Sunday, August 19, 2012

Developer hacking the mortgage rules

Colwood developer offers 'new kind of mortgage'
"The equity mortgage is the next revolution in homepurchase financing."

Homebuyers will need 10 per cent of the purchasing price, but League Financial will then loan them an additional 10 to 25 per cent in order to qualify for a 65 to 80 per cent conventional mortgage.
Shades of U.S.A. circa 2006. The developers aren't sacrificing anything. Nada. They set the price, you'll recall. All they have to do in this scenario is set the price higher by the amount of the "gift". And voila, the developer books a sale and someone else is on the hook for the risk. Although, not clear who in this case. Is the bank's nose plugged up enough to think this passes a sniff test?

Part of the reduction in risk reflected in a larger downpayment is not some magical higher equity number it is the risk exposure to the buyer's personal capital investment during the buying decision processes as well as a test of ability to save.
Gant said League's equity mortgage results in monthly payments up to 40 per cent lower than a CMHC-insured 25-year mortgage because no payment of interest or principle is required.

"Equity mortgage covers the majority of the downpayment, but ... there is no monthly payment for it," he said. "Relying solely on debt is old fashioned and just plain dangerous."
I can't come up with a response to this except to observe that satire is dead.

Hat tip: Patriotz commenting at


jesse said...

I was scratching my head on this scheme. As phrased it is a shoo-in that regulators are going to be looking at this with added interest. Remember OSFI guidelines are just, well, guidelines, in theory anyways.

Maybe some bright accountant can break this scheme down into two simple bottom line ledger entries for me. Here's what I see. Take a $400K purchase

1) Buyer puts down $40K (10% of purchase price).
2) Lender lends buyer $40-$100K (Loan A) (10%-25% of purchase price).
3) Buyer uses loan proceeds to put down $80-$140K (20%-35% down).
4) Buyer now has a $260-$320K first mortgage (Loan B) and a $40-100K second Loan A. Both are not insured.

OK so a few things here:
1) Loan B is secured by the property, full-recourse, and likely superior to Loan A.
2) Both Loan A and Loan B would need to be included, along with other previous debts, to calculate GDS/TDS ratios when making Loan B.
3) Since Loan A is subordinate and does not qualify for mortgage insurance its spread is likely, um, higher.

The devil's in the details with this type of loan but it looks a bit unconventional to me.

GG said...

Gosh, you are right, it is a second loan. That's what I get for posting in my sleep, apparently. Then I assume they might only have inflated the price by half the loan amount as a loss provision. As you said, no guarantee on it.

They didn't say who was backing the first mortgage. I assume they have an institution lined up, otherwise they are ahead of themselves.