news for buyers; not so good for homeowners who took out a big mortgage to buy a residential property during the real estate boom. Especially vulnerable are the rising numbers of homeowners who suddenly find their employment income at risk.

The federal government and Canada’s chartered banks hope to head off a wave of defaults by appealing to homeowners to approach their lenders before they find themselves in serious financial trouble. A foreclosure is not just an unhappy human story, it represents a loss for the banks and a potential policy challenge for Ottawa. Most mainstream lenders are willing to help their customers through a crisis by offering options such as deferred payments, extended amortizations and debt consolidation.

Canada Mortgage and Housing is expected to launch a campaign next week to inform the public that such options exist and to encourage homeowners in jeopardy to be proactive to protect their investment. CMHC and lenders realize that recessions are cyclical, home prices will recover and new jobs will be created. Besides, no one wins in a foreclosure, which can be costly for the banks and, with the resulting rise in the homeless population, politically damaging for all levels of government.

Canada’s preventive measures appear meek and mild compared with America’s aggressive $75-billion US mortgage relief plan that aims to help homeowners modify their loans, mainly by providing cash incentives to lenders to cut monthly payments. But each country’s circumstances are strikingly different. Mortgage delinquencies in the United States, where one in five mortgage holders is under water, jumped to 7.9 per cent of all loans last month. That excludes the 3.3 per cent of loans already in foreclosure.

In Canada, only 0.3 per cent of mortgages are in arrears.

Despite the relatively low risk of defaults, it makes sense for CMHC to put out the word that lenders are willing to be flexible on troubled mortgages.

It is likely that more Canadians will face financial pressures as the recession drags on and it is better for all involved, other than in the most extraordinary cases, that they stay in their homes.

In some hard-hit communities, banks are taking the initiative to contact customers to ask if they need help. Lenders might want to consider introducing that kind of customer service across the board to avoid problems before they happen.

Ultimately, it is up to individual homeowners, who best know the state of their own household finances, to recognize the warnings signs and seek relief from their lenders. With the encouragement of CMHC, the banks appear willing to play ball to prevent a U.S.-style mortgage meltdown in Canada. Communication and cooperation are key to helping mortgage holders get through this economic slowdown with a roof over their heads and equity in their homes.

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Sub Prime Mortgages in Vancouver Failing to be Renewed – Foreclosure Follows…

Saturday, March 28th, 2009

So everyone was worried that a sub-prime problem would rear it’s ugly head in Canada much like it has in the US. I, for one, didn’t think the same price crashing and defaults would occur. However, the sub prime market has had a different effect in Canada. Lenders that made sub-prime loans are unable to get the money back for clients are renewal, meaning people that had sub-prime mortgages are unable to renew them with their current lender. Many borrowers were sold a bill of goods whereby they figured that after 3 or 5 years they could get out of their higher-rate sub prime mortgage, and into a conventional mortgage with their bank. However, market conditions have changed, and most clients are unable to get into a new mortgage.

In light of these developments, the lenders that did sub prime loans have approached the government with the goal of getting some government backed funding to assist homeowners in this situation. I applaud their effort, but feel they have done an injustice by funding mortgages they weren’t sure they could renew. The first signs of distress have occurred with lenders foreclosing on borrowers who have made every single payment on time. It was featured last week on the front page of the Vancouver Sun, and now the Globe and Mail has caught wind of the story as well.

Below is an article that appeared in the Globe and Mail on March 26th and was written by Greg McArthur and Jacquie McNish. I have reproduced the article in full, and it is entirely their work. I felt it was a realistic look at what is going on in the market and being largely unreported (so far) by the main stream media.

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As many as 25,000 Canadian homeowners who consistently met their mortgage payments could lose their homes unless Ottawa or other financial players help supply capital to the struggling subprime lending market.

A loose network of about 12 alternative mortgage lenders began lobbying the Prime Minister’s Office and the Department of Finance in January about what they say is a looming problem: An estimated $3-billion to $5-billion worth of subprime mortgages are coming up for renewal over the next four years, and the lenders say they can’t renew them because capital has dried up for higher-risk borrowers.

“These are hard-working Canadians who could face foreclosure on their homes if they are unable to renew or find mortgage financing,” said Paul McGill, the CEO of the N-B Group, an alternative mortgage lender that has been spearheading the campaign.

These mortgages were arranged in the headier times of the early 2000s, when investors easily bet money on complex securities backed by mortgages. Many investors were comfortable investing in securities with subprime mortgages because of the higher returns these investments offered. The torrent of money flowing into securitized investments, such as asset-backed commercial paper, allowed a new generation of lenders such as Toronto-based Xceed Mortgage Corp. and U.S.-based Accredited Home Lenders Inc. to offer mortgages to people with credit score blemishes.
A Ladysmith, B.C., property in foreclosure this month. A recent spike in foreclosures in Western Canada could spread across the country over the next four years.

A Ladysmith, B.C., property in foreclosure this month. A recent spike in foreclosures in Western Canada could spread across the country over the next four years. (Deddeda Stemler for The Globe and Mail)
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When the global credit crisis struck in August 2007, investors fled mortgage-backed securities, forcing subprime lenders to turn to more conventional securities such as Canada Mortgage Bonds, which the Canada Mortgage and Housing Corporation administers. Because Canada Mortgage Bonds require borrowers to meet higher credit standards to qualify for their investment program, subprime homeowners who got mortgages a few years ago are on the verge of being orphaned.

Executives with subprime lenders said they have been unable to tap alternative sources of financing for the stranded borrowers. Unless Ottawa steps in to help support the homeowners, for example by buying or backstopping the loans, they warn that thousands of homeowners will lose their homes through foreclosure or power-of-sale proceedings

“The bottom line is, these people made their payments,” Mr. McGill said in an interview, repeatedly stressing that the number of affected homeowners in Canada – tens of thousands – pales in comparison to the subprime lending crisis in the United States. “It’s not dismal. It’s a problem that needs to be addressed.”

Ottawa has put forward no formal proposal, Mr. McGill said, adding that he couldn’t specify what kind of solution the lenders have in mind because the process is at such a preliminary stage.

Some subprime lenders, such as Xceed Mortgage Corp., say they have been forced to start foreclosure proceedings on customers who were current with their payments for this very reason. Ivan Wahl, chief executive officer of Xceed, said the company has initiated foreclosure proceedings against 200 homeowners, mainly in Ontario and Quebec, because the company was unable to find new money to lend to them.

He said another 1,200 of his company’s mortgage customers will be in a similar predicament over the next four years.

“They upheld their end of the bargain by making their payments. It would be fantastic if Ottawa stepped in, even temporarily, to help provide capital. The initial indications are that [federal government officials] are receptive.”

Two weeks ago, The Globe and Mail reported that foreclosures in Alberta and British Columbia have spiked, with Alberta’s foreclosures on pace to double from two years previous – to 5,300 in the first 11 months of 2008-09 from 2,510 in 2006-07.

Subprime lenders initiated about half of the foreclosures in Western Canada in 2008, although they held, at peak, only about 5 to 7 per cent of the market share. It’s not known how many of these foreclosures were launched against homeowners who were up-to-date on their payments.

In the current depressed housing market, foreclosures can be devastating to lenders because they can be forced to sell homes for less than the value of the mortgage debt.

The group of subprime lenders has enlisted lobbyist Kaylie Wells to negotiate with the federal government, according to records with Canada’s lobbying commissioner. In late January, Ms. Wells organized meetings with two policy analysts in the Department of Finance, Andrew Wallace, a policy adviser in Prime Minister Stephen Harper’s office, and Neil Desai, the manager of the Prime Minister’s Office.

“We are listening to a broad range of stakeholders on a broad range of topics,” said Chisholm Pothier, a spokesman for Finance Minister Jim Flaherty. “We’ve been clear that access to credit is among the top issues facing this country.”

He added that the federal budget contains “unprecedented measures” to provide financing. “Through the Extraordinary Financing Framework, we are making $200-billion in capital available to facilitate the flow of credit through the capital markets to lay the foundation for recovery.”

Among the measures the government has taken, Mr. Pothier said, were reducing the maximum amortization period for new government-backed mortgages to 35 years; requiring a five per cent minimum downpayment; introducing new loan documentation standards; and establishing a consistent minimum credit score requirement.

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Foreclosures – Pitfalls and Hidden Costs

Tuesday, January 13th, 2009

I have been taking more and more inquiries about foreclosures lately as people are looking for a good deal. The media, in particular late night TV, has glorified foreclosures as a method of finding amazingly discounted properties at low prices, that you can buy up below market value, and reap the rewards. While this opportunity exists, it really exists more with PRE-FORECLOSURES than with Foreclosures.

Here is the general policy with a foreclosure. It is important to understand this process, as you will then understand that by the time you get wind of the foreclosure from public information such as MLS data, the opportunity to buy it below market value will likely be passed.

PRE-FORECLOSURE PERIOD

Generally, lenders do not advertise when their clients are in arrears. This has everything to do with privacy laws, and also, people DO get caught up sometimes. Lenders try to give their clients the benefit of the doubt, and they don’t initiate foreclosure proceedings the moment the homeowner goes into arrears. They usually give them somewhere between 2 and 3 months to get caught up.

This is the best time to buy a pre-foreclosure. Usually, the borrower knows they are in financial difficulty (they aren’t able to make payments) and all sorts of things will be running though their head: refinance? Sell and pay out the mortgage(s)? Get a roommate? Etc.. All this will have them worried. Oftentimes, during this period they may not be doing all the required maintenance of the house as they scramble to try and get money put together for mortgage payments.

IN FORECLOSURE

If the arrears continues for 2-3 months, the lender will petition the borrower into court, and will request an “ORDER NISI” which is a ruling that if the borrower doesn’t “redeem” (pay their arrears) within 6 months from the date of the Order Nisi being issued, then the mortgage holder (lender) can take over the property, evict the owner, and sell it or rent it out for their own profit. Once the 6 months is up, the court will issue an “ORDER ABSOLUTE” which hands the house (and any remaining equity) over to the lender. It becomes the lender’s property.

Throughout this 6 month period of time, we call that being “in foreclosure” as it is during the process of foreclosing (lender taking over the property).

COURT ORDERED SALE

This is usually part of the foreclosure process, but only comes up when the lender’s equity is threatened. For example, if the lender does a mortgage for $375,000 on a $400,000 home with $2,500 a month payments, then this means that it will take 10 months (25000 / 2500)  of late payments before the equity is wiped out due to accruing interest and the lender starts losing money. Now assume the market value slips by 5% (VERY normal) that leaves only $5000 equity in the property meaning that if the client is 2 months in arrears the lender’s position is wiped out! If the client is going to get 6 months to redeem and get caught up, the lender could lose a LOT more than their initial investment (their investment is your mortgage)!

In this situation, if it appears that the lender will lose money, they can approach the court and ask for “Conduct of Sale” meaning they are allowed to list the property (with a realtor of their choice) and sell it. You can tell if a listing on the MLS from your realtor is a Court Ordered Sale by looking at the portion where it says “Owner” and if it is a financial institution’s name on there, you can be assured it is a Court Ordered Sale.

So, the court has ordered the sale, and the lender desperately wants to sell. You can get a great deal on this property, right?

WRONG! Any sale has to be okayed by the court. There is typically a day where your offer is read into court, along with any other offers, and the court awards the highest. I have seen it, many times, where the property ends up going for MORE than market value as buyers get swept away in the heat of competition and the emotional process of buying their home!

Bottom line: just because it is a court ordered sale, doesn’t mean it will go for a low price. Oh, sure, it COULD be a great deal if you are the only one offering the price, but this is ultra rare in Canada (common in the US) as most buyers and realtors are very savvy on this process here in Vancouver due to our high prices and recent massive price run up.

POST FORECLOSURE

Once the lender has foreclosed and taken title, they can then sell the property, live in it, rent it out, or do whatever they wish. It is their property now. During this period of time the property will typically go up for sale on the MLS system in your area. The lender will usually just want to get whatever their mortgage money is back and move on, so they MAY accept a slightly lower-than-market-value offer for the property if they can quickly sell and get their money back. Why? Because their money is tied up in the property and they could be lending it out and earning money on it in the marketplace with another borrower.

Once the property is sold, the lender takes all money required to pay them off, pay all lawyers, pay for all services relating to disposing of the property, and then they pay the remainder (if any) to the borrower. Typically, there is no leftover funds or the borrower would have found a way to pay the arrears to preserve the equity.

WHY LENDER’S FORECLOSE

In times of stable or rising markets, the 6 months is usually allowed to pass before the lender gets aggitated. However, if the arrears and late payments are really adding up, and if it appears that the lender may take a loss the longer this process goes on. Why will they take a loss? I have been in this situation as a private lender, and this was how it went:

The client came to me and asked to borrow $20,000 as a 2nd mortgage. Their home was worth $440,000 and they had a 1st mortgage with a Trust company for $350,000 and payments of interest only for $2,750 per month. I agreed to lend them the money as they were a few months in arrears and needed some cash to do some renovations to install a suite in the basement that they could rent out and earn an additional $700 per month.

I agreed to loan them the money, and they bounced the very first cheque! And the second! I got contacted in month three by the 1st mortgage company who told me they were initiating foreclosure proceedings as they were not getting paid either!

I looked over the numbers, and there was a LOT of equity, so I wasn’t worried. However, then the market took a shift lower (September 2008) and lost 10% almost overnight!!! The property went from $440,000 to $396,000!!!

The client had the following situation arising:

$350,000 1st mortgage
$5,000      Arrears on 1st mortgage
$20,000   2nd Mortgage
$375,000  TOTAL DEBT (Before realtor commissions and legal costs)

I saw the writing on the wall and immediately requested Conduct of Sale so that I could sell the property, pay out the 1st mortgage, and get my money back. We were awarded Conduct of Sale and put it on the market for $379,000 to get a fast sale. No luck.

It’s been on the market for months, and as of this article, it appears that I will be losing the money I loaned to these people.

So why did I lend it, you may ask? The clients came to me desperate. The wife had just recovered from liver cancer and was back at work. Both husband and wife were working full time jobs that made JUST enough for them to cover their payments. Plus, they were going to renovate and put a suite in so they would be able to earn $700 more per month. We had cleaned up all the issues on their credit, and at 78% financing it looked like a safe deal. In hindsight, it taught me a valuable lesson about lending and why foreclosures aren’t a great deal all the time:

1. The property was in poor repair by the time I got conduct of sale as they had done no maintenance in the past couple years

2. The arrears were stacking up on the 1st mortgage and ultimately wiped me out.

3. The market can move quickly and far

So, if someone were to come along today and offer to buy that property off of us, we would sell it at a tremendous discount and someone could get it for a great deal! However, we are not going to spend money to advertise it as we are already losing our investment, so unless someone knows about me, my business, or this blog, they will never know what a great deal is sitting out here or how desperate the sellers really are.

The only want to get quality information on foreclosures is either to:

1. Work with a foreclosure lawyer who is willing to forward you their list of foreclosures

2. Get in with a mortgage broker (such as myself) who can tell you of clients in PRE-foreclosure

3. Listen to people that are going through divorces, deaths in the family, etc… as they often have a need to get rid of property soon as they may be distressed and going to lose it

4. Look at the court docket for what is appearing – you have to go to the courthouse everyday (or know how to dig it out online – not easy) and see lots of “John Smith vs. TD Bank” and “Ray Horshman vs. Capital Direct” or other such things. When those people leave the courtroom, TALK TO THEM.

Other than this, there is no LIST of foreclosures, and certainly no list of PRE-foreclosures. It takes research, hard work, or connections (usually the latter) to find gems amongst the PILE of deals in foreclosure.

Happy investing!