SUMMER 2022 $6.95
THE MAGAZINE FOR PROFESSIONAL MORTGAGE BROKERS
MAKE IT HAPPEN
WHAT TO DO WHEN THE MARKET SLOWS p.40
+
CULLEN COMMISSION
Recommending major industry changes p.12
FINDING YOUR FIT
How to choose the right brokerage house p.18
COMMUNITY COOKING
A broker finds the recipe to give back p.30
RISK Private lending
PM No. 41297283
issues p.32
CMBA-ACHC.CA
BRIDGING GAP THE
COMMERCIAL MORTGAGE LENDING CRITERIA Mortgage Type
Loan to Value (up to)
Loan Amount Range
Interest Rate Starting at
Retail/Office/ Industrial
70%
$1 M - $75 M
7.00%
Land (urban infill)
70%
$1 M - $75 M
7.00%
Apartments
70%
$1 M - $75 M
6.85%
Res. Condo Inventory
70%
$1 M - $65 M
7.15%
RESIDENTIAL MORTGAGE LENDING CRITERIA Mortgage Type
Loan to Value (up to)
Loan Amount Range
Interest Rate Starting at
Single Family
70%
$1.5 M - $5.0 M
6.50%
Luxury Condos
70%
$1.5 M - $3.5 M
6.95%
Vacation
70%
$1.5 M - $3.5 M
6.95%
Sam Fogell - Western Canada sfogell@lanyardgroup.com 604-688-5388 x103 David Coyle - Ontario dcoyle@lanyardgroup.com 416-509-2940
Phone 604.688.5388 www.lanyardgroup.com
VOLUME 7 ISSUE 3 SUMMER 2022
12
features
THE CULLEN COMMISSION’S RECOMMENDATIONS Will the report transform the mortgage brokering landscape? BY RAY BASI
18
FINDING YOUR FIT Are you a freshly minted mortgage agent looking for a brokerage house to help launch your career? Choosing the right firm isn’t always as simple as it sounds
departments 8
Editorial
46 Advertisers’ Index
BY LISA GORDON
22
THE BIG CHILL Cooling-off period could turn up the heat for sellers BY RAY BASI
29 32
16
SAVE THE DATE CMBA-BC and CMBA-ON 2023 Conferences & Trade Shows
GET UP TO SPEED ON LENDING ISSUES
30 Off the Clock: Carey Benvenuti nails the recipe for giving back to her community BY LISA GORDON
WHAT TO DO WHEN THE MARKET SLOWS The sweet spot – and where to find the gold BY DUSTAN WOODHOUSE
44
Industry Profile: Terry Kilakos’ Passion for Education BY LISA GORDON
Lenders and brokers must understand the additional risks BY TIMOTHY LACK
40
columns
THE COST OF CONTROLLING INFLATION CIBC managing director and deputy chief economist Benjamin Tal’s views on the potential impact of inflation and rising interest rates on the housing market BY CARLA GILES CMB MAGAZINE
38 Legal Ease: Second mortgages: How brokers can protect themselves and find opportunities for borrowers BY RAY BASI
CMBA-ACHC.CA SUMMER 2022 I
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VOLUME 7 ISSUE 3 SUMMER 2022 THE CANADIAN MORTGAGE BROKERS ASSOCIATION DIRECTORS
Terry Kilakos (CMBA-Quebec) Kimberlee Freeman (CMBA-Ontario) Meg O’Leary (CMBA-Atlantic) Troy Resvick (CMBA-BC) EXECUTIVE DIRECTORS
Carla Giles Petra Keller CMBA - ATLANTIC Mortgage Brokers Association of Atlantic Canada 12 M - 7095 Chebucto Road, Halifax, NS B3L 0A1
CMBA - BC Mortgage Brokers Association of British Columbia 202 - 338 West 8th Avenue, Vancouver, BC V5Y 3X2
CANADIAN MORTGAGE BROKER magazine is produced by the Canadian Mortgage Brokers Association (CMBA) EDITOR
Carla Giles STAFF WRITER
Ray Basi MANAGING EDITOR
Kathleen Freimond ART DIRECTOR
Scott Laing BILLING AND SALES
Debra Hiller CONTRIBUTORS
Ray Basi Carla Giles Lisa Gordon Timothy Lack Dustan Woodhouse IMAGES
Adobe iStock
CMBA - ONTARIO Independent Mortgage Brokers Association of Ontario 7 - 40 Winges Road, Woodbridge, ON L4L 6B2
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CANADIAN MORTGAGE BROKER © All rights reserved. The views expressed in CANADIAN MORTGAGE BROKER are those of the respective contributors and are not necessarily those of the publisher or staff. PUBLICATIONS MAIL AGREEMENT 41297283 Please return undeliverable Canadian addresses to 202-338 West 8th Ave, Vancouver, BC V5Y 3X2 Printed in Canada by Hemlock Printers Ltd.
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editorial
The Bank of Canada is working with international partners to develop strategies to mitigate transition risks and promote sustainable finance
CLIMATE RISK AWARENESS
P
opulations across the globe are experiencing the adverse effects of climate change with an increase in the number and severity of weatherrelated events, rapid biodiversity loss and population displacement. Extreme climate-related events in Canada, such as the Fort McMurray wildfire in 2016, have caused Canadians to shift their attention to the potential impact of climate change effects on their lives. Catastrophic events are expected to amplify risks to homeowners and taxpayers as mitigation and adaptation efforts are delayed. There is urgency to increase climate risk awareness in Canada and create the measures and mechanisms to improve how climate-related risk is managed. These are important steps to help industry and consumers adjust to increased exposure to losses due to climate change.
next five years. Yet, 49 per cent of Canadians are worried about the impact that forest fires, flooding and other weather-related events will have on their neighbourhood and community over the next five years. Underwriters of property insurance have seen a notable increase in the number and size of claims in relation to climate-related events, which have led to massive insured losses. In 2021, Insurance Bureau of Canada (IBC) reported $2.1 billion in insured damage caused by severe weather in Canada. At the global level, insured damages hit $355 billion according to the Munich Reinsurance Company. This loss trend affects the balance sheet of insurers and is triggering changes to how business decisions are made across the
LIMITED AWARENESS ON CLIMATE-RELATED RISKS
$ Billion
BY CARLA GILES, EXECUTIVE DIRECTOR, CMBA-BC AND MBIBC; CO-EXECUTIVE DIRECTOR CMBA
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Insured Catastrophic Losses in Canada *A catastrophic loss = 1 event costing $25 million or more in insured damages 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Loss + Loss Adjustment Expenses Estimated Trend
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
Despite the urgency brought about by climate change, current and future homebuyers do not fully understand how they can be impacted by climate-related risk. According to a Leger survey commissioned by RE/MAX Canada, only one in four Canadians worry that climate change will impact their home/neighbourhood and their home-buying journey over the
industry. As the pricing of climate-related risks gets more complex, insurers are evaluating the exposure of their underwriting portfolios to physical climate risk. At the same time, homeowners with properties in flood-risk areas are being affected by significant premium increases.Up to 10 per cent of Canadian homes are uninsurable due to flood risk, according to the IBC. Homebuyers who are not able to secure adequate property insurance may have their mortgage application denied “to satisfy lenders’ requirements” after ‘property insurance’. Efforts to understand climate-related risk to physical infrastructure have not been a priority in Canada, and this has left consumers and industry alike unprepared to consider and assess risks related to climate change when
Source: IBC Facts Book, PCS, CatlQ, Swiss Re, Munich Re & Deloitte Values in 2020 $ CAN, *2021 preliminary
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making decisions about where to live or what investments to make. With the expectation that the number and severity of climate-related events will increase, it becomes more urgent to integrate climate-related risk assessment into property underwriting criteria, and for current and future homeowners to be informed about the risks they face and how they can mitigate for these risk factors. According to IBC, the greatest cumulative insured losses in Canada are being caused by flooding, where one in five residential properties are at risk of overland flooding. In B.C., even though overland flood insurance is available to about 95 per cent of properties, just half of B.C. residents have obtained coverage. This points to the need for increased awareness of the risks and costs associated with climate-related events. For example, the most recent catastrophic flooding in the Sumas Prairie in the City of Abbotsford in late 2021 resulted in $675 million in insurable losses. Most payouts were associated with commercial policies as most residential properties did not have flood insurance coverage. Infrastructure and emergency response and recovery costs are estimated to surpass $4 billion, and these are being borne by the government.
STEPS TO IMPROVE CLIMATE RISK ASSESSMENT AND MANAGEMENT IN CANADA The Bank of Canada is taking steps to better understand the impacts of climate change on the economy. It recognizes that both climate change and the transition to a low-carbon economy will impact almost every sector of the economy, and it is within its mandate to better understand these effects and their implications for the economy and financial system. In its most recent Financial System Review, the Bank reports that the risk of a quick repricing of assets exposed to climate change has increased. “The vulnerability associated with climate change stems from the likelihood that the pricing of assets exposed to either physical or transition climate risks does not fully reflect the hard-to-measure future economic risk factors due to climate change.” For a description of physical and transition risks, see sidebar. The Bank also reports that for “financial instruments to be appropriately priced, market participants need access to reliable information on firms’ and financial institutions’ exposure
to climate-related risks and on their transition plans. The current level of disclosure is not enough to properly assess these risks.” The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) conducted a climate transition scenario analysis pilot project, which included several Canadian financial institutions to gain an understanding of potential risks in transitioning to a low-carbon economy and to build the capabilities of authorities and financial institutions in assessing climate-related risks. Key takeaways and lessons learned to inform and support the broader financial sector were released earlier this year. Since then, OSFI has issued a draft version of Guideline B-15: Climate Risk Management, which sets the stage for OSFI’s expectations of federally regulated financial institutions. OSFI will be also introducing mandatory climate-related financial disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. It is reported that these disclosures will incentivize improvements in the quality of the institutions’ governance and risk management practices related to the climate. The Bank of Canada is also working with international partners such as the Network for Greening the Financial System, among other partners, to develop strategies to mitigate transition risks and promote sustainable finance. These are much-needed steps to bring awareness to the risks of climate-related events to the financial sector. This will also help and support financial institutions in building their capacity for climate-related risk assessment and management, while increasing transparency.
TRENDS IN CLIMATE RISK ASSESSMENT REPORTS In Canada, most lenders, appraisers and insurers rely on out-of-date flood maps to assess climate-risk to properties, which may affect closings and existing loans for homebuyers or homeowners and business owners. Historically, lenders and insurance companies in the U.S. have relied on the Federal Emergency Management Agency (FEMA) maps to evaluate flood risk and to inform consumers about the requirement or recommendation for flood insurance. According to a study released earlier this year by the Research Institute for Housing America (RIHA), the housing industry lacks an accepted indicator of
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editorial climate risk projections that lenders can use for risk management. In response to the growing need for climate risk information, the private sector is coming up with solutions to allow decision-makers to quantify climate risk in their mid- and longterm strategies. These solutions are often powered by predictive analytics, which can generate quantified assessments about current and future risk from climate-related events. For example, ClimateCheck® offers climate risk solutions for corporate customers, such as real estate investors, environmental consultants, lenders and insurance companies. ClimateCheck® runs on a proprietary risk assessment model to quantify climate-related risks for a property or a portfolio of properties. The non-profit First Street Foundation® offers a free online tool for homeowners to find their property’s risk from environmental threats such as flooding and wildfires, and to understand how risks are changing because of a changing climate. These solutions are giving property owners information about the risks they face from climate-related events, particularly flooding and wildfires. The launching of similar services in Canada that combine climate data sets with predictive analytics can be part of a pathway to alleviate the immediate need for climate-risk
“
Protecting Canadians, the economy and the financial system will very much depend on the implementation of climaterelated financial disclosures and broader climate risk management frameworks.
awareness and help build capabilities to support decision-making. Regulators may want to screen these services to ensure compliance with any applicable legislation and alignment with applicable risk management guidelines. The need for climate risk awareness and management in Canada is undeniable. While integrated efforts across government and industry are needed to implement the federal government’s commitment to transition to a
low-carbon economy, helping current and future homeowners and the public at large better understand the potential impact of climate change on their properties is a step in the right direction. Protecting Canadians, the economy and the financial system will very much depend on the implementation of climate-related financial disclosures and broader climate risk management frameworks.
CLIMATE RISK MANAGEMENT: OVERVIEW Climate change and the global response to the threats it poses have the potential to significantly impact the safety and soundness of federally regulated financial institutions (FRFIs) and the financial system more broadly. These risks, also known as “climate-related risks,” are broadly categorized as physical and transition risks. n “Physical risks” refer to the financial risks from the increasing severity and frequency of extreme climate changerelated weather events (i.e., acute physical risks); longer-term
gradual shifts of the climate (i.e., chronic physical risks); and indirect effects of climate change such as public health implications (e.g., morbidity and mortality impacts). n “Transition risks” refer to the financial risks related to the process of adjustment towards a low-greenhouse gas (GHG) economy. These risks can emerge from current or future government policies, legislation and regulation to limit GHG emissions, as well as technological advancements, and changes in market and
customer sentiment towards a low-GHG economy. Physical and transition risks can also lead to liability risks, such as the risk of climate-related claims under liability policies, as well as direct actions against financial institutions for failing to manage their climate-related risks. Climate-related risks may manifest over varying time horizons and are likely to intensify over time, especially if the global economy undergoes a disorderly transition. They can drive financial risks, such as credit,
market, insurance and liquidity risks. They can also lead to strategic, operational and reputational risks. In severe instances, climate-related risks can threaten the long-term viability of an FRFI’s business model. Building resilience against climate-related risks requires FRFIs to address vulnerabilities in their business model, their overall operations and ultimately on their balance sheet. This entails forward-looking approaches that are holistic, integrated and built on reliable empirical data and sound analyses.
Source: Office of the Superintendent of Financial Institutions (2022). Climate Risk Management (Draft Guideline B-15; p. 15). https://www.osfi-bsif.gc.ca/Eng/Docs/b15-dft.pdf
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CULLEN COMMISSION RECOMMENDS MAJOR
CHANGES TO MORTGAGE BROKERING
BY RAY BASI , J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA2BC AND MBIBC
port transform e r the he m li l t o W
rokering landsc b e ap ag e? g rt
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S
The final report of the Commission of Inquiry into Money Laundering in B.C. – often referred to as the Cullen Commission – recommends significant changes that would impact mortgage brokers and the environment in which they conduct business. Of the 101 recommendations the recently released report makes, 17 are directed at mortgage brokers and two additional ones are directed at private lenders. Many of the other recommendations impact mortgage brokering indirectly or because they impact a larger group that includes mortgage brokers. The B.C. government is keenly interested in the recommendations, and other provincial governments have been keeping a watch. The over 1,800-page report, prepared after the public inquiry headed by former B.C. Supreme Court Justice Austin Cullen, was released to the public on June 15, 2022. The report addresses how billions of dollars of ‘dirty money’ were laundered by the province’s real estate, gaming (including casinos) and luxury car market sectors. The report is the result of more than three years of work by the Commission, including testimony from over 200 witnesses (including from former CMBA-BC’s CEO Samantha Gale) and considering over 1,000 exhibits. The Commission’s mandate was to inquire into and report on money laundering in British Columbia, including: n the extent, growth, evolution and methods of money laundering in various sectors of the economy; n the acts or omissions of responsible regulatory agencies and individuals that contributed to money laundering in the province; n the effectiveness of the anti-money laundering efforts by these agencies and individuals; and n barriers to effective law enforcement. The Commission was also asked to recommend measures to address the conditions that have allowed money laundering to thrive.
RECOMMENDATIONS Of primary general interest is that the report recommends an ongoing antimoney laundering regime consisting of: establishing a commissioner; continuing with the Deputy Ministers’ Committee and Anti-Money Laundering Secretariat; and requiring all government agencies, regulators and law enforcement bodies with an anti-money laundering mandate to have a designated anti-money laundering liaison. These are the Commission’s recommendations of particular interest to mortgage brokers, together with some of the rationale the report provides for each and non-exhaustive page references. The complete report can be found at cullencommission.ca
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“There is an overarching need for professionalization of the mortgage brokers industry. I am hopeful that the reforms I have supported will go a good distance toward accomplishing this.” (Report: p.870)
Recommendation 14: The Province amend the Mortgage Brokers Act (MBA) definition of “mortgage broker” to harmonize it with the requirement for registration. (Report: p.862) n The definition of “mortgage broker” in the MBA is confusing and does not align with the activities that give rise to the obligation to be registered.
n At a minimum, originating loans
and the ability to earn fees from doing so should be limited to registered mortgage brokers.
Recommendation 15: The Registrar of Mortgage Brokers (Registrar) make it a requirement that applicants for registration provide an extended criminal and police background check, showing not only convictions and outstanding charges but also past charges relating to financial misconduct, as well as police database information about the person. (Report: p.863) n The RCMP have access to broader information about an applicant than is made available to the Registrar. At the very least, the Registrar would benefit from an extended criminal record check that flags connections to organized crime and charges relating to financial crimes or fraud in determining if the applicant is suitable for registration.
Recommendation 16: In its revision of the MBA, the Province include a requirement that brokerages submit annual information returns to give the Registrar better insight into industry trends and risks. (Report: p.864) n This will better allow the regulator to identify where risks lie and to target resources appropriately.
Recommendation 17: The Province give the British Columbia Financial Services Authority (BCFSA) rule-making authority in respect of mortgage brokers. (Report: p.865) n The current MBA does not give the Registrar rule-making authority.
Recommendation 18: The Province amend the MBA to create a managing broker role with clearly defined responsibilities. (Report: p.866) n The current role of Designated Individual (DI) is created by a Registrar’s policy and not by legislation. It requires no separate licensing or enhanced education/training for DIs. CMB MAGAZINE
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industry impact
Recommendation 19: The Registrar require education for both managing brokers and sub-brokers, focusing on the detection and reporting of fraud and money laundering in the industry. (Report: p.867) n Submortgage brokers are well positioned to observe fraudulent activity and should receive clear guidance from the Registrar about what fraud looks like, and when and where to report it.
Recommendation 20: The Province amend the MBA to allow for larger financial penalties, up to $250,000, to align with penalties available under the Real Estate Services Act. (Report: p.867) n The risk/reward calculus provided by the current maximum penalty of $50,000 is inadequate.
Recommendation 21: The Province amend the MBA to give
consequences, including suspension and loss of licence or registration.
the Registrar the power to make an order of disgorgement of profits for registered mortgage brokers found to have engaged in misconduct and for unregistered persons engaged in mortgage brokering activities. (Report: p.868) n The person would be forced to give up any profits made from the misconduct and/or unregistered mortgage brokering activities.
Recommendation 23: The Province amend the MBA to eliminate the automatic stay pending appeal found in section 9(2) of the Act. (Report: p.869) n It is unusual and contrary to public expectation to allow a person to continue to practise despite what might be very serious disciplinary findings.
Recommendation 22: BCFSA impose a positive obligation on real estate licensees to report suspected unregistered mortgage brokering to it. (Report: p.868) n In an industry where the financial incentives are oriented toward closing deals, the risk/reward calculation of participating in or turning a blind eye to abuses must be adjusted. n The regulator can impress on the profession the seriousness of failing to report by imposing appropriately serious
Recommendation 24: BCFSA work with the new dedicated provincial money laundering intelligence and investigation unit to develop an information-sharing partnership. (Report: p.870) n A provincial law enforcement agency with a clear anti-money laundering mandate is needed to take up investigations at points where a regulator’s jurisdiction, mandates and/
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or capacity ends. Effective sharing of information and insights will permit the identification of money laundering vulnerabilities within each regulator’s area of responsibility.
Recommendation 25: The provincial Minister of Finance urge her federal counterpart to make mortgage brokers reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). (Report: p.870) n PCMLTFA applies to reporting entities. Mortgage brokers are presently not included in the definition of a reporting entity; hence, they are not required to report suspicious transactions even though they are in a position to observe them first-hand.
Recommendation 26: The Province create a positive obligation on mortgage lenders to make source-offunds inquiries of investors providing capital for the lending business if such obligations are not included in the federal reforms to the PCMLTFA and associated regulations. (Report: p.886) n Private lenders are vulnerable to facilitating, unwittingly or otherwise, money laundering either by lending out funds that are the proceeds of crime, or by providing financing to borrowers who are dealing in the proceeds of crime.
Recommendation 27: The Province amend Form B (the form for registration of a mortgage under section 225 of the Land Title Act) so that all legal owners of mortgage charges are reported, and that this information be available through the land titles registry. (Report: p.887) n This can address, for example, the situation where the Form B lists a person who administers the mortgage as the lender but the person in fact has syndicated the loan by way of agreements with the real lenders. n Not requiring the real lenders to be identified on the Form B is a
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barrier to regulating mortgage lenders and may encourage money laundering.
n The Province should be able to determine who is engaged in
Recommendation 28:
Recommendation 31:
The Province amend the definition of “interest in land” in the Land Owner Transparency Act (LOTA) to include mortgages, in order to ensure that the beneficial owners of a charge cannot obscure their ownership. (Report: p.891) n LOTA presently does not include mortgages; hence, the true lenders can hide their involvement in mortgages.
The Province implement a mandatory source-of-funds declaration to be filed with the court in every claim for the recovery of a debt, such that no action in debt or petition in foreclosure can be filed (except by an exempted person or entity) in the absence of such a declaration. (Report: p.912) n The court would then not be used as a tool to collect illicit funds.
Recommendation 29: The Province enact legislation directed at private mortgage lenders providing for registration, oversight, and enforcement. This regime should be separate from the scheme applicable to those engaged in brokering loans. (Report: p.892) n It is not intuitive that lenders are included as mortgage brokers under the MBA. n There is apparent confusion over when the MBA applies to private lenders – not just among registrants but within the regulator itself.
Recommendation 30: The Province ensure that the regulator of private mortgage lenders has access to land title data, including new mortgage registrations, in a form that allows it to identify private lenders that ought to be registered with the regulator but are not. (Report: p.902)
private lending and should be registered with the regulator.
Recommendation 32: The Province enact legislation authorizing the court, in its discretion, to refuse to grant the order(s) sought by the plaintiff in a debt action or foreclosure petition if it is not satisfied that the declaration is truthful and accurate, or if it concludes that the funds advanced by the lender were derived from criminal activity. (Report: p.913) n As above, the court would then not be used as a tool to collect illicit funds.
Recommendation 40: The Land Title and Survey Authority make information about historical mortgage and property ownership available through an online search. (Report: p. 951) n The availability of a person’s historical property ownership and mortgage lending is valuable information for anti-money laundering purposes, as it provides records of the movement of wealth. n Historical searches are presently available in-person at the Land Title Office but not online.
Recommendation 41: The Province amend the Land Title and Survey Authority’s enabling legislation to direct the collection of information on real estate agents and mortgage brokers involved in a property transaction. At a minimum, this information should be available to the Ministry of Finance, the British Columbia Financial Services Authority, law enforcement, and other federal and provincial agencies with an anti-money laundering mandate. (Report: p.952) n An ability to track the participation of individual real estate agents and mortgage brokers across transactions would be a useful tool for regulators (see Chapter 16). In certain cases, it would also be useful to law enforcement.
CONCLUSION Mortgage brokers need to remain informed as some or all of these recommendations are enacted into legislation by the B.C. government or other governments. The potential for the mortgage brokering landscape to be very changed is considerable. CMB MAGAZINE
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industry profile
Terry Kilakos is a big proponent of educating mortgage consumers about the biggest financial transaction most of them will ever make BY LISA GORDON
E C I
A PASSION FOR E
F
rom mechanical engineering technology to computer network design and even a stint in the Canadian military, Terry Kilakos followed a winding career path before joining the financial services industry more than 16 years ago. After studying mechanical engineering technology, he turned his attention to computer network design, did a lot of travelling and spent a couple of years in the Canadian Armed Forces. The lure of entrepreneurship prompted him to open a couple of businesses. After a mix of success and failure, he went back to school and became a real estate and mortgage broker, later deciding to shift his attention to mortgage brokering. He continued to follow his educational path by getting licensed as an agency executive officer and obtaining international business certificates from both Harvard and the New York Institute of Finance. In 2006, Kilakos joined Multi-Prêts in Montreal, where he stayed until 2011. Today, he is president and CEO of North East Real Estate & Mortgage Agency as well as Coldwell Banker in Quebec. While running his businesses, Kilakos turned to the banks for financial assistance, but found little support. “I had lots of potential, but nobody was willing to take a chance on me,” he said. “From the first client I had as a mortgage broker, I realized that I could actually help people. I could help educate them on how to be more successful with their finances, with their credit and with restructuring some of their cash flow. I found a career at which I could earn a good living while actually helping people. I found something I could be passionate about.” That passion and experience led him to a secondary career he had never envisioned. One day in 2008, Kilakos was invited to be a guest on CJAD, a local radio station in Montreal. His first appearance went well and he was asked to fill in on a call-in show after a guest had to cancel. “Once I started fielding calls, I became increasingly comfortable. The host asked if I would consider coming back as a regular guest every month or so,” he recalled. Kilakos’ appearances were successful enough that the station asked him to do his own show, “The Real Estate Show,” which started in 2009.
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“It was the ability to educate people that spurred me on,” said Kilakos. “We talk about mortgages, we talk about real estate and credit, and we help people understand what it means to buy real estate and to get a mortgage. By providing that education to the public, they gravitate to us and end up doing business with us.” The successful show can also be found on Facebook and Spotify as a podcast. After all these years in the industry, Kilakos has simple and straightforward advice for other mortgage agents and brokers: “Stay up to speed on every single thing that’s going on in the industry. You can’t take for granted that a customer knows what you’re talking about. Each customer has to be treated as if you are giving them a mortgage lesson. If we’re not on top of everything, we can’t teach them properly.”
RATES VERSUS SOLUTIONS Kilakos feels that the top issue facing the Quebec mortgage industry isn’t unique to Quebec at all. “There’s a huge disconnect in that customers have been miseducated by
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There’s a huge disconnect in that customers have been miseducated by society, by the media, and by the banks to believe that the most important part of their mortgage is their interest rate.
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society, by the media, and by the banks to believe that the most important part of their mortgage is their interest rate,” he explained. “I often get calls from clients saying, ‘I hear that you can get me the best interest rate.’ But really, what I can promise you is that I will provide you with the best solution for your needs. Each solution is different for each client. I think education has to be at the forefront for clients. As mortgage brokers, if we’re not able to address that, our market share isn’t going to grow.” As for the role of mortgage brokers in the future, he added: “As people are educating themselves, they begin to realize that the traditional brick and mortar type of mortgage business is not the end-all and be-all. The brokerage role is going to grow more and more. As we’ve seen in the last few years, people have started to gravitate more to brokers than to banks. My fear with this is that it may open up the door to more people entering the industry with an eye solely on making money. This will lead to a huge disservice to the clients and the industry as a whole.” In his limited off hours, Kilakos loves to spend time with his wife and three sons, taking advantage of his well-earned down time with family. He also loves competitive shooting, flying and scuba diving. When asked about future career plans, he noted that expansion into other provinces is key, especially in light of Bill 96. He recently became licensed in Ontario and expects the business to expand into British Columbia and New Brunswick in the near future. Kilakos concluded with a plug for industry associations like the Canadian Mortgage Brokers Association (CMBA). “As licensed brokers, we need a place to have our voice heard when educating the public, but also governments,” he said. “I’ve met with many Members of Parliament who don’t understand the subtleties of the stress test. They’re shocked when I give them the numbers that they would qualify for. This is where we, as the professionals, need to be able to address these issues with the government.”
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According to Kimberlee Freeman, CEO and founder of KMF Enterprises, there are important factors to consider. Based on her 24 years of experience, Freeman said more transparency between brokerage houses and the agents working under their umbrella is needed. She believes the mortgage agent training course should include detailed information on how brokerages are typically structured. “A new agent has absolutely no idea where to begin,” she told Canadian Mortgage Broker magazine. “Brokerage houses must be clear and show what they are offering, so agents understand. It would be great to have education somewhere in the mortgage training course. When they get licensed, there should be a checklist of key items that agents should ask about – including case studies of different types of brokerage structures.” Freeman is past president and chair of education for CMBA Ontario and the current treasurer and chair of national education for CMBA National. She said the issue is so important that the Ontario chapter created a checklist to help mortgage agents link up with the right brokerage house. After all, both the brokerage and the individual agent are looking for the right fit. “How do you investigate a brokerage to make sure they are someone you want to join? Google them and have questions ready for them. Who are the leaders? Check them out; do your research. When you do approach them, you will be prepared,” she advised. Some of the many questions to ask include clarification on the house fees and what services they include – proprietary software, marketing materials, technical support and structured mentorship, for example. How are an agent’s credit bureau fees charged back to them? What is the commission split and how are volume bonuses handled, if applicable? “And, here’s a big one,” said Freeman. “What happens if an agent decides to leave? What is the exit process and what happens with their book of business, or CRM? These are all important questions.”
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BEGIN WITH THE END IN MIND According to mortgage industry veteran Dustan Woodhouse, author of the Be The Better Broker series of books and president of Mortgage Architects in Vancouver, it’s best to begin with the end in mind. “When it comes to work, you shouldn’t enter into a contract without understanding how to get out of that contract,” he said. “It needs to be very clear. If this isn’t the right fit for me, how do we break up? If you wind up deciding to make a move six years from now, how will this play out? Are they organized, professional, is everything written down? Or, is everything kind of loosey goosey, smoke and mirrors? It could be a sign of a mess ahead. How it starts is how it ends.”
When it comes to client data, understanding who owns it is key. In general, Woodhouse said the Personal Information Protection and Electronic Documents Act (PIPEDA), the federal privacy act, supersedes any internal company policies. “A broker/owner should be following the rules. If they release your client data to you, which then goes to a new brokerage, they are technically contravening the act. So, you need to make sure you’re building your own database with your clients’ permission, so you have a copy of it. Don’t use a corporate email and don’t store everything on a brokerage server.” As with many situations in life, how you ask a question is often more important than the question itself. “I think the topic of splits is the first thing on an agent’s mind,” said Woodhouse. “In any role, you tend to want to know what it pays. But the question needs to be rephrased. Instead of asking what commission split the brokerage offers, you need to ask how the
split is calculated by the brokerage.” To illustrate, Woodhouse gave an example: “In our organization, for instance, let’s take a lender who pays 75 basis points plus 35 basis points in maximum volume bonus. We offer our brokers/agents a true 95/5 split. ‘True’ means that they receive 95 per cent of the total 110 basis points, or a net of 104.5 basis points. “Other brokerages may claim to offer a 95/5 split, but it’s actually 95 per cent of 95 per cent. Which lacks, to use the word of the day, transparency. It’s a bit ridiculous for a brokerage to claim this is OK given that their split simply represents overhead. And brokerages, like any business, have all kinds of other overhead. Yet, for some reason, they routinely base splits on the net of the split they are paying to the superbroker, to the house. Why not net of all operating expenses? Why not net of CRA as well? It creates a moving target, and it’s bad math. As I say, that five per cent split simply covers overhead in a neat and tidy number;
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payroll, compliance services, support staff on demand, E&O insurance, etc.” To Woodhouse, the lack of transparency in the basic math of splits is further compounded by how, in some cases, a lender’s volume bonus figures are modified by a few basis points here or there – or worse, kept secret. “All of this is reflective of bad math and bad business, and it’s very misleading.” He also said agents should inquire about a brokerage’s involvement with industry associations. Some firms make it mandatory for their agents to join associations like CMBA. Others are not members themselves and so do not require it. “From day one, I became a member of my provincial and national mortgage broker associations,” said Woodhouse, who joined the industry in 2008. “I think it’s very important that we support these associations so that our industry has a voice. Plus, there is the education and networking piece, in addition to government relations.” The number one thing agents want from their brokerage is support, he said, but they don’t really understand what they will need until they are deep into a file. “It’s difficult to ask about this up front, when you don’t know what you don’t know. So instead, you can ask, ‘What regular training and meetings do you offer to support me in my path to become a skilled mortgage agent? How will you help me grow?’ ” Like Freeman, Woodhouse said agents must interview the brokerage and remember that the brokerage works for them. “They are interviewing you because you need to be a good fit. But don’t lose sight of the fact that they work for you.” Also, don’t be afraid to wade into the weeds when discussing potential brokerage agreements, to understand what ancillary costs and services come with the deal. For example, are credit bureau fees charged monthly or on an à la carte basis? What house fees are mandatory and what do they include? In terms of support, does the brokerage have dedicated IT and marketing divisions? Do they offer training in how to present mortgage commitment and compliance documents? “Most brokers are just thrown in the deep end,” lamented Woodhouse.
CLEAR EXPECTATIONS Nick Talib, president, CEO and broker at Lend at Ease in Vaughan, Ont., provided further insight into the brokerage perspective. He agreed that transparency, training and communication are key factors to a successful broker/agent relationship. “We really train newer agents here,” he said. “We’re not shy to hire agents and shape them the right way. We’ve had an influx of agents coming to our industry during the pandemic. They saw the market on fire; a great way to make so-called easy money. There has to be a clear expectation from the get-go.” He said the commission split has always been a big topic. “First of all, it’s important to remember that brokers/owners are also here to provide support to our team and have a sturdy business,” said Talib. “Some agents that approach us want a high split. But I want to know, what kind of value will you provide me off the hop? Let’s put it on paper. Every brokerage should have an agreement to set the expectations from the beginning.” Additionally, when it comes to business development, Talib recommends clarifying brokerage policy. “Some agents ask, ‘Do you provide leads?’ First of all, I’d argue that when someone reaches out to the brokerage those are not really leads – they are inquiries,” he continued. “Some brokerages will promise these leads, but I’m not sure I’m in favour of it. Sometimes agents might rely on that instead of devel-
5 QUESTIONS FOR BROKER INTERVIEWS 1. How will my split be calculated? 2. Do you pay volume bonuses to agents? 3. How much are the house fees and what do they include? 4. What regular training and support do you offer? 5. Can I take my client list with me if I leave?
oping their own network and relationships, which is what this industry is all about.” Talib also feels volume bonuses should be earned as opposed to simply handed out. “If someone is only doing one deal a year, why should they earn a volume bonus? But the door should remain open to revisit this topic as the relationship progresses.” He, too, has heard of multiple disputes where an agent wants to leave a brokerage and feels they should be able to take a copy of their client list with them. “That will need to be stipulated somewhere in the brokerage agreement,” he advised. “There is nothing in the regulations that states we must give the CRM clientele back to you as an agent. The way it’s supposed to work is that agents ask about it up front, when they join, and it would be part of our contract.” All brokerages are required to have their policies and procedures clearly outlined, Talib said, and they should be provided to all agents. “If they can’t produce them, well… that says something right there.”
COMMUNICATION IS KEY Poor communication is the number one reason why brokers and agents part ways, according to Dustan Woodhouse. If things are spelled out clearly in the beginning, both parties can make the decision that is best for them. “If you’re going to keep the lender points for the house; if you’re going to skim off basis points from certain lenders, be open about that,” he said. “State the facts. I field calls every week from disgruntled agents who can’t believe their brokerage has kept thousands of dollars from them without their knowledge. The trust is gone. They wonder: What else have you not told me?” However, when the terms are clear, there’s no better place for a new mortgage agent than under the umbrella of an established brokerage. There, they can learn and perfect their craft before potentially striking out on their own. Woodhouse offered a final piece of advice: “People who are just starting out and want to start their own brokerage on day one, this is a really bad idea. Rather than repeat others’ expensive mistakes, get some guidance under a big corporation and grow from there.”
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Cooling-off period could turn up the heat for sellers BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC
THE BIG CHILL THE PROBLEM
A couple finally locates one of the few properties on the market that suits them, they make an unconditional, well above the asking price, outside of their financial comfort zone offer. They think this is necessary to compete with other interested buyers. They win the prize – the seller accepts their offer. What now? A little buyer’s remorse sets in. Was the next best offer way lower than theirs? Will they be able to get a mortgage for the amount they need to close the transaction? Will their due diligence disclose property defects that will significantly add to their cost of ownership or make potential lenders balk at lending (such as soil contamination, mould or foundation damage)? Will their lawyers identify something on title that makes the property problematic for them (such as building restrictions)? If they do not close the deal, will they be sued for breaching their purchase contract? This couple’s circumstances are far from unique. Many homebuyers face remarkably similar pressures and concerns.
GOVERNMENT RESPONSE Governments have been targeting housing affordability – arguably ineffectively and sometimes in a misguided manner. For example, the federal government’s housing plan provides some assistance to first-time buyers, but it is insufficient to remove the substantial hurdles for those who cannot get into the market in the first place (see: “Liberal Government Housing Plan – A Home for Everyone” Canadian Mortgage Broker, Winter 2022, p.30). At best, it will slightly help those on the fringe of affording a purchase. Likewise, the B.C. government’s intention to address money laundering, while important for other reasons, proved to be misguided as a step in making housing more affordable. The Cullen Commission’s final report to the B.C. government (see: “Cullen Commission recommends major changes to mortgage brokering” p.12 of this issue) concluded at p.959: … money laundering activity is not a significant contributing factor to housing unaffordability. It seems that fundamental factors such as supply and demand, population, and interest rates are far more important drivers of prices. And at p.960: …. Anti-money laundering measures should not be considered a “silver bullet” that will somehow fix housing unaffordability in the province. On November 24, 2021, the B.C. government announced – in an effort to control housing prices and otherwise protect real estate purchasers – it would be introducing legislation requiring 22
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a cooling-off period for residential real estate purchases. That legislation has the potential to dramatically change the process of buying and selling residential properties. It would adjust the power balance between buyers and sellers, possibly overly so, and put the seller at a significant disadvantage. In addressing a set of problems for the buyers, the government may very well be creating a fresh set for the sellers. Other provincial governments are undoubtedly watching.
B.C.’S ‘COOLING-OFF’ LEGISLATION The B.C. government is in the process of putting legislation into place to protect buyers from circumstances that cause them to overpay (in relation to what the next highest bid would be) or take unreasonable risks (such as not making offers conditional to due diligence regarding the state of the property and the availability of financing). The Legislature on April 25 passed Bill 12-2022 Property Law Amendment Act, 2022. If brought into force, the amendment would: n apply to residential real estate sales only; n apply to private sales (that is those not involving real estate agents) as well; n give buyers a right to rescind a purchase contract by serving notice on the seller within a prescribed number of days after the date on which the offer was accepted (Note that the sellers are not given any right to rescind an agreement); and n give Cabinet the right to make regulations
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concerning, among other things: • waiving the right to rescission; • an amount to be paid by the purchaser to the seller if the purchaser rescinds the contract; • the timing and procedures for paying deposits; • payout of the deposit upon rescission, including whether a portion is to be paid to the seller, and a dispute resolution process, in relation to the return of the deposit; and • exempting classes of residential real property, purchasers, or contracts from rescission. B.C.’s financial services regulator, BC Financial Services Authority (BCFSA), sent its report “Enhancing Consumer Protection in British Columbia’s Real Estate Market” to government on May 22, 2022. The terms of reference for the report were to: n consider appropriate parameters and provide advice for implementing a cooling-off period, including the appropriate length of the cooling-off period and whether there should be a penalty for exercising the right to walk away; n examine blind bidding and other practices that may be identified as consumer protection risks; and n examine rules, requirements and other activities related to the process of buying a home including those related to condition waiving, such as: • home inspections; • financing; and • other conditions. The terms of reference did not ask BCFSA to report on whether a cooling-off period was an appropriate measure. In making the reference, the government had already decided it was an appropriate measure. Nor was BCFSA asked to report on issues relating to housing affordability. At the outset, we should note several misnomers concerning the report. Firstly, the report (including in its title) refers to protections being enhanced. That may be true from the buyers’ perspective, but a seller is more likely to think that the changes create new limitations and risks for them. Secondly, the report speaks of protecting consumers. However, it considers only the interests of the buyer in single transactions. That is far too narrow a definition of consumers. It would be more accurate to consider that real
transactions often occur in a chain, where the seller in one transaction uses the proceeds to be the buyer in the next transaction in the chain. That seller/purchaser is in very real sense a consumer worthy of protection. Thirdly, the report ignores the fact that other would-be buyers of the property are also consumers. The report does not truly protect their interests. For example, it does not give due weight to the fact that their position may be prejudiced by the fact a prospective buyer may put in an extravagant offer only to rescind it later. This can alter the expectation of the seller as to what a reasonable offer should look like. The report made recommendations in three categories: n Parameters of a cooling-off period n Additional measures to address risk associated with unconditional offers n Potential alternatives and enhancements to blind bidding
PARAMETERS OF A COOLING-OFF PERIOD The report considers the inappropriateness of the term “cooling-off period” and embraces instead the term “homebuyer protection period.” This is probably appropriate as many of the changes have to do with the buyer having time to perform due diligence rather than coming down from some heated, delirious or compromised state during which they could not think rationally. Of note is that the Property Law Amendment Act, 2022 appropriately does not refer to a “cooling-off period,” and the term is no longer used extensively in government communications. The report recommends the following six parameters of a cooling-off period for government to implement. The buyer should have three clear business days to rescind the contract, starting on the day after the seller has accepted the offer to purchase. The report indicates this would balance minimizing the marketing delay caused for the seller with time for the buyer to do some due diligence. Unfortunately, this balance does not substantially assist the buyer as very little due diligence can be completed within three days. For example, arranging financing, obtaining a home inspection report, and meeting with a lawyer who has the opportunity to obtain and review relevant information all will generally take well over three
days. A little due diligence, or just getting started on performing due diligence, is of limited help to a buyer. On the other hand, unfortunately the report oversimplifies the seller’s interests that are compromised by the delay. Would-be buyers may move on to other properties. The reduced number of interested buyers may reduce the price the seller ultimately obtains, assuming the initial buyer rescinds the agreement. The seller might be delayed or otherwise prejudiced from proceeding to purchase a property in which they are interested. The buyer should not be able to waive the cooling-off period. The report indicates this recognizes the importance of the cooling-off period (that is providing time for the buyer to perform some due diligence) and ensures a level playing period. Unfortunately, the report ignores that the balance between buyers and sellers may be vastly different in a buyers’ market. In such a market, the interested buyer could make the accepted offer, ward off other interested buyers who then move on, rescind the agreement, and renegotiate with the seller who then has much less negotiating power. The cooling-off period should apply to all residential properties with narrow exemptions based on characteristics of the sale process. The Property Law Amendment Act, 2022 would already exempt contracts where section 21 of the Real Estate Development Marketing Act already provides the seller with the right to rescind the contract. Fortunately, the report recommends further exemptions (including court order sales, sales by auction, and sales where a buyer has previously made an offer to purchase the same property within a prescribed time period). The list is not extensive enough. Some buyers do not need the protection of government in making an offer and such protection could be viewed by them as patronizing. Perhaps a plainly worded, standard form, notarized certificate setting out the rights the buyer is waiving and risks being taken on should be sufficient. The buyer should pay a modest termination fee (such as between .1 and .5 per cent of the purchase price) to exercise the right to cool off. The report indicates this could prevent frivolous offers and it would recognize the disruption to the seller. It suggests consideration be given to not requiring the payment of the continued on page 26 CMB MAGAZINE
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homebuyer protection period
termination fee where a buyer who exercises their right to cool off can demonstrate that they identified legitimate concerns in performing due diligence. While the concept suggested by the report appears appropriate, determining how significant and real the concern must be for a buyer to rescind an agreement is likely to generate much case law. Even in the absence of such legislation, courts have long distinguished what defects are latent versus manifest (not discoverable with reasonable prudence versus discoverable with reasonable prudence) and material versus immaterial (enough to warrant rescinding the contract versus too trivial to warrant rescinding the contract). While the concepts are easy to state, applying them is far more challenging. The legislation would do nothing to ease the challenge and would make it arise more frequently. Consideration should be given to requiring buyers to make a disclosure to sellers of any other offers that they have made that are currently active. The report indicates this disclosure would provide information to the seller to guide their decision-making about accepting the offer, given the potential that the buyer may walk away from the purchase for reasons other than the results of their due diligence inspections. It may also give buyers pause in submitting multiple concurrent offers or prompt sellers to query prospective buyers about whether they are seeking to purchase multiple homes. This seems consistent with the report’s view that disclosure between the parties is appropriate. On the one hand, this requirement appears to go too far by requiring buyers to give up personal information for the sake of making an offer. On the other hand, it appears to not go far enough. If sellers are to be required to show their entire negotiating hand, perhaps the same should be required of buyers. Perhaps buyers should have to demonstrate that they can afford to close on the purchase by disclosing their financial circumstances, bank approvals for loans and so forth. After all, the lender is throwing the dice that the buyer they accept will be able to close the transaction; should they not have full disclosure to minimize their risk? There should be an explicit requirement for sellers to provide reasonable access to the property for professionals engaged 26
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by or on behalf of the buyer to perform due diligence inspections. The report sees this as being necessary to allow due diligence to be performed. No issue is taken with this recommendation. For any agreed upon due diligence to be performed in a meaningful way, whether by agreement or imposed by legislation, access needs to be given.
ADDITIONAL MEASURES TO ADDRESS THE RISKS ASSOCIATED WITH UNCONDITIONAL OFFERS The report (under this heading) makes recommendations concerning property disclosure forms, conditions, pre-offer periods and disclosure of strata documents.
Property Disclosure Forms A property disclosure is a document completed by the seller that provides information specific to the property being sold. The report recommends requiring sellers to provide a prescribed property disclosure filled out to the seller’s best knowledge and ability, at the time of listing/offering for sale, for all properties subject to the cooling-off period. The recommendation includes ensuring that the property disclosure be incorporated into the contract of purchase and sale. The report recognizes that requiring disclosure in certain circumstances would be inappropriate and suggests considering exemptions in situations such as foreclosure or court-ordered sales, newly constructed property that has never been occupied, sellers with cognitive impairments, government transfers, properties that pose health and safety risks where demolition is intended, and non-owner-occupied properties. Frankly, the exemptions are unnecessary. If a seller is required to complete the form to the best of their knowledge and ability, they should merely be required to list any factors that limit their knowledge and ability. The buyer can then understand the completed form with those limitations in mind. The form should not apply to manifest defects. The buyer is able to discover these on their own and should be required to do their part.
CONDITIONS Conditions are clauses in an offer to purchase that provide specific conditions that must be fulfilled before a contract of purchase and sale is considered binding for the buyer and seller.
The report recommends requiring all contracts of purchase and sale for residential real estate to contain standard, optional conditions clauses related to financing, home inspection, insurance and legal advice. One might wonder what this adds to a contract already with a cooling-off period, mandatory property disclosure, mandatory access and so on. It could give notice to the seller as to the types of due diligence for which they have to provide access and may limit the buyer’s ability to avoid a penalty if they back out for some other reason. If such clauses are to be included, they should be worded to set thresholds (types of defects that are material enough to warrant rescinding the contract). For example, should the buyer be disqualified from relying on the financing condition if financing of a principal amount, specified rate, term and other key conditions stated in the contract is made available? Should the buyer be disqualified from relying on the inspection condition unless the inspection discloses a defect that would cost more than an amount specified in the contract to fix? Should the buyer have to obtain a certificate from the legal advisor specifying a valid and significant basis for relying on the condition relating to legal advice?
PRE-OFFER PERIOD (MINIMUM TIME ON MARKET) The report recommends implementing a “pre-offer” period (minimum time on market) of five business days, in combination with a cooling-off period, to provide adequate time for prospective buyers to perform due diligence on properties and to prevent the practice of bully offers. The time is to start from when the property is listed or offered for sale. This would amount to an eight-day period (five days pre-offer plus three days of cooling off) before a binding offer can be in place. At the very least, this recommendation needs to be worded so as to apply only to publicly offered properties. Many properties are sold/transferred without ever being listed or publicly offered for sale. Family transfers and private transactions between acquaintances are examples.
DISCLOSURE OF STRATA DOCUMENTS The report recommends requiring sellers of resale strata units to provide key strata documents
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to prospective buyers at the time of listing or marketing their property for sale. At a minimum, this should include Form B: Information Certificate, Strata Corporation Bylaws; and two years of Strata Council minutes, including annual general meeting minutes. It also recommends requiring sellers of resale strata units to provide prospective buyers with an updated disclosure of strata documents if there is a material change between listing or marketing their property for sale and the date on which the contract for purchase and sale becomes firm or binding. The forms determine the strata fees that owners are required to pay each month for expenses related to maintenance and repair, insurance and the contingency reserve fund. A buyer considering a strata property may want to know if there are any restrictions on pets, rentals, age or ways in which the unit can be used. They may also want to know how much money is in the contingency reserve fund, the condition of the strata corporation’s assets, when the assets are expected to be repaired or replaced, what parking or storage owners are entitled to, and how the strata property is managed. These documents take time to obtain. Making them mandatory from the outset avoids that delay. The report is very correct on this point. The information, rights and obligations contained in these forms is very much part of the package the person would purchase. Providing the information upfront could only prevent otherwise inevitable delays.
POTENTIAL ALTERNATIVES AND ENHANCEMENTS TO BLIND BIDDING Blind bidding is a term commonly used to describe an industry practice in which a prospective buyer submits an offer to purchase a property without knowing any information about the content of competing offers from other prospective buyers. The report says that this lack of transparency in real estate transactions can skew the perception of market fairness and potentially lead to distrust of the real estate transaction process. This includes concerns that: n buyers are overpaying by offering a price that significantly exceeds the next highest offer; n all offers are not presented to the seller; and 28
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n sellers and their agents are misleading
prospective buyers about the number or content of offers on a property, with limited potential for being discovered. Blind bidding may also contribute to rapid price escalation as the price of subsequent home sales in the area are based on, among other things, recent sales. This can lead to inflated valuations.
Open bidding The report recommends that the government further explore open-bid/open-end auction formats used in Scandinavian countries to increase transparency during the offer process. It recommends that the exploration include additional research to identify the implications of open-bid/open-end auction formats and real-time disclosure of offers on sale prices and housing affordability. The report further recommends that as a measure to enhance transparency, consideration be given to implementing a disclosure in multiple-offer situations where prospective buyers are asked to compete directly against another buyer’s offer following an initial round of offers (that is, during a bidding war). In these situations, an anonymized disclosure of the number of legitimate offers and the price of competing offers could be provided to the prospective purchaser on invitation to submit a second offer or on counter-offer from a seller that is intended to solicit a higher price in reference to a competing offer. Both models end when no more bids appear. In comparison to blind bidding, these models provide a high degree of transparency to prospective buyers regarding the number and content of competing offers.
Enhancements to blind bidding: Disclosure of offers in multiple offer situations The report recommends requiring sellers to provide an anonymized disclosure to all prospective buyers who submitted an offer once an enforceable contract is in place. At a minimum, this disclosure should include the number of offers, the representation status of prospective buyers, including the real estate brokerage involved (if any) and the sale price. The report states that this type of disclosure could increase confidence in the real estate transaction process by providing assurance to unsuccessful buyers that their offers were presented to and considered by the seller. As
well, it could verify information that may have been shared during the offer process about the number of prospective buyers and/or the substance of their offers. With respect, the assumption as to fair market value the report must be using in making these recommendations as to potential alternatives and changes to blind bidding is a marked departure of how that term is applied in our society. Market value generally involves the amount a buyer is willing to pay and a seller is willing to accept for selling the subject property, based on how the subject property compares to other properties that have recently sold in that market. In effect, it is a version of the basic supply and demand concept. In contrast, the report assumes fair market value as being marginally above the value assigned by the person who is the second most willing buyer. We have historically referred to comparable properties in determining a property’s value; the report would have us instead refer to comparable potential buyers. A marked departure from basic economics indeed.
TAKEAWAYS The cooling-off legislation involves far more than allowing time for buyers to come down from an altered state to more rationally consider making an offer to purchase a property. More accurately, it is legislation that would allow the buyer time to perform due diligence, require the seller to make mandatory disclosures (some of which are warranted and others which need to be further detailed before an assessment can be made), and alters the balance between buyer and seller in agreeing to the true market value of the property. To the extent the legislation provides greater protection for the buyer, it does so at the undue expense of the seller. Unfortunately, the legislation does not address the root cause of unaffordability of housing – that is, there is a dramatic shortfall in supply to meet the demand. Until that root problem is addressed, properties will continue to rise in price accordingly, and buyers will continue to stretch themselves thin in pursuing purchases. Postscipt: The B.C. government is proceeding with a mandatory three-day homebuyer protection period to come into effect on January 1, 2023. It includes a rescission (cancellation) fee of .25 per cent of the purchase price.
SAVE THE DATE CMBA-ON and CMBA-BC 2023 Conferences are on the calendar Ready to go back to a live industry event? In-person broker events are finally back in full force across the country! Ranging from speed networking sessions and live symposiums to trade shows and golf tournaments, mortgage brokers and industry partners are reconnecting and enjoying the camaraderie across our industry. After two-years of connecting online, CMBA-Ontario held its Gala, Conference & Trade Show at the Universal Event Space, in Vaughan in April. Both events crushed attendance expectations with more than 400 people joining in the fun of the Gala and over 650 attendees talking business at the Conference & Trade Show. In 2023, these events will be held on March 29-30. CMBA-BC’s annual Conference & Trade Show is on target to take place on May 8 and 9, 2023, at the Vancouver Parq Hotel and Casino. Mortgage brokers and industry partners are eager to get together again to learn, reconnect and celebrate as an industry. With its awards, marquee speakers and unparalleled access to leading exhibitors, this event is surely one to mark on the calendar.
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brokers off-the-clock
Mortgage broker Carey Benvenuti has nailed the recipe for giving back to her community BY LISA GORDON
COMMUNITY
S
ix years ago, Carey Benvenuti was building the interiors of high-end hotels and restaurants in New York and Washington, D.C. Today, she’s constructing mortgage deals that put people in homes. And, when she’s not working as a team lead with Mortgage Architects in St. Catharines, Ont., Benvenuti is busy feeding hungry people in her community. It all started in 2017 when she began volunteering on The Salvation Army mobile outreach trucks, which deliver hot meals to communities in need six days a week. She quickly realized there were gaps in what they could provide, and she set out to help. “I found a certified kitchen, got a few girlfriends together, and got everybody to bring a pile of ingredients,” said Benvenuti. “Back then, we weighed the trays, and that first night we made about 450 pounds of food, which we donated to The Salvation Army. “What I realized was that you get so much back when you give. We just felt like a million dollars afterward. That’s how ‘No One Goes Hungry’ was born. It’s my own grass roots initiative. I just gave it a name so we could create a Facebook page, and it’s just grown from there.” Today, having prepared almost 200,000 meals, Benvenuti’s initiative is very well known in the Niagara community. With anywhere from 25 to 30 people joining her, the group cooks as much food as possible from an industrial kitchen generously donated by the Stamford Centre Volunteer Fire Association.
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COOKING They also support two local high schools. “I had the mayor of Niagara Falls reach out to me and ask if we could support a local high school, where about 70 per cent of the kids live below the poverty line,” said Benvenuti. “They weren’t coming to school with a lunch and they often weren’t going home to a dinner. I committed to doing it, although I didn’t know how I was going to pull it off. We just started preparing food, much like we did for The Salvation Army. Anything that was left over was packaged for the kids to take home for dinner that night.” She now provides meals for 65 students each day and has helped create a pantry at one of the high schools, where students can pick up snacks and basic toiletry items. In total, the team of volunteers helps up to 2,000 people each month. Not
TOP LEFT: ADOBESTOCK; ALL OTHERS: SUPPLIED
surprisingly, the demand did not decline during COVID-19 lockdowns. Benvenuti partnered with a Mississauga organization called ‘Care for Cause.’ Together, they delivered 800 meals a week to people on the streets and in their homes. Still, the calls for help are only increasing. “I have to be careful not to exhaust myself,” said Benvenuti. “I have a husband and four children, but I could cook every day and it would still not be enough help.” Food insecurity continues to be a huge problem in the Niagara region, and Benvenuti has seen requests almost doubling. “There isn’t a whole lot of industry in Niagara, so a lot of people work in the hospitality sector, which is just starting to gear up again,” she explained. “I see a lot more requests for help than we ever have in the past. With existing housing issues, a lot of families are living in
“
You make time for what is important to you, and the biggest gift of giving back is to yourself.
Above: Volunteers gather and prepare food to support people who need a meal.
motels, out of a bar fridge and a hot plate, maybe a microwave oven, and that is a predominant issue within the Niagara region.” Benvenuti comes by her desire to help from her own personal experience. “I moved out of the house at a very young age, and I was helped out by a family who really taught me the importance of giving back,” she said. “Helping other people became a core value for me at a very young age. I’ve always donated my time and money to give back, in whatever capacity I can.” With no charitable status, and increasing costs due to inflation, Benvenuti is determined to continue expanding her efforts. “It’s just not something I could ever give up. There are just too many people and organizations that depend on the food that we cook every month. We try to take some time off in the summer, but we’ve also committed to supporting the YWCA and YMCA shelters,” she said. “A few people within the broker community have been very generous and I have a really good core group of volunteers that come out every month ‒ but all of the planning and execution is done by myself, including the shopping, planning, organization, menu planning and most of the delivery. It comes out to about an additional three to four days per month, which isn’t crazy. “You make time for what is important to you, and the biggest gift of giving back is to yourself. I only operate on one speed, and that’s Mach 1000 per cent.” This interview with Carey Benvenuti continues our series Brokers off the Clock. In every issue, we ask a mortgage broker to tell us what they like to do when they’re not behind a desk. Be it working with animals, travelling to exotic places or researching your family roots, we want to know how you unwind. Would you like to be profiled in a future edition – or suggest a fellow mortgage broker? Contact info@cmba-achc.ca
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As the source of loans shifts, lenders and brokers must understand the additional risks
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lending issues
GET UP TO SPEED ON LENDING ISSUES
This article discusses concerns about private lenders with less knowledge, sophistication and experience. The discussion is not intended to include those lenders who are knowledgeable, sophisticated and experienced [for example, the overwhelming majority of mortgage investment corporations (MICs)].
R BY TIMOTHY LACK
ecently, the Bank of Canada signalled that interest hikes will become the new norm to help combat inflation. These rate increases have started, and experts predict there will be plenty more to follow. But the constant and insatiable need for cash never stops, and the source of loans will likely shift as traditional lending sources become increasingly unavailable to many Canadians. Individuals may turn to private lenders if they want a second mortgage that provides a quick cash infusion. However, mortgage brokers and lenders must understand (and be prepared to explain) how private lending tends to carry additional risks not seen in a traditional first mortgage transaction. There are many legal and factual situations that illustrate the unique risks these mortgages carry, including: n Lenders with less restrictive lending criteria; n Lenders accepting borrowers that banks would normally avoid; n Lenders with less lending sophistication and/or underwriting prowess; n Borrowers with unstable forms of income such as non-salary, fluctuating levels of income, self-employed, contract work, etc.; n Borrowers with poor or no credit history; and n Parties pushing, with a heightened sense of urgency, to complete the transaction. These issues complicate what would otherwise be more straightforward in a first mortgage. Parties on both sides – borrower and lender – will approach brokers with varying levels of knowledge, sophistication and experience. Be mindful that some borrowers may come with heightened desperation and an unsophisticated private lender may do very little, if any, real due diligence and will bank on their agents/brokers/lawyers to “do it right” and “keep them safe.” In my experience, the broker role in a private mortgage is significantly more pronounced and the “handholding” is in effect right up to funding. Are you ready for this changing role? As you review the situation in a private loan transaction, a compelling picture emerges depicting the greater risks of second and private lending. And this does not even consider the very real and increasingly prevalent element of fraud. I cannot emphasize enough about taking safeguards to avoid fraud as it just takes one fraudulent transaction to throw your business into disarray. I lump identity theft, valuation fraud and undue influence together in this warning. I have seen it. It’s real. Don’t get caught – brokers and lenders must take extra care and exercise greater vigilance.
ADOBESTOCK
PRIORITY ISSUES: MITIGATE THE LOAN-TO-VALUE THREATS While other lending criteria are not always pushed aside, it is not a stretch to say that loan-to-value ratios are determinative for many private lenders. And of course, no lender wants their loan’s loan-to-value ratios to negatively change as the term of the mortgage progresses. Accordingly, protecting the priority position of the second mortgage transaction against future advances secured by a pre-existing (first) mortgage is of utmost importance. The available protection measures vary by province.
Alberta Alberta has a straightforward approach to priority issues. Section 104 of the Alberta Land Titles Act provides that a mortgage will rank in priority to a subsequent mortgage for all advances up to the registration amount, including subsequent advances, notwithstanding that the subsequent mortgage was registered. Any estoppel arguments for second mortgages to gain priority, such as actual notice, have yet to be tried in Albertan courts.
Ontario Ontario provides priority protection for second mortgages by way of actual notice. The lender of the subsequent (second) mortgage must ensure that the first or prior mortgagee receives actual (as opposed to constructive) notice in writing of the registration of said CMB MAGAZINE
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subsequent mortgage. This is required pursuant to s. 73 of the Registry Act and s. 93(4) of the Land Titles Act, which provide that such actual notice will allow advances to the subsequent mortgage to rank in priority to the first or prior mortgage. Actual notice must be provided in writing. Registration alone is not enough to constitute actual notice. Furthermore, the onus is on the subsequent charge holder to provide actual notice of registration to the first or prior lender.
British Columbia A Court of Appeal decision in British Columbia (see Forjay Management Ltd. v. 625536 B.C. Ltd., 2020 BCCA 70 (Forjay)) brought practical application from legislation to case law to legal practice for lawyers doing second mortgages. Section 28 of the Property Law Act (PLA) acts as the B.C. equivalent to Ontario’s protection provisions under ss. 73 and 93(4) of the Registry Act and Land Titles Act, respectively. More specifically, this Act allows a second mortgage lender to assert priority over further advances made by a first mortgage provided certain fundamental steps are taken. Also, like Ontario, note that an initial or preliminary request for information regarding the status of the first mortgage does not constitute notice under the PLA, and the obligation falls on the subsequent mortgage holder to give the prior mortgagee actual direct express and written notice of registration of the second mortgage registration. However, please note that while there was no clear definition for what constitutes good and proper notice in the PLA, the case law is clear: notice needs to be actual, direct, express and in writing. As stated, its interpretation was only recently opined upon by the courts, and lawyers are well served with the clear guidance from this case. The courts ruled that actual notice must be direct, express, written and sent pursuant to s. 28 of the PLA. Lacking any of these elements, regardless of whether the prior mortgagee attained actual knowledge of the subsequent mortgage, would render the notice insufficient in protecting the priority of the subsequent mortgage. Don’t be caught by the suggestion that “everyone knew about the second mortgage.” Give the notice as the Court of Appeal as directed. 34
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“
I readily acknowledge that GST priority seems to be a huge unknown, especially when it is often the small business owner seeking a loan. I further acknowledge that the steps to enhance protection set out above are hardly ready and quick methods for allaying the risks. Unfortunately, the risk remains real and the steps to protect the lender are cumbersome in a hurried deal.
Such notice can also be sent directly by the lender or via an agent/lawyer. I mention this because prior to Forjay there was some doubt as to who could send such notice to give it full effect. These clearer guidelines do not preclude future issues, especially given the high frequency of priority issues between first and second mortgages. In response B.C. lawyers have developed new practices that, although they go beyond the scope of the PLA and jurisprudence, work to mitigate potential issues and enhance protection for lenders. Lenders and brokers will need to ask their lawyers to take the necessary steps to avail the second mortgage lender of the protections afforded by the PLA. Takeaways are good. Here are your takeaways to help assert priority against further and higher advances made by a first mortgagee:
1. Confirm the Details of the First Mortgage Lenders, brokers and lawyers must perform a thorough process to confirm the terms, balances and details of the first mortgage. As an experienced second mortgage lawyer, I have been retained to review mortgage files where this confirmation was not performed and the priority fights were full on. Virtually
all banks and credit unions now use “all indebtedness mortgage” type language to describe the principal amount owed under their first mortgages. As such, brokers should pay close attention and request each and every loan facility secured by the registered mortgage. Also, be extremely mindful as to where these balances and information were obtained. Obtaining these balances is often the slowest activity in the critical path of second mortgage financing and, accordingly, the source of such information might be something less fulsome than if the second mortgage lender or their lawyer obtains it directly from the first mortgagee.
2. Send Notice Immediately Upon Registration and Funding Send direct, express written notice to the first mortgagee of your new second mortgage registration pursuant to s. 28 in B.C. or ss. 73 and 93(4) in Ontario. If you learn one thing from this article, this is it. Keep in mind that virtually all mortgages prohibit subsequent encumbrances being registered on title. The written notice protects the second mortgage lender but also serves as clear notice that the borrower is likely in breach of the terms of their first mortgage. Brokers and lawyers helping the borrower
obtain a second mortgage must be aware of this and it is prudent, if not fundamental, to tell the borrower of this breach and the risk of recourse being taken by the first mortgagee.
GST SUPER PRIORITY Just as the B.C. courts have brought some needed clarity to how a second mortgagee should give notice to prior mortgagees to protect their priority, the Federal Court of Appeal, in 2020, brought some worrisome clarity to the issue of GST super priority as against mortgage lenders. See TorontoDominion Bank v Canada, 2020 FCA 80. Essentially the court’s decision gave the Canada Revenue Agency (CRA) its Teflon armour for asserting priority for GST obligations of a borrower over secured mortgage loans by asserting that the deemed trust has priority over secured loan funds. This happens when a borrower has outstanding GST obligations payable before a mortgage transaction. Unremitted GST is considered a “deemed trust” as defined by the Income Tax Act, Excise Tax Act, Employment Insurance Act, and the Canada Pension Plan Act. If an individual does not remit these monies to the Receiver General as governed by these Acts, the individual becomes a tax debtor. This results in the tax debtor’s property (as well as any proceeds including those from its sale or foreclosure) being deemed as held in trust for and beneficially owned by the Crown up to the value of the tax debt, regardless of any registered security interests. Yes, this is as scary as it sounds. The federal court held that unremitted GST ranks in priority to all other interests and that the onus is on the lenders to pay the borrower’s GST obligations out of the funds that went to the lender instead of to CRA. Secured creditors are not considered to be bona fide purchasers, which is otherwise a valid defence raised against deemed trusts. Thus, the super priority will jeopardize the lender’s priority position and make the lender personally liable for the borrower’s GST obligations to the extent that funds were paid to the lender instead of CRA. However, the super priority does not apply to all situations. It does not survive bankruptcy under the Bankruptcy and Insolvency Act (Canada) upon which CRA loses its deemed trust and is treated as an
unsecured creditor with respect to its claim to unremitted GST/HST. Additionally, the priority position of any mortgage transaction made before the borrower’s failure to remit GST or under the Companies’ Creditors Arrangement Act (Canada) should not be affected by the super priority. There are other nuances about this super priority that are beyond the scope of this article. Also, don’t consider this as a case of “bad law” or a unique fact pattern or even bad arguments. Everything from the public interest to uncertainty for lenders, promoting bankruptcies and the chilling effect on business transaction were raised to no avail in the case. While hardly a concrete best practices checklist, there are some steps to ensure protection from the super priority: n Identify high-risk borrowers; n Advise lenders about the importance of unremitted GST payments; n Amend mortgage terms to require evidence of tax compliance for all deals, including new and ongoing ones; n Require enhanced disclosure including, but not limited to, presenting evidence of ongoing tax compliance; n Obtain a conflict letter at the time of repayment (though subject to audit); n Require borrowers to provide authorization for CRA to allow lenders to make inquiries regarding outstanding tax liabilities; n Post cash security until a GST clearance certificate can be obtained; n Petition the debtor into bankruptcy or to make a filing under the Companies’ Creditors Arrangement Act; and n Request additional guarantees. Title insurance may cover loss to unknown super priority liens payable prior to the policy date, with extended coverage available. However, this comes with ceilings on liability coverage. Thus, lenders should seek guidance on these endorsements. I readily acknowledge that GST priority seems to be a huge unknown, especially when it is often the small business owner seeking a loan. I further acknowledge that the steps to enhance protection set out above are hardly ready and quick methods for allaying the risks. Unfortunately, the risk remains real and the steps to protect the lender are cumbersome in a hurried deal.
INDEPENDENT LEGAL ADVICE I keep repeating that the deals are hurried and the parties always seem desperate to get the funding concluded. This is not always a bad thing so long as the transaction is viewed with a learned eye. Bank transactions easily lend themselves to the lawyer acting for both parties. Private transactions, with higher rates, additional fees and perhaps desperation on the part of the borrower, may dictate that the borrower obtain independent legal advice. Also, as previously stated, some lenders can be less sophisticated with little or no underwriting taking place beyond an assessment of the LTV ratio. The broker and/ or the lawyer have little comfort that there has been a detailed enquiry made about the borrower and their loan transaction. The additional cost, time and mechanics added to the deal may very well be worth it. I have seen too many defences raised by borrowers in private transactions that could have been nipped in the bud if the borrower had received fulsome clear advice from the beginning. The takeaway here is to let the lawyer decide if the borrower needs independent legal advice and follow that decision.
CONCLUSION The timeframe to close a deal can be extremely short. The challenges that come with second mortgages and unsophisticated private lenders add additional obstacles that may put pressure on the timeline. Therefore, taking prudent measures at the outset will allow brokers to mitigate common issues. In turn, they can then focus on more complex matters, act and react quickly for their client, take charge of the situation and provide top-shelf service. This article summarizes certain general issues surrounding second mortgages, but the authors advise it is not a substitute for legal advice on a specific lending transaction. Each such transaction has its own particulars, and you should seek appropriate professional and legal advice on each loan transaction. Timothy Lack is a partner and lawyer at Redpoint Law LLP Vancouver. Research assistance by Jerry Shi, articled student, and Abiel Kwok, summer student. More information: redpointlaw.ca CMB MAGAZINE
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legal ease
How mortgage brokers can protect themselves and find opportunities for borrowers BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC
BROKERING A SECOND MORTGAGE
I
nterest rates are on the rise. Borrowers in need of additional funds might want to add a second mortgage, rather than refinance the first and lose their existing favourable rate. Existing first mortgage lenders might welcome the borrower creating circumstances that entitle the first mortgage lender to call its mortgage due. How might a mortgage broker navigate these opportunities, best serve their borrower client, and best protect themselves? We will alert you to some of the issues. This is not intended to be legal advice. You should consider obtaining legal advice to cover specific situations and/or concerns. A broker may conclude that addressing the cautions expressed in this article would be impractical, disruptive or needless, and may result in borrower clients not proceeding with some transactions. The benefits, detriments and risks of following or not following the suggestions provided here is something each broker will have to assess. Regardless of the decision the broker makes, it is always better that the decision has been made with proper consideration of significant (and to some degree, unavoidable) factors.
The Borrower Client’s Request 1 A borrower asks you to arrange a second mortgage. This is a request commonly made of mortgage brokers.
Default triggered under the first mortgage While you are unlikely – at the time of the client’s initial request – to have seen the first
mortgage, you know that almost all mortgages contain a term to the effect that registering any further mortgage will amount to a default. The default generally gives the first mortgage lender the option to call for immediate repayment of its loan in full, by way of foreclosure proceedings if need be.
Incentives for first mortgage lender Most first mortgage lenders to date have not acted on the default created by the registration of a second mortgage. This may be because the existence of a second mortgage sometimes offers more protection for the first mortgage lender. For example, in a foreclosure action the first mortgage lender is entitled to payment in full in priority to the second mortgage lender receiving any funds at all and, in some cases, the second mortgage lender may protect its own interest by paying out the first mortgage lender. There are, however, sometimes incentives or reasons for a first mortgage lender to act on the default, and no broker should take comfort in a specific instance that the first mortgage lender will not do so. For example, the lender: n may make greater money on the transactional costs earned at the time loans are made (such as lender’s fees and brokerage fees) as compared to during the term of the mortgage. Accordingly, the lender may monetarily benefit from the early return and relending of the mortgage funds. n may conclude that the market has changed since the money was lent (such as interest rates having increased) and that the lender may benefit from relending money under the more favourable terms. n may simply have come to desire other uses for the funds (such as holidays, vacations,
For convenience, this article refers to the existing mortgage as the first mortgage and the mortgage to be arranged as the second mortgage. In fact, all mortgages, except the first mortgage, by their registration potentially breach then existing mortgages and accordingly raise the concerns discussed in this article. 1
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other investments, or meeting other obligations) and the default gives the lender the option of having the mortgage funds available early. n may find it unacceptable that the new mortgage causes the borrower’s earnings to cover more debts than had been presented to be the case at the time the first mortgage was granted. n may find it unacceptable that the borrower is, after granting the second mortgage, left with less equity in the security property. The lesser equity may make the borrower less inclined to appropriately protect and maintain the property.
What can the broker do? n Does the first mortgage prohibit further
mortgages? The broker should first determine whether the first mortgage contains the clause prohibiting further mortgages. Almost all mortgages do. If the first mortgage documentation does not contain such a clause, the broker acting for the borrower may proceed. n Obtaining informed instructions from client If the first mortgage does contain such a clause, the broker should obtain informed and written instructions from the borrower before proceeding. The instruction form should include that the client understands unless consent is obtained from the first mortgage lender to register the second mortgage, the registration could be a default under the first mortgage and entitle that lender to immediate payment of the full balance owing under the first mortgage. Failure to
make that payment could trigger foreclosure proceedings. If the client, after being informed of the possible consequences, instructs the broker to not proceed, that should end the matter. n Obtaining consent from the first mortgage lender If the client, after being informed of the possible consequences, instructs the broker to proceed without obtaining consent from the first mortgage lender, the mortgage broker should obtain instructions to that effect in writing. The instructions should include that the borrower understands the advice the broker has provided and should be signed. This protection for the broker could be very important if the first mortgage lender later calls its mortgage due and the client denies having provided the instructions or not having been informed before providing them. Do note that even with the borrower client’s informed instructions there is always some risk to the broker that a regulator or court could determine that the broker was not entitled to facilitate the breach of the first mortgage. If the client, after being informed of the possible consequences, instructs the broker to proceed only with the consent of the first mortgage lender, the mortgage broker should obtain informed and signed instructions to that effect. This is important because once the first mortgage lender learns that the borrower is looking for additional funds and in effect cannot obtain those funds without his or her consent, the first mortgage lender is in a powerful position to decline consent and itself lend further funds for the borrower on terms favourable to the first mortgage lender. This could of course also have the effect of depriving the broker of an otherwise earned commission. The broker may want to instead have an appropriate commitment letter signed, providing that the commitment is subject only to the condition that the conveyancing lawyer obtain the consent of the first mortgage lender prior to the registration of the second mortgage. If consent is requested and declined by the first mortgage lender, the broker should not encourage the borrower to proceed. As well, the broker should not lawyer-shop until one agrees to register the second mortgage, either not knowing of or not caring as to the first mortgage having withheld consent. This is discussed in more detail in the sidebar Illustrative Regulatory Case alongside. n Closing the second mortgage transaction If consent is requested and approved by the first mortgage lender, the deal can proceed to closing with the borrower and the broker better protected. n What shouldn’t a broker do? A mortgage broker who fails to obtain the informed instructions of the borrower or encourages a borrower to proceed in the face of the first mortgage lender declining consent risks regulatory action and civil consequences. n Civil liability A broker being liable to a borrower for not having advised as to the possibility of the first mortgage lender calling its mortgage due would most likely be on the basis that either the broker: • breached contract obligations (if there is such a contractual term in place); or • was negligent (that is, not performing mortgage brokering services to the standard of a reasonably prudent broker). It is far less certain that the broker would have liability for the non-client second mortgage lender or the first mortgage lender. That said, the categories of liability are never closed.
TAKEAWAY Not obtaining the consent of the first mortgage lender to register a second mortgage can expose the borrower to the first mortgage becoming due and the broker to regulatory action and civil liability. A prudent broker can take steps to minimize the exposure for both borrower client and the broker.
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ILLUSTRATIVE REGULATORY CASE In November 2008, the BC Registrar of Mortgage Brokers made an urgent suspension order against a broker for having conducted business in breach of the Mortgage Brokers Act and in a manner prejudicial to the public interest.2 The broker had encouraged and facilitated the borrowers to proceed with obtaining a second mortgage, in the face of clear opposition from the first mortgage holder. The Registrar concluded that the broker’s conduct was to the prejudice of the first mortgage lender, second mortgage lender, borrowers and public interest. The urgent suspension order was made also on the basis of the Registrar forming the opinion that the broker had: n not provided required cost of consumer credit disclosure, conflict of interest disclosure, and lender information to the second mortgage lender; n administered mortgages without the required administration agreement in place; n not kept required accounting records; and n taken no steps to ensure the developers were using the mortgage funds as intended. The borrowers’ initial lawyer had refused to process the second mortgage because the first mortgage lender declined to consent to its registration. The broker, knowing this information, advised the borrowers that the first mortgage lender’s refusal was not a problem, as he knew another lawyer who could process the transaction for them. He advised them to proceed. Indeed, the broker found another lawyer to process the second mortgage. The broker advised the borrowers that proceeding with the second mortgage would not put their home at risk provided the mortgage payments remained current. The broker told the Registrar’s staff that he advised borrowers “all the time” to proceed over the objections of a first mortgage lender, and this was the first time it had “backfired” on him. The broker was unaware of any requirement that would compel him to tell the borrower’s lawyer, or any other party to the transaction, of the first mortgage lender’s refusal. The borrowers later went into bankruptcy. The first mortgage lender learned of the second mortgage in that process and commenced foreclosure proceedings based on the mortgage having been breached by: n the claim of bankruptcy; and n the registration of the second mortgage over its objections. In the Matter of the Mortgage Brokers Act and Richard Dowding and RBD Financial Inc. dba Mortgage Connection (BC Registrar of Mortgage Brokers) Nov 13, 2008 2
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tough market
MAK IT HAPPEN The sweet spot – and where to find the gold
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KE BY DUSTAN WOODHOUSE
What to do when the market slows? There isn’t a one-size-fits-all answer here. As such, what follows is really two different pieces written for two different audiences.
AUDIENCE 1
AUDIENCE 2
You may be wondering if it’s all over. It is not.
You may be wondering if your recent level of success is all over. It is not.
You’re new(ish) and don’t have an established network, an established database, or an established niche (or two). You might be freaking out a little in the summer of 2022 as purchase activity drops and rates skyrocket.
You’re established in all the ways that Audience 1 is not, although perhaps you’re feeling too established with higher fixed overhead (offices, staff, a Tesla and a new summer place).
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tough market
AUDIENCE
1
AUDIENCE
Who am I to write about starting in a tough market? Fourteen years ago, I was as broke a broker as you could find. And the week I officially started was the same week the government took away zero deposit down and tightened the available amortization from 40 to 35 years. I was told it was all over. It was not. What can be applied from that moment in 2008 to today? Grit. Drive. Tenacity. Optimism. Market knowledge. Product knowledge. The world is opening back up, and, at the same time, there is a wide variety of online opportunities to interact with our lender partners, with other brokers, and to learn about products and markets. Attend every event and happening you can. Be everywhere. Invest in yourself. I spent thousands of dollars in my first year as a mortgage broker on memberships to real estate groups and attending financial and real estate conferences. Whatever I could do to learn more about the markets and meet more people, I did. Learn first, then meet people. Do you truly understand the mechanics behind fixed rate movement, and the totally different set of mechanics that drive variable rate movement? Not just prime, but the discounts offered? Can you articulate how and why certain rates move as they do? If not, learn how. Then get out there and impress people with your knowledge. This was the source of nearly all my early business, me being the source of an explanation as to what was actually happening in the market and why. The reality is that massive opportunities remain even in a softening market. There are more than one million privately owned properties in British Columbia and 60 per cent have mortgages. That’s 125,000 renewals every year, if everyone went for a full five-year term – which they do not. It’s more like 200,000 opportunities each year, excluding sales. How many of those 200,000 non-purchase related transactions that will happen in 2022, despite interest rates rising, do you need to have for yourself to call it a successful year – 25, 50, 100, 200? Pick a number, work it backwards and build a plan of attack. Create a simple one-page business plan. That’s what I did, and it can lead you past 100 closed files for 2023 as well.
2
You’ve been around for a while, let’s say more than five years, maybe that sweet 10-year spot. You’ve just had an incredible few years, your database is solid, and your referral network is whittled down to people you more less truly like working with. Life is good. And a slow down for summer is welcome – you’d like some breathing room. Time to take a trip to the lake or just relax. Sure you would. And a month, a week, a day or few hours into the slow down, or the break, you start worrying. Is it all over? Is this it? Do I need to redo my resume? No. No. And no. If you want the machine to keep ticking along at the same pace, because you’ve staffed up and invested in your setup, it can. You can make it happen. You already know what I am going to say. There is gold in your database. And it’s being mined every day. All the lenders are actively calling your clients, as if you don’t exist. Which is the lenders’ right to do. Because you sold your clients to the lender, you did not rent them. And now you need to earn them back. The lenders are calling your clients one by one to get the variable rate clients to lock into a fixed rate. Pushing that renewal date out by years. Taking away flexibility when it comes to accessing equity, something the clients don’t realize in the moment. The lenders are calling your clients to get the renewals locked in nice and early. Why aren’t you beating the lender to the punch? Ninja-level strategy: Client’s renewal date is May 15, they’d like some new money, or not, which may or may not open the door to do an early refinance with the existing lender (yes that’s a thing, and yes most lenders still pay you on the overall new balance) so are you working the client’s file on January 15? Of course not, you are smarter than that. You are working that client’s refinance at renewal with the same lender, on September 16. You can hold the rate for 120 days, and close on day 1 of the 120-day early renewal zone. Some of you are already doing this and are closing clients with February/March rates in July who had December/January renewal dates. You are the experts. And your clients are thanking you. Because what do we humans crave most of all? Certainty! That is what you can deliver to your database. You understand how the systems work and have the ability to help your clients win in a rising rate environment like nobody else. Take this strategy, among others, and dive into your database. You know, that group of past clients with whom you stay in constant contact through written and video blogs emailed directly. That group with whom you are positioned as the trusted advisor. Go forth and broker!
Dustan Woodhouse is president at Mortgage Architects. More information: dustanwoodhouse.ca 42
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THE COST OF CONTROLLING INFLATION
I
nflation is likely to be brought back to within the Bank of Canada’s target range of 1 to 3 per cent in a couple of years, but the cost of getting there could be high if the Bank’s actions in the interim trigger a recession, CIBC managing director and deputy chief economist Benjamin Tal told a recent Industry Forecast event organized by CMBA-BC. While many Canadians are concerned about the impact of rising inflation, Tal worries that the Bank of Canada may trigger a recession by overshooting and raising the policy interest rate beyond 3 or 3.5 per cent. He notes the Bank monitors inflation expectations and will act accordingly until it is convinced that the public believes inflation is not out of control and will be brought down. Tal said several forces are contributing to current inflation levels, with some being less sensitive to a rise in the policy interest rate. For example, he said the global supply chain disruptions experienced through the pandemic are inflationary but should ease as consumers shift their demand for goods to services as part of the transition from a pandemic to an endemic with less restrictions. The shift from goods to services will be deflationary as services are less sensitive to supply chain disruptions, he added. Tal said energy was another inflationary force partly due to the current “energy shock” marked by significant European efforts to reduce dependence on fossil fuels. However, he believes oil prices are less inflationary today than in the past because there is less sensitivity to oil price hikes due to gains in energy efficiency.
CIBC managing director and deputy chief economist Benjamin Tal’s views on the potential impact of inflation and rising interest rates on the housing market
BY CARLA GILES
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interest rates
On the housing front, Tal said rent inflation is expected to accelerate in coming years as demand continues to increase and supply shortage becomes more pronounced. He added that homebuyers who could afford to buy a property during the pandemic benefited from a recession without the cost of a recession. Also, during the pandemic, unemployment rose most significantly for low-wage earners who were most often renters. However, with the ease of restrictions there is a shortage of workers for low-paying jobs leading to wage inflation becoming more pronounced in this sector. Tal said this could be a result of changes in the labour market structure due to increased flexibility to work remotely. Most new immigrants (about 70 per cent) are already in Canada as students who can speak the language and are
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more employable, which could have led to fewer low-paying jobs being filled by new immigrants. Tal expects the housing market to soften and experience a price correction through 2023. He said this would not be a bad development because a price correction would rebalance the market and avoid prices rising as quickly as they did over the past two years. Tal added: “If the Bank of Canada stops the rise of the policy interest rate at 2.5 or 2.75 per cent, I think we will be fine. If we go to 3.5 per cent too quickly, that’s when an adjustment in the market will be more significant.” He said that while the strong demand for housing should ensure prices rising again within a couple of years, there will be a more accentuated shortage of supply triggered by increasing construction costs.
“The ultimate measure of intelligence is what to do when you don’t know what to do. Nobody knows exactly what will happen.”
“Construction costs are rising faster than prices, so developers’ margins are shrinking,” he said, adding that builders are choosing to defer or even cancel projects as they face record-high job vacancies and a shortage of building materials. In the short and medium term, Tal said he hopes the easing of the housing market and the expectation that supply chain issues will diminish by October or November this year may be sufficient to convince the Bank of Canada that there is no reason to overshoot by raising the policy interest rate beyond 2.5 or 2.75 per cent. He is also hopeful this will be sufficient to keep inflation expectations in check while allowing supply chain issues to dissipate slowly. However, if 2022 does not materialize as a transition year and the pandemic gets out of control, all bets are off. CMB MAGAZINE
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