By Gareth R. Jones
Answer: Maybe
There is an old myth still actively circulating that some Lenders are in the Power of Sale (POS) business and place Mortgages with the anticipated hope that the Borrower will default on the payments and huge profits will be realized by Lenders from the resulting sale.
Although, there are unscrupulous Lenders out there who do conduct their business this way, the vast majority do not. These Lenders are well known within the Brokerage community and are completely avoided by most reputable Mortgage Agents/Brokers.
Today, usually every effort is made with the homeowner to redeem themselves, pay arrears of taxes, interest, utilities etc. prior to Lender formally commencing the process. Lenders may adjust amortization, payment frequency etc. to accommodate. It is predominantly lifestyle changes, such as unemployment/change of employment, illness, poor cash management, divorce etc. that has caused the arrears in the first place. Seldom is it determined that the Mortgage should not have been advanced due to improper qualification of Borrower at time of application The Lenders do not want the property, nor do they want the aggravation of selling it. Lenders also have a fiduciary responsibility to the Borrower, as documented in the original Mortgage Charge, to act within the guidelines of Law, if or when the disposition need arises.
There are also Purchasers that, when speaking with their Agents, will tell them, “Just show me POS’s, I’m only interested in getting a great deal, at the bank’s expense!!”
Question: How do you know if a Power of Sale is a good deal?
Let’s see an example:
In June 2007, Mr. Smith bought his home for $300,000 with a 5% down payment ($15,000) insured through CMHC and a $7,000 premium was added to the $285,000 mortgage totaling $292,000.
A year later, June 2008, Mr. Smith lost his job and has not been able to find replacement work since. As of August, 2008 Mr. Smith has not been able to pay the Mortgage, taxes, utilities, insurance, make any repairs or do any maintenance on his property and is now six months in arrears. Notice was sent to Mr. Smith 45 days after his default that Power of Sale proceedings would commence immediately. During the first three months of arrears, Mr. Smith and the Lender worked together attempting to rectify his situation by changing his amortization period to 35 years and having his payment date changed to coincide with his Unemployment cheques. Mr. Smith did manage, under the new arrangements, to make partial payments and clear a small portion of arrears.
The end result, and after exhaustive efforts, Mr. Smith finally decided that he could no longer continue on and agreed to vacate the property, handing the property over.
The market has softened somewhat since Mr. Smith made his purchase 18 months ago and because of his situation and his inability to maintain, the property, now vacant, does not show well.
Mathematics:
Mortgage: $290,000 ($3,000 paid down)
Interest: $17,000
Taxes: $6,000
Utilities: $1,400
Insurance: $800
Total: $315,200
Add Disposition Costs:
Commission and Legals: $22,000
Property Maintenance: $2,100
Miscellaneous charges: $2,000
Total: $26,100
Cost/Value to Lender from above: $341,300
A realistic listing price for this property when expecting to recover losses would be $349,000 allowing for some negotiation and other miscellaneous costs.
Is $349,000 or even $339,000 a fair listing price in today’s market?
Make sure that all research is done on properties that are fair comparables and do not assume that all POS’s are a great deal and Lenders have deep pockets. This mortgage is insured through CMHC and the Lender will receive their funds. It is the disposition costs and arrears that they may not receive. Whether they are willing or able to absorb these costs relies heavily on the Lender’s policies and market conditions.
Gareth R. Jones A.M.P.(FSCO Licence #M08009150) is a Mortgage Agent with Home Loans Canada- (the Brokerage arm of CIBC Mortgages, Lending and Insurance). FSCO Licence #10423. Gareth can be reached at Gareth.Jones@HLCmortgages.com.
