chapter 11 vendor take back

Question 1

Elliot, a representative for City Wide Realty, entered a listing agreement with Belinda to sell her house for $450,000. Within a month, he found a purchaser, Lorraine, who was willing to buy the house for the list price. After Lorraine arranged a mortgage with National Bank for $275,000, she told Elliot that she was still short on funds. Elliot suggested a vendor take back mortgage, to which Belinda agreed, and proceeded to prepare an offer which provided for a vendor take back mortgage in the amount of $220,000, which mortgage would rank behind National Bank’s mortgage. Which of the following statements are TRUE?

a. Elliot has a duty to ensure that Belinda receives adequate security for the loan extended to Lorraine.
b. If accepted, this offer would leave Belinda under-secured.
c. The federal Interest Act would not impose a limit on the rate of interest which Belinda could charge Lorraine with respect to the mortgage transaction.
d. Under the Mortgage Brokers Act, Belinda would be regarded as a mortgage broker.

1. All of the above
2. A, B, and C only
3. A and B only
4. C and D only

Answer 1

Correct Answer: 2

Elliot, as a licensee, has a general duty to protect the best interests of Belinda C this includes ensuring that the vendor receives a fair price for her property and that she receives adequate security for the loan. Statement A is therefore correct. Statement B is also correct because this arrangement would result in a situation where the total of the first and second mortgages would exceed the total purchase price of the property. Statement C is correct because the Interest Act does not limit the rate of interest which can be charged in a mortgage transaction, although provincial legislation or the Criminal Code may apply. Statement D is incorrect because under the Mortgage Brokers Act, a person must make at least ten mortgage loans in a year in order to be defined as a mortgage broker.

Question 2

Vendor “take back” mortgages:

1. may be used when the purchaser cannot obtain a loan through a bank.
2. are limited to a maximum loan value of 75% of each subject property’s value.
3. are ranked lower in priority than mortgages held by institutional lenders.
4. are secured both by the land and by the vendor’s guarantee of the lending institution’s loan.

Answer 2

Correct Answer: 1

Vendor take-back mortgages may be used when the purchaser cannot obtain a loan through a bank. Vendor take-back mortgages are not limited to a certain value. Like other mortgages, their priority is a function of contract and of time of registration. There is no lending institution involved in a vendor take-back.