Chapter 1: Market Overview Flashcards
Who are the key participants in the Ontario mortgage market? (13)
- Mortgage Brokerage
- Principal Broker
- Institutional Lenders
- Private Lenders
- Borrower
- Institutional Mortgage Originators
- Real estate salesperson
- Real estate appraiser
- Home Inspector
- Mortgage default insurer
- Morgage creditor insurer
- Lawyer
- Title insurer
- Mortgage Administrator
What is a Mortgage Brokerage?
What happens if a mortgage agent stops being authorized by a mortgage brokerage?
What happens if a mortgage agent resigns from a mortgage brokerage?
- Licensed mortgage brokering entity.
- Every mortgage agent must be licensed and authorized by only one mortgage brokerage.
- If a mortgage agent stops being authorized by a mortgage brokerage their license will be suspended.
- If a mortgage agent resigns from a mortgage brokerage, their license will be suspended until they are hired by another mortgage brokerage.
What is a Principal Broker?
A licensed mortgage broker who is designated as the chief compliance officer of a mortgage brokerage.
Under the MBLAA Act, 2006 a licensed mortgage brokerage must have one licensed mortgage broker designed as a principal broker.
What is an institutional lender?
What are Schedule 1,2 and 3 banks?
Any schedule 1,2 or 3 bank, credit union, loan and trust company, finance or other companies that are constructed to lend money on real estate.
Schedule 1 banks - Canadian owned banks
Schedule 2 banks - branches and subsidiaries of foreign-owned banks
Schedule 3 banks - foreign-owned banks operating within Canada
What is a private lender?
Why do they prefer second mortgages over first mortgages?
An individual investor with funds who would like to invest in mortgages. Any private lender can be referred to as a mortgagee.
They usually invest through their lawyer who may have clients who require mortgage financing or a mortgage agent.
A private lender usually invests in 2nd mortgages as the rate of return is usually better than alternative investments such as GICs and bonds.
What is a borrower?
Under what circumstances will you not meet the borrower? Why do you need to be careful?
An individual(s) that are receiving a mortgage loan and are pledging their property as security.
There are some circumstances in which you will meet with someone who is acting under the Power of Attorney for the homeowner. You need to be more careful in these situations as the likelihood of fraud is higher.
What is a Continuing Power of Attorney for Property (Enduring Power of Property)?
Can you expand on the ‘continuing’ definition of the document?
It is a legal document where a person gives someone else the authority or right to make financial decisions on their behalf.
It is entitled ‘continuing’ because the person given the authority or right can still make decisions after a person is no longer mentally capable of making decisions on their own.
What is an Institutional Mortgage Origintaor?
Why are they not thought of as “brokering mortgage transactions”?
What is the difference between Institutional Mortgage Originators and Mortgage agents?
Many financial institutions have teams of mortgage originators that go out and find borrowers. They are compensated by the financial institution.
They are not thought of as brokering mortgage transactions as they are restricted to only working with the lender they are employed under.
Although they both must provide the best solutions for their client, originators can only offer solutions from their financial institutions and can not recommend solutions offered by other lenders.
Who are Real Estate Salespersons?
What are their characteristics?
It is an individual who brokers purchase and sales transactions between vendors (sellers) and purchasers.
A real estate salesperson must be:
- Meet licensing guidelines
- Must be employed by a licensed real estate brokerage
- Must be a member of their local real estate board
Real estate salespersons are a vital link in the process of purchasing and selling real estate and therefore of considerable importance for mortgage agents.
What should we keep in mind when making connections with real estate salespersons?
Remember the 80-20 rule. Often 80% of sales are done by 20% of a salesforce. It is important to focus on establishing relationships with top salespersons to ensure you get the most referrals.
Who are Real Estate Appraisers?
Do they need to be licensed in Ontario?
Real estate appraisers determine, in the case of financing, the market value of a property to be mortgaged.
No, Real Estate Appraisers do not have to be licensed in Ontario. However, no lender will accept an appraisal from an individual without a professional designation for financing purposes.
Who are Home Inspectors?
They advise the homeowner and purchasers on the condition of the property and provide advice regarding issues that arise around the condition of the property.
What are mortgage default insurers?
Who are the main mortgage default insurers in Ontario?
What types of mortgages do they typically insure? Who pays the cost? What’s the benefit to the borrower?
Mortgage default insurers provide mortgage default insurance policies to lenders.
The main insurers in Ontario are the Canadian Mortgage & Housing Corporation (government), Sagen and Canada Guaranty Mortgage Insurance Company.
Typically they are used to insure mortgages with a high LTV (high ratios). The costs are usually passed on from the lender to the borrower, who benefits from the policy by being able to get a high LTV mortgage at conventional rates.
What three main tasks do Lawyers perform in real estate transactions?
- Negotiate and draft Agreements of Purchase and Sale
- Acting on buyers and sellers for new and re-sale homes, condos, commercial purchases or sales
- Acting on borrowers and lenders for mortgage transactions - preparing and registering documents.
Who is Mortgage Creditor Insurer?
An insurer that provides a policy to the Mortgage borrower so that upon a claim (death or other situation covered by policy) the mortgage loan is paid by a one-time lump sum to the lender. The policy is specific to the mortgage loan.
What is a Title Insurer? What are the benefits?
Provide an example on where a policy can protect a purchaser?
An insurer that provides a policy that provides coverage for the insured’s title. The policy can provide coverage for real losses associated with covered issues found in the policy.
The policy can potentially streamline the mortgage closing process (lawyer closing mortgage transaction), protects against fraud and forgery for purchases and refinances.
Example: There is an old mortgage on the title that was never discharged which is blocking the property from being conveyed to the purchaser. The title insurance policy will take the necessary steps to remedy the situation.
What is the definition of Loan to Value (LTV)?
If the mortgage is $200,000 and the value of the property is $400,000, what is the LTV?
It is the amount of the loan to the value of the property.
LTV = 200000/400000 = 50%
History of the Mortgage Industry in Ontario: What is the history of land ownership in Canada?
- Where the original system derived from
- 1867
- Situation in Canada today where no initial patent was granted for piece of land
Land ownership in Canada stems from the French feudal system of land ownership.
The system was based on the principle that all land is owned by the crown and individual citizens can obtain the rights to use the land by making an agreement with the crown, such as military service or other feudal activities.
In Canada, this system was incorporated by the Constitution Act of 1867. Under this legislation, the Crown is the ultimate landowner. Citizens can be granted rights, called patents to use the land in exchange for clearing the land and building shelter.
In Ontario and the rest of Canada, where no initial patent was granted for a piece of land, no private ownership could result. This is the case even today.
History of the Mortgage Industry in Ontario: What is the current system of land ownership in Ontario?
Can you provide an example of how the current system of land ownership works in Ontario?
What is a possibility under the current system of land ownership if a property owner fails to pay their property tax?
In Ontario, the Crown owns a full residual interest in land which allows the Crown to expropriate land for its own use. The crown can expropriate the land or require the current owner to sell the property back to the Crown.
There are multiple examples of the Crown usually in the form of municipalities, expropriating land to build a new road. This can also happen if a property owner fails to pay their property taxes. The municipality then has the right to take the property and sell it to recover those taxes.
History of the Mortgage Industry in Ontario:
Who originally provided mortgages in Ontario?
Who else entered the market in 1954?
What happened in favour of them in 1967?
% they own today?
Originally, mortgage lending in Ontario was serviced by Life Insurance companies. They had significant deposits from the premiums of their policy holders, which they could loan to individuals wishing to purchase land. Banks were not allowed to lend on mortgages due to the Bank Act.
Banks however were already in the most competitive position for providing mortgage loans. They had branches in most communities and thus able to reach many more potential borrowers.
In 1954 the Bank Act was changed to allow banks to lend mortgages, however, there was a cap on the amount of interest they could charge (6%). At the time, banks did not find the capped interest profitable and therefore Life insurance companies continued to dominate the mortgage market.
In 1967, the Bank Act was amended and the 6% cap was removed. Virtually overnight the banks became the prominent mortgage lending institution. Today, 61% of all mortgages held in Canada are loaned from banks.
History of the Mortgage Industry in Ontario:
Provide an overview of the Mortgage market in the 1970s in Canada.
- Domination of Canadian banks, Mortgage brokers on the fringe
- US market vs Canadian market in terms of the lender availability
The market in the 1970s was dominated by banks. They offered standard mortgage products, namely 25-year amortization, 5 year fixed rates and standard repayment options. Mortgage brokers at the time could not provide a major benefit to borrowers.
If a borrower wanted a low-interest rate, they would simply go to their bank. If a borrower was denied by their bank, they would be essentially denied by all other banks since the lending criteria among banks were almost identical.
The mortgage brokerage community arose from the need of borrowers to obtain financing if they were rejected by their bank. Mortgage brokers offered borrowers a private mortgage at a higher interest rate. They would charge a fee for arranging this financing. Other alternative solutions at the time were to borrow from their friends and family to finance their home purchase.
Mortgage brokers at the time offered a fringe service. However, in the US the mortgage market was changing. Many regional lenders entered the market which caused the growth of the mortgage brokerage industry as these brokers would help borrowers find lenders that best met their financial goals.
History of the Mortgage Industry in Ontario: Up until the late 1980s mortgage agents were primarily used as sources of private mortgages for those declined by the bank.
The mortgage industry was thought to still be in its infancy but there were major changes coming. What were those changes?
Further legislative changes were being made that allowed an influx of mortgage funds into Canada. The number of lenders began to increase. Non-deposit-taking institutions started to open shop in Ontario and started providing more options to borrowers.
There are dozens of institutional lenders today along with non-institutional and private lenders of mortgage financing. Unfortunately, there has been a shift back towards the conventional lending practices due to the sub-prime mortgage meltdown in the US. Although Canada was not directly impacted by the sub-prime mortgage crisis in the US, the problems faced in the US have had an impact on the sub-prime mortgage market in Canada.
The Sub-Prime Mortgage Market: What is a Sub-Prime Mortgage? Why were they required?
A Sub-Prime Mortgage also referred to as Alternative Mortgage market or B-type mortgages has been around since the early days of the mortgage industry.
Sub-Prime Mortgages were for borrowers who were declined by traditional banks and had to seek financing from private lenders. Borrowers were usually declined for income or credit-related issues.
The Sub-Prime Mortgage Market: What was the trend in the 1980s that accelerated the growth of the Sub-Prime mortgage market?
How did these Sub-Prime mortgages become more aggressive?
- change in the employment market
- entrance of lenders -> change in verification
Since the 1980s there was a 50% increase in self-employed citizens in Canada. Traditional lenders did not have products that could service these individuals and thus they had to obtain mortgages through private or non-institutional lenders.
As more lenders entered the market, the products became more aggressive. These programs allowed individuals to simply state their income without verification. The concept behind this program was that if a person had other assets and a good credit score they essentially had enough income to make their mortgage payments.
Essentially borrowers could provide a self-declared statement of income. This income amount would then be used to calculate ratios for loans. Even today, income verification is not required under these programs.
The Sub-Prime Mortgage Market: What happened in the US that accelerated the sub-prime mortgage crisis?
What was an additional tactic used by lenders to aggressively sign up new borrowers?
- 1/3 of all mortgages were what?
- income + excess
- teaser
In the US the programs were more aggressively pushed. In 2005, one-third of all mortgages in the US were interest-only loans.
In addition, borrowers in the US could borrow in excess of 100% of the value of their homes. In summary, borrowers could state their own income (income fraud) and borrow in excess of the value of their homes. This led to many borrowers signing up for mortgages they could not afford.
Borrowers were aggressively targeted with teaser interest rates. These were rates that started off low but increased over time. in 2006, almost 90% of all sub-prime mortgage loans consisted of teaser rates. Borrowers could afford teaser rates but could not afford the rates when they went up.
