This morning I had the pleasure of waking up just steps from the ocean at my spot in Cape Breton. Picture a travel trailer parked on a rocky beach surrounded by forty acres of forest and about 1200 feet of sheltered and secluded oceanfront.
I started the day on my paddle board followed by a cool dip in the ocean and a coffee on the beach. My mind tends to wander at times like this, and a recurring thought I’ve had is how the mortgage industry in Canada has screwed over so many people over the last several years.
Specifically, I’m thinking of all the transactions where multiple co-applicants were used to get a deal approved when the co-applicants had virtually no interest in the property (usually less than 1%). It was not unusual to see three or four co-applicants on an application at the peak of the market.
Now that the market has turned these co-applicants are discovering how much risk they actually signed up for. They are responsible for 100% of the debt. Not a portion of the debt; 100% of the debt!
When the primary borrower defaults, the lenders are turning to the co-applicants to step in to keep the mortgage current. If the co-applicants can’t bring the mortgage into good standing, the property will usually be sold under Power of Sale. If there is a shortfall in the proceeds from the sale, which is happening often these days, the lender will pursue the co-applicants for any shortfall.
If you’re a co-applicant that has other assets, the lenders will be starting legal action against you to recoup any shortfall from the sale of the house. In some circumstances we are seeing significant shortfalls if the home was purchased at the peak of the market.
If you’re a co-applicant that is facing this sort of situation your first phone call should be to a litigator familiar with mortgage enforcement.
I’m not a lawyer so definitely consult one but if you did not receive Independent Legal Advice prior to signing off on the mortgage documents you may have a defence if you are a close relative, or friend, to the primary borrower. There is a presumption of undue influence in cases like this, and lenders have a duty to protect you from yourself. The Supreme Court of Canada made this clear in Gold v. Rosenberg where they concluded that if the transaction is clearly detrimental to you, and you are exceptionally close to the primary borrower, the bank may lose its ability to enforce the mortgage against you.
To be clear, a lack of Independent Legal Advice does not automatically invalidate the mortgage but it’s worth having a conversation with a litigator to discuss the facts of your case. If you’re considered a sophisticated borrower there will be no get out of jail free cards to play but if you truly did not understand the liability you were signing up for or you felt pressured to go along by close friends or family, you may have a viable defence.
If you used a Mortgage Broker or Mortgage Agent in Ontario, you may also have a legal argument against them if they failed to ensure the mortgage was suitable for you or if they failed to fully and plainly disclose any material risks of the mortgage. It would be hard for a Mortgage Broker or Mortgage Agent to argue that signing up for 100% liability on a mortgage, with no direct benefit to you, would be suitable for most people. Keep in mind that many of these mortgages were close to a million dollars or more. How many Canadians can absorb that sort of liability? As well, many co-applicants never fully understood the full extent of the liability they were signing up for. Was their liability clearly and plainly explained to them by the Mortgage Broker or Mortgage Agent?
If you know anyone that had the misfortune of signing on to a mortgage as a co-applicant and they are now facing the ramifications of a mortgage in default, you may want to send them this article.
Andy MacDonald is a Mortgage Broker with over 35 years of experience in the mortgage industry. He acts as an Expert Witness for litigation dealing with mortgages, Mortgage Brokers and Mortgage Agents in Ontario.