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Government Protection in Lending, What about real estate?

Mike De Sousa

Government rules should protect processes not products!

It was a mere 3 months ago when new legislation kicked in and Canadians were told by our government that new rules were being installed to protect consumers from certain lending practices.

We saw the down payment for non-owner occupied homes increase to 20%, a standardized rate used for qualifying all variable rate mortgages, and no longer would the government support 100% financing.  Even business for self mortgages were affected to a degree!  All this is supposed to protect the consumer from those greedy banks & salivating mortgage brokers!

I question the government's reasons for "protecting consumers" because there are examples of consumers being preyed upon by professionals with no process for protecting the consumer.  I recently came accross a story that saddened me:

Bob was a factory worker in East London who owned a  fifty year old, small bungalow for the past 3 years.  He made his mortgage payments as best he could, and had the odd late payment on his credit card bills, but thought he was doing "okay" for a person with his income.  He enjoyed his home.  It was duplex that gave him some extra income when he had a tenant who could pay, but the headaches of being a landlord and the fact that the property was a bit small to accommodate his hobby of working on his 67' Ford Mustang.

Bob happened to notice that a Realtor™ named Sean had a "for sale" sign on his neighbour's lawn.  Sean worked for a national real estate brokerage that was well known, so made a call.

"Hi Sean, my name is Bob and I am thinking of selling my home.  The property is smaller than I'd like, and I think this landlord thing is not right for me anymore."

Sean said that he'd be right over to discuss the listing.

Sean was of average height, wore a typical golf shirt, pleated pants and dress shoes.  He walked in confidently and carried a portfolio with a listing package for Bob.

"Well Bob, I have bee doing some research before I came over and found out that most homes are selling in your area for $130,000.  Based on the condition I see your home here, I would say that we are in that range."

Bob interjected, "I have cleaned up the property since I bought it.  I painted the garage and put some new vinyl flooring in the bathroom.  That should add some value."

"Bob, you have done some clean up and my recommended listing price is based on clean homes like yours.  That is top dollar.  I am confident we can get that for you".

Bob agreed to list the home.  The home sold in 3 days!

"You see that Bob?  I told you we would sell it for top dollar!  Are you happy?"

Bob replied, not knowing whether to be happy or sad, "I think so.  This is all happening too fast."

"That's ewhat happens in real estate Bob.  Things happen quick and you have to have a good Realtor™ to help you act on things quickly when they materialize.  Don't worry, we'll find you a new home right away!"

Bob and Sean searched over the next 7 days and finally found a home that met Bob's guidelines and put in the offer.  They ended up getting the offer accepted by the vendors, conditional upon Bob getting his finances in order and a home inspection.

While Bob started the approval process with a mortgage broker who was referred by Sean to Bob just before Bob accepted the sale agreement on his home.  The people who bought his home made a firm agreement so his house was sold with confidence!  The mortgage broker began the process by identifying that Bob had an existing mortgage with an alternative lender called Xcel Mortgage Corp.  This alternative style mortgage was unknown to the broker, so he made the effort to get Bob to sign consent forms in order to talk with a rep at Xcel Mortgage Corp. about Bob's existing mortgage.

Was this mortgage protable?  Could Bob take it woth him to the new property?

Was it assumable?  Could the buyers apply to take over Bob's mortgage without a penalty?

What was the penalty?  What was the rate?  Can Bob get out?

These are typical questions that a professional broker would ask.  The broker got the answers to these questions and had to break the news to Bob.

"Hi Bob, I have some really bad news.  Your mortgage with Xcel Mortgage Corp. is firmly locked in and can only be broken with a bona fide sale, which is what you have accepted on your property.  The bad news is that you MUST pay a penalty of about $13,000 which is the interest until the maturity date."

"I am not sure I heard you properly, did you say I had to pay $1300?"

"No Bob, it's $13,000 and when I calculated the equity from the sale of your home, you'll actually have to kick in an extra $1000 out of your pocket just to sell your home!  Did nobody sit with you and help you calculate this before you decided to sell?"

"No.  I had no idea about my mortgage and I figured that my mortgage was $120,000 and if I sold for $130,000 plus the real estate commission that I'd be okay".

Bob ended up selling his home, but he paid the extra $1000 out of pocket just to complete the sale without being sued, but he had no equity to buy a new home.  His credit was spotty so even cash back mortgages wouldn't suit his credit score. 

Bob ended up negotiating with the people who bought his home to rent out the basement so that he had a place to live.  Bob ended up being the tenant in his own home!  The Realtor™ received the 4% commssion on the $130,000 sale!

Although the names are not real, this story is!  It happened in East London over the past year!

The point I am making is that goverment seeks to protect consumers by making rules that impact products.  How about making rules that impact process?

True consumer protection would be to legislate both Realtors™ and Mortgage Brokers to initiate a process that involves doing equity calculations for clients selling their homes AND ensuring that the client fills out a budget sheet to see just how their new purchase will affect their lifestyle.

Why can't we be prudent in protecting consumers from making a mistake, rather than protecting them from buying a product by changing guidelines and interest rate qualifications? 

Bob probably should have never bought his home to begin with, yet he lost all equity because the second time around, a so called "professional" analyzed some market data and sold his home. Would the new rules instituted last April have mattered to Bob? Not one of our government's new rules applied to Bob losing his shirt!  No planning was involved, nor was it required. Who was protected?

I am of the opinion that we are all responsible for our choices, but if the government is going to make rules to arbitrarily protect us, then those rules should involve a protective process, and forget about changing the products!

"Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for life."

Thanks for reading!

Mike De Sousa and Mindy Small

Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671