In the olden days, when a couple wanted to buy a home, they saved for a downpayment, and qualified for a mortgage on their own. Occasionally, they would get a gift from a family member, but it was generally a nominal amount.
This all changed post pandemic when house prices accelerated exponentially and people became fearful of never being able to buy a home. We began to see purchasers adding multiple family members to mortgage applications just to qualify for their mortgage. In some cases, Mom and Dad would tap into a home equity line of credit to fund a large downpayment and get added to the kids’ new mortgage as a co-applicant.
Then you had the “investors” who were buying up multiple rental properties, often pre-construction condos. When it came time to close on the purchase many of these “investors” had to add multiple family members just to qualify for their new mortgage.
As a Mortgage Broker we are obligated to ensure that any mortgage we arrange is suitable for the borrower. Looking back at the irrational exuberance that we saw in the market it’s clear that a lot of Mortgage Brokers and Mortgage Agents failed to properly assess the suitability of these mortgages from the perspective of the secondary co-applicants that had no real interest in the properties but 100% of the liability.
Now that the real estate market has turned, and house prices have dropped, we are seeing the fallout. Co-applicants that were just “helping out” a family member are discovering that they are on the hook for mortgages that their family members can’t afford. Even worse, many that purchased at the peak of the market are discovering that the balance owing on the mortgage is more than the market value of the properties.
Mortgage Brokers and Mortgage Agents in Ontario are held to a stand of care governed by the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA). Two of the most important standards revolve around suitability and disclosure of all material risks. I have a strong suspicion that if files with numerous co-applicants were reviewed, a good percentage of them would fail the suitability and disclosure requirements of the Act. Too much attention was given to getting the deal done and not enough attention was given to reviewing if the mortgage was suitable for the co-applicants, given their own financial circumstances, stage of life, and capacity to take on risk. I also believe that the disclosure of material risks was glossed over in many circumstances and there was never a clear and open discussion on the risks the co-applicants were undertaking.
As an industry we need to do better!