In case, like me, you were cleaning your Hummer and missed the news, Canadian house prices are now overvalued by 23.9%. So says The Economist.
That’s a national average, covering Bathurst NB and North Bay ON, as well as the places where people actually live. Which means it’s likely closer to 45% in Vancouver and 35% in the GTA. In fact, just above every day that passes now bring another little hunk of evidence that this blog is not totally on crack.
But that’s not the topic. Well, almost not.
Those who believe my best-before date was in the Eighties, and that a US-style real estate correction in this country is impossible, often makes these points: (a) our banks are more conservative. (b) Canadians are cautious about debt. (c) We never had funny mortgages.
Those are myths, of course. And to help us prove this, we’re joined by the TD Bank.
Here’s the story: Starting last Monday the bank is registering all its new home loans as collateral mortgages, rather than conventional ones. If you have no idea what that means, you’re normal.
A collateral mortgage is a loan which is backed by a promissory note which is in turned backed by security. A conventional mortgage, as you know, is just a loan secured by a house. Normally the only people who are asked to sign collateral mortgages are folks who use their houses to arrange lines of credit with balances that can balloon, not a regular mortgage with a fixed amount owing and a standardized payment.
With a conventional mortgage there are strict rules about how much you can borrow determined by the value of the property when you take the loan. Not so with a collateral mortgage, because it’s actually a loan which is backed by your promissory note. That means you can borrow more than your house is worth.
Yes, just like those old fast-talking Ditech.com TV commercials offering American homeowners mortgages worth 125% of their home’s value – the ones we used to snicker at. Well, giggle no longer. TD is now shopping 125% collateral mortgages.
In fact, bank customers (I’m told) are being encouraged to ‘register’ for 125% mortgages when they sign up, even if they don’t need all that money. It’s just there, the pitch goes, if you ever need it. Kinda like a built-in line of credit you don’t need to reapply for.
(Of course, it should be lost on nobody that the bank just found a way around guidelines on loan-to-value ratios.)
OK, so much for the conservative Canadian bankers part. But it gets better. For the bank.
With a conventional mortgage it’s your house backing the loan, which means transferring a mortgage is simple, and can be done for a couple of hundred bucks. But collateral mortgages cannot be transferred, since they’re more akin to personal loans. That means one must be discharged and a new mortgage arranged elsewhere if you want to move. Since that can cost thousands, not hundreds, it pretty much ensures you won’t.
But it gets even better. For the bank.
With a conventional mortgage if you miss a payment there are standard procedures, which involve catching up in a timely fashion and maybe having to pay for a lawyer’s letter. But the terms of the loan remained fixed. Miss a collateral mortgage payment, however, and the bank has the right to slap you around with the imposition of a higher interest rate for the life of your loan. Just as the bank is registering these things with 125% principal amounts, so too is it registering interest rates as high as prime plus double digits. Just in case.
And it gets better. Guess for who?
When a collateral mortgage renews, and you don’t like the rate being offered, you can’t just walk away and get another bank to lend you the money to pay TD off. Instead, the collateral mortgage/promissory note – which is registered (like a car loan) under PPSA – needs to be discharged legally. And you pay. Or you capitulate and stay a bank customer. Additionally, a borrower may find the collateral mortgage gives the bank the right to dip into any of their other bank-held assets if they happen to miss a payment or two.
Says a mortgage industry insider: “TD Bank’s move is brutal for customers unless they are share holders of the Banks. None mention the true legal / security implications and how it increases the bank’s security and sticks customers with more liability.
“I am in the industry but we cannot speak out against this as strongly as we would like for fear of repercussions. Honestly think all banks are headed this direction, using TD Bank as a test case. Don’t think there is a conspiracy? Bet me.”
Finally, given Canadians’ track record with debt lately (look at the chart I published here yesterday), is it such a good idea to dangle a 125% mortgage in front of people who are horny for granite, stainless and flat screens? Is this entrapment?
So the next time some dinglenuts tells you we’re immune from real estate self-destruction because our banks are looking after our butts, just mimic a TD customer.
Pucker and turn green.