The Canadian mortgage industry got greedy as house prices surged post Covid.
Prior to the run up in prices, it was rare to see more than two people on a mortgage. With surging purchase prices, and tightening regulations by OSFI, your typical two income household wasn’t qualifying for the mortgages they needed. To solve this problem lenders and mortgage brokers started adding additional co-applicants to applications to get the deals approved.
Now you had three, four, five, sometimes even six people signing on a mortgage while most of the co-applicants had virtually no interest in the property (usually 1% or less). These co-applicants had signed up for 100% of the liability with the only benefit to them being some goodwill with their friends or family members that they agreed to help.
I reached out to an Insolvency Trustee who is seeing the aftermath of these transactions. He hasn’t tracked if the co-applicants received Independent Legal Advice (ILA), but he was of the mind that most of them didn’t. Most of them had no clue that they were liable for 100% of the debt.
Most of these mortgages were inherently large mortgages, often a million dollars or more. There are very few people in Canada who can absorb that sort of liability on their own but that is exactly what these co-applicants signed up for.
As a Mortgage Broker in Ontario, we are obligated to ensure that every mortgage is suitable for the borrowers. I’m not sure how anyone could suggest signing on to a million dollar mortgage is suitable for a co-applicant that has only a negligible interest in the property. There will be exceptions, but for most of these mortgages there were likely no suitability assessments done; the goal was just to get the deal closed.
Mortgage Brokers in Ontario are also required to disclose any material risks associated with a mortgage that might influence a borrower’s decision to enter into a mortgage. Disclosures must be clear and concise and written in plain language. If Brokers failed to disclose that co-applicants were individually liable for 100% of the mortgage amount that would be concerning.
To my knowledge FSRA has been silent on these transactions. They have offered no guidance to the use of multiple co-applicants, nor have they announced any enforcement action on the lack of suitability assessments, or lack of disclosures, in relation to the multiple co-applicant deals.
From a lender’s perspective, they were the ones issuing the approvals on these transactions and they should have been requiring ILA in most situations. ILA just makes sense from a consumer protection point of view and to protect their own interests. A co-applicant with a good lawyer may be able to walk away from their obligation under the mortgage if they did not receive ILA.
In my opinion, the Canadian mortgage industry just got greedy and failed to consider the best interest of the co-applicants they used to get these mortgages approved. Their only consideration was getting the deal closed and keeping the gravy train rolling.