Mortgages for all
Toronto Life
By Philip Preville
There are many qualities that make a good homeowner. Aaron Miller had
none of them, and the banks knew it. He wasn’t good with tools or
money. As a self-employed contractor in film and television
post-production, his job security was precarious. His credit history
was spotty at best. He and his wife, Jenna, whose names have been
changed for this article, had three kids, and the prohibitive cost of
daycare kept Jenna at home, which put them at a financial disadvantage.
But they wanted a house of their own, and by 2004, with his family’s
help, they had accumulated a nest egg of $70,000.
They wanted to put that money down on a $317,000 could-be-charming
Victorian semi in Dovercourt Village. “It was a rooming house,” recalls
Aaron, “so it had been carved up into lots of small rooms. We planned
to fix up the kitchen and the bathroom. Jenna wanted to make it the
house of her dreams.” But the mortgage shopping didn’t go as well as
the house shopping. They went to a broker, who hooked them up with
Meridian, Ontario’s largest credit union, to secure a mortgage.
Luckily, Meridian didn’t require someone else to co-sign.
Within the first year, they realized the house needed more work than
they had thought. The basement was damp, its walls rotting with
moisture. The windows were ancient single panes in wooden frames, which
made the house expensive to heat. One of those windows was in a shower
stall, the shower head spraying directly onto it. Aaron had noticed
this before buying the house, of course, but as a first-time homebuyer
he hadn’t realized that a hot, soapy, near-constant stream running down
the inside of a window might accelerate damage. Every time he tried to
do some simple repairs, he’d discover faulty wiring or waterlogged
drywall. “The house wasn’t about to fall over,” he says. “It had good
bones. But it should have been a full gut job from the beginning.”
they took out a second mortgage on the house
Back then, he and Jenna still believed they could whittle away at the
repairs bit by bit. Since they didn’t have any cash to hire a
contractor, they took out a second mortgage on the house, this time
with CitiFinancial, a Canadian arm of the American behemoth Citigroup.
Thanks to their substantial down payment and their thus-far-spotless
record with Meridian, Citi was happy to extend them a smaller loan on
favourable terms. They borrowed $30,000 and bought the materials they
needed to fix up the house, but couldn’t find the time to do any of the
work. “There was lots of deconstruction of the house, but no
construction,” says Aaron. “The IKEA kitchen never made it out of the
box.”
Even before taking on the Citi loan, Aaron was working longer hours
than ever to support his family. He was getting crushed under the
stresses of his job, his house and his financial commitments, unable to
get on top of any of them. And then, shortly after taking on the second
mortgage, the work dried up. Instead of getting ahead on the
renovations, he was scrambling to find new employment. “A self-employed
friend of mine told me, ‘You’ve got great credentials but you’re not
hirable. You’re too ineffective because you’re burnt out,’ ” he says.
the Millers missed their first mortgage payment
That’s when the Millers missed their first mortgage payment. “I paid
the first month on the second mortgage but was late the next month,”
Aaron recalls. The people at CitiFinancial were patient at first, but
after six months of late and missed payments, they’d had enough. Aaron
and Jenna received a letter from Citi’s lawyers, threatening them with
foreclosure. The letter demanded they pay off the remaining principal,
plus the missed payments, plus default penalties for each late payment,
plus legal fees, which totalled into the thousands.
The Millers weren’t ready to give up on themselves or the house yet. So
they went to a new mortgage broker, who connected them with a private
lender willing to take over their second mortgage. They rolled
everything they owed Citi into the principal of the new second
mortgage, which ballooned from $30,000 to $50,000. The new mortgage
also came with a higher interest rate of 10 or 12 per cent—Aaron
doesn’t remember the exact number—“that was too many loans ago,” he
says. “Our financial situation was already snowballing out of control.”
Aaron, still out of work, started to miss payments on the first
mortgage and was on the phone constantly with Meridian, making
arrangements. The situation turned dire when their new second mortgage
came up for renewal. It’s standard practice in the world of private
lending for mortgages to have terms of only one year, and for lenders
to charge a renewal fee. But the Millers’ renewal fee was 15 per cent
of the principal, more than $7,000—an astronomical sum even by private
lending standards, designed to push them out of the home and force its
sale. “That clause was in the paperwork somewhere, but I don’t remember
seeing it,” Aaron says. “I had to come up with the money right away or
we were going to lose the house.”
no shortage of doublespeak
The financial sector has no shortage of doublespeak to describe Aaron’s
situation. His credit record wasn’t bad, it was “bruised.” He didn’t
default on his loans, his mortgages were simply “non-performing.” The
private lender wasn’t a shark but a “less-regulated lender.” His loan
wasn’t subprime, it was “non-prime.” And Toronto is where all the
euphemisms converge: non-prime mortgage lending to bruised-credit
borrowers by less-regulated entities—better known as “shadow
lending”—has existed for ages, but it has been on the rise over the
last few months in this city, and elsewhere in Canada as well. The Bank
of Canada is nervously keeping tabs on the non-prime trend and in the
past year has begun sounding alarm bells. “A sizable proportion of new,
uninsured mortgages are being issued to riskier borrowers,” it
announced last December, calling the situation “worrisome.”
the terms subprime and non-prime
The difference between the terms subprime and non-prime is largely
semantic. A prime mortgage is a lender’s qualitative assessment that
takes into account the quality of the borrower, the home and the loan.
Subprime mortgages, obviously, fall below this standard, and during the
American crisis of 2007 a sea of mortgages missed the mark on all three
counts: the borrowers weren’t creditworthy, the homes were overvalued,
and the loans featured “teasers,” or low interest rates that
automatically increased after a brief introductory period, and that the
borrowers, since they were uncreditworthy in the first place, couldn’t
afford. Even at its height, American subprime borrowing accounted for
only 20 per cent of all mortgage loans. But when those borrowers began
defaulting in waves, it was enough to spark a market crash, a series of
bank failures and shotgun mergers, massive bailouts, and a global
meltdown.
Non-prime mortgages, or near-prime as some institutions call them, are
those where only one of the three factors falls short. Usually it’s the
borrower, who may not have a biweekly paycheque or an ideal credit
rating, but—on paper at least—the mortgage payments are affordable and
the property makes for sound collateral. The “non-prime” and
“near-prime” coinages are distinctly Canadian in their low-risk
intonations, offering reassurance that these loans are better than the
American ones. But they are still dicey loans.
And the federal government has helped to create them. Federal
regulators recently increased the amount of reserve capital the major
banks must keep on hand to guard against losses, which has tempered the
banks’ lending. And Ottawa has tightened the qualifications for
mortgage insurance: the maximum amortization period for an insured
mortgage is now 25 years, down from a high of 40 years back in 2008.
The government also capped the amount of total debt households can
carry: if your monthly mortgage payments plus your other bills amount
to 40 per cent of your income or more, neither CMHC nor any private
insurer will insure your mortgage.
have done nothing to stem access to credit
A key purpose of all these regulations is to prevent people who can’t
afford a mortgage from ever getting one in the first place. On that
score, they have failed. The regulations have done nothing to stem
access to credit; they have merely created a stronger market for
alternative lenders. Any schmuck can get a mortgage, and a great many
of them do. If the major banks reject them, there are dozens of other
lenders that won’t. Home Trust, a major non-bank lender that issued
roughly $9 billion in mortgages last year, states on its website that
it caters to new immigrants and people with checkered credit histories.
The website for Equitable Bank, a small, branchless bank that issued
more than $2.3 billion in residential mortgages in 2014 (a vast
increase from the $1.6 billion it issued in 2013), trumpets its
aptitude for finding ways to justify a loan beyond the standard Beacon
scores. Subprime borrowers can also turn to mortgage investment
corporations, in which shareholders pool their funds to invest in
residential real estate; Northwood Mortgage, a brokerage that
advertises heavily on the AM dial, also runs a mortgage investment
corporation to underwrite non-prime deals. Then there are private
mortgage lenders, the kind who took over the Millers’ second mortgage:
individual investors, alone or in partnerships and syndicates, who
invest their money in other people’s homes.
the riskier the client, the higher the rate
They all charge an interest premium—the riskier the client, the higher
the rate. I met one private lender who explained to a client that it
would cost $5,000 to set up a $15,000 mortgage—meaning the loan would
end up being for $20,000, at 10 per cent interest. It’s an arrangement
only a desperate borrower would make. At Home Trust, the interest rate
on what’s termed their Alt-A mortgage, for the least risky of the risky
borrowers, is 4.64 per cent for a fixed five-year term, far beyond the
2.59 per cent they charge prime borrowers. Rates for private lenders
usually range from seven to 15 per cent, but they can, in theory, go
far higher. Under the Criminal Code, only rates above 60 per cent per
year are illegal. Why would anyone pay double-digit rates at a time
when the prime lending rate at most banks is well under three per cent?
The obvious reason is that no one will lend to them at prime. But
they’re also betting on themselves: if they can make those payments for
a couple of years and improve their credit rating, they might be
eligible for a prime mortgage, or at least a better rate, at renewal
time.
they are betting on the Toronto market
Above all, though, they are betting on the Toronto market. In some
neighbourhoods, most notably Leaside, Cabbagetown and Yorkville,
detached home prices have averaged 10 per cent price increases per year
for the last 19 years, even after adjusting for inflation. The same is
true of condos in much of downtown: Riverdale condo prices, for
instance, have risen 195 per cent since 1996. And the market is only
getting hotter. Detached home prices across the 416 area code increased
by an average of 12.9 per cent over the past 12 months. With numbers
like those, a six or seven per cent interest rate on a mortgage looks
like a pretty good deal. Even a 10 or 12 per cent interest rate can
seem sound, if borrowers think the market will stay buoyant. That’s how
hot Toronto’s market is: people will not only pay an increasingly steep
price to get in, but they’ll pay a premium interest rate to stay in.
They’ll borrow from whomever they have to.
they aren’t really down payments at all
Research by CIBC shows that eight per cent of all new mortgages in
Ontario are non-prime. The Bank of Canada’s figures are more alarming:
they suggest that roughly 35 per cent of all new mortgages issued by
smaller banks—the ones the bank doesn’t consider “systemically
important”—could be considered non-prime. As for private lenders, 100
per cent of their loans are non-prime, because that’s their business
model: serving the borrowers that prime lenders won’t. By and large,
these private mortgages are not insured against default because the
borrowers make a substantial down payment. But down payments in this
city are often not what they seem. According to a recent study by the
Canadian Association of Accredited Mortgage Professionals, Canadians
borrow more than $10 billion annually just for down payments—which
means they aren’t really down payments at all, just loans piled atop
loans. The Bank of Canada has singled out this trend in its reports: if
down payment loans become too prevalent, it says, stating the
blindingly obvious, “they may reduce the effectiveness of financial
system safeguards.” Buying a home is supposed to be an investment in
the future, but it’s looking more and more like a liability, not just
for individual homeowners but for the entire economy.
The phrase “shadow lending” conjures up all sorts of nefarious imagery:
back alleys, manila envelopes, shakedowns, tire irons. Private mortgage
lending, for the most part, looks nothing at all like that. Mortgages
aren’t drug deals but registered loans, and private lenders aren’t
kingpins with thugs who break kneecaps. They are ordinary people with
money to invest and a taste for a particularly human kind of risk.
I met one private lender—I’ll call him Jeff—who agreed to be
interviewed in exchange for anonymity. He lives north of Toronto in a
1980s suburban-style house with a double garage whose most appealing
feature, for Jeff, was the sprawling, densely treed yard that preserves
his privacy. Jeff is no shark, though he is something of a Cheshire
cat. He is soft-spoken, friendly and infectiously calm. He spent much
of his career as a Bay Street banker. Now in his 60s, he lives off the
proceeds of his personal mortgage lending business, which he runs out
of his home in between trips to the Caribbean. Call it Jeffbank. “I
earn enough to have a nice life,” he says with a grin.
Jeff doesn’t advertise his services. His borrowers find him through the
mortgage brokers and lawyers who know him, and whom he trusts. He says
his primary line of business is first mortgages for homes in the
Toronto area, which means he’s got hundreds of thousands of dollars
tied up in each loan. He declined to say how many mortgages he
bankrolls or how many millions he’s invested in total, but he typically
charges interest of 6.99 or 7.99 per cent on a first mortgage,
depending on the client. He also holds some second mortgages for lower
dollar amounts, but, as he puts it, “I’m not a $20,000 guy.”
such fees can be shocking
Jeff generally operates according to standard practice for private
lenders. Setting up a private mortgage always incurs a series of
initial charges: broker fees between one and five per cent of the loan,
lender and administration fees of one to two per cent, and legal fees
totalling roughly $1,000. His mortgages tend to have very short terms,
usually a single year. When the term is up, the fee to renew the
mortgage is typically one per cent. For people who’ve only ever
borrowed from big banks, such fees can be shocking, but in private
lending they are common. Jeff explains all these costs at the outset,
giving his clients the chance to pay them willingly or walk away.
Jeff is a shrewd underwriter of risk and judge of character. He takes
the time to lay eyes upon every borrower and every property he invests
in. “A lot of mortgage lending is paperwork, but there’s a human
dimension to it as well,” he says. “There are lots of legitimate
reasons why someone might miss a payment. The borrower and the lender
need to have a discussion about the accommodations they will make for
each other.”
More to the point: once borrowers are 15 days late on a single mortgage
payment, they are legally in default, and on day 16, any lender, from
Scotiabank to Jeffbank, can begin foreclosure proceedings. The banks
never do that, of course—they wait for mortgage holders to be multiple
months in arrears before giving up on them—and neither does Jeff. When
his borrowers become unable to make payments, he’ll sit down with them
and try to talk sense. “I say to them, ‘Look, it’s not going as
planned, and let’s not sell the house under legal duress,’ ” he
explains, because once lawyers get involved, the timelines will be
strict and the process can become adversarial. “We are better off
putting the house up for sale quickly and making new living
arrangements without legal pressure.” Ideally, though, it never comes
to that. As Jeff puts it, “You don’t want to push the borrower beyond
their ability to pay.”
the kind of lender who wants to do precisely that
Unless, of course, you are the kind of lender who wants to do precisely
that. Not all private lenders are as patient or even-handed as Jeff.
They aren’t regulated by any government agency. One borrower I spoke
to, named Janice, decided four years ago to deal with a private lender
to consolidate $25,000 in outstanding bills and credit card debt she’d
incurred to send her daughter to university. Her lender, who was also a
mortgage broker, told her the interest rate would be six per cent, upon
which Janice signed 12 postdated cheques to set up withdrawals. She
later found out the interest rate was 15 per cent. She says her lender
never mentioned the $10,000 in setup fees, which turned it into a
$35,000 loan. At year’s end she was hit with a renewal fee and other
charges, so that the principal jumped to $42,000. Janice, who owned her
home outright, decided to remortgage the property with a reputable
institution to pay off her private lender. That’s when he registered a
second mortgage on her home without her knowledge. Once she missed her
payments, he initiated legal proceedings to seize the house. Janice
bolted. She is now living in a basement apartment. The lender sold her
house in August for $200,000 and garnished her wages in lieu of
payments on the second mortgage.
Aaron and Jenna Miller spent nearly a decade fighting an uphill battle
to stay in their home. They had gotten around the problem of the
renewal fee by finding yet another private lender to take over their
second mortgage. But as time went on, they fell behind on their first
mortgage, until Meridian eventually gave up on them. With the help of a
broker, they found a new consortium of private lenders and restructured
all their mortgage debt yet again.
When they first bought their house in 2004 with that $70,000 down
payment, their total mortgage was $247,000, and their monthly payments
were $1,420. Ten years later, their total mortgage debt was roughly
$370,000, more than they’d initially paid for the house. A consortium
of three private lenders now held their first mortgage, which totalled
$345,455 and came at an interest rate of 7.9 per cent. Another private
lender held a $25,000 second mortgage at 12.9 per cent.
combined monthly payment had skyrocketed
Every new mortgage offers a new beginning. Aaron and Jenna had every
intention of honouring the debt. They figured it would be worth it,
since homes in the neighbourhood were by then selling for well over
$600,000. But if they couldn’t manage their mortgage payments
beforehand, there was no way they would be able to afford them now.
Their combined monthly payment had skyrocketed to roughly $4,000. Aaron
hadn’t completed any significant repairs to the property. The stress
was taking a toll on their marriage, and on him personally. “I might
have walked away were it not for my family,” Aaron told me. They
defaulted on both mortgages in early 2014, and once again found
themselves facing foreclosure.
when your mortgage lender gives up on you
Whether it’s a bank, a trust or a private investor, when your mortgage
lender gives up on you, the balance of power shifts heavily in their
favour. They hand your file over to a lawyer, whose first move is to
serve you with a Notice of Default demanding that you bring the
mortgage back into good standing within 30 days. If you fail to pay up,
your lender has a choice to make: foreclosure or power of sale. Under
foreclosure, your mortgage lender evicts you and takes title to your
property, including all your equity. Power of sale is a different kind
of default remedy: rather than taking title to your home, your lender
simply sells it from under you and uses the proceeds to pay off your
debts: mortgages, property tax arrears, property liens. If there’s any
money left after everyone’s been paid, you get to keep it; if not, your
lenders can still come after you for any remaining balance on your
mortgage loan.
Power of sale is cheaper and quicker
Foreclosure has become increasingly rare, because it can take up to
eight months and incur thousands in additional fees. Power of sale is
cheaper and quicker: the whole process can be wrapped up in less than
four months. It begins with a registered letter, titled Notice of Sale
Under Charge, which gives the homeowner one last chance to bring the
mortgage back into good standing. The Notice of Sale is a sobering
ledger of indebtedness: its line items include the entire principal of
the loan, all outstanding interest, late fees, administration and
maintenance fees, interest on arrears, next month’s instalment (which
must now be prepaid), property taxes and the lender’s legal costs,
which, per standard procedure with any mortgage, are passed on to the
borrower.
By mid-2014, the legal costs on the Millers’ $25,000 second mortgage
had jumped to more than $11,000. Including all the penalties and fees,
they owed $54,564, more than double the initial amount. Of course Aaron
and Jenna could never pay up, but at this late stage no one expected
them to. They and their kids were about to be evicted. Aaron knew this
was the end, and he was beyond casting blame. “The situation wasn’t any
bank’s fault or any lender’s fault,” he says. “They were just doing
what they do.”
In desperation, Aaron and Jenna went to the Internet looking for last-ditch help. A Google search led them to powerofsalesontario.ca,
which offered the chance to stop the legal proceedings. That’s how they
met Ron Alphonso. He’s a 57-year-old private mortgage lender and
mortgage agent who operates out of his home, an ordinary suburban
bungalow in north Toronto. His private lending portfolio for second
mortgages typically ranges from $25,000 to $75,000, though he does hold
some first mortgages and larger amounts as well. In recent years, he
has carved out a profitable niche for himself doing business with
people who are facing foreclosure.
Alphonso typically visits lawyers’ offices to pay off his clients’
debts and to buy them time. There are dozens of small law offices that
handle real estate transactions, which by the nature of the business
includes foreclosures and powers of sale. In any given month, the big
banks have about 3,000 mortgages in default in Ontario alone, and to
handle them they rely heavily on two firms. One is Chaitons, at 5000
Yonge, north of Sheppard. The other is Gowlings, one of the city’s
largest and most prestigious firms. Gowlings is headquartered on Bay
Street, but their office for what they call “recovery services” is in
Hamilton, where they have a full floor dedicated to the practice. “It’s
a volume business,” says Alphonso.
When I visited his home office, the kitchen table was piled high with
files featuring Notices of Sale and NSF cheques of defaulting
homeowners, all needing his active attention. Alphonso spends much of
his time on the road, travelling to and from homes, banks and legal
offices, trying to get everyone on board with his plans.
everyone takes a loss except the lawyers
“When I first started out as a private lender, if a mortgage went sour
I sent it off to the lawyers like a good boy because that’s what I was
supposed to do,” he says. “Except that, after a while, I started to
notice that nothing good ever happened.” People who default on their
mortgages come in all stripes: deadbeats, the newly divorced,
overextended well-to-do types and people who have been defeated by the
demands of home ownership. As they lose their grip on their finances
and fall behind on their payments, they often become experts at dodging
phone calls and ignoring letters, which drags the process out
needlessly—and, from Alphonso’s perspective, only pumps up the late
fees and legal bills. In his experience, people who haven’t been making
their payments often haven’t been maintaining their properties well
either, which hurts their resale value. Alphonso has seen this scenario
enough times to know how it ends: both the homeowner’s equity and the
lender’s principal get eroded by bloated fees and a bad sale price, and
everyone takes a loss except the lawyers.
once lawyers get involved, the owner will be leaving the house one way or another
In a real estate market as hot as Toronto’s, that should never happen,
no matter the circumstances of the sale. Given a little spit-shine, any
home in the GTA can command a premium right now. Alphonso has figured
this out, and what he offers to people facing foreclosure and power of
sale is the opportunity to regain control over their situation. His
website claims he can help keep people in their homes. But once
foreclosure or power of sale proceedings have begun, it becomes
increasingly hard to do. “My first question to people is, ‘What do you
want to do?’ ” he explains. If they say they want to fight to keep the
house no matter how dire the circumstances, he says goodbye. “But if
they say they want to sell before they get foreclosed, then I can
help.” Alphonso says homeowners need to realize that once lawyers get
involved, the owner will be leaving the house one way or another—on
their own terms or someone else’s.
Earlier this year, Ellen Locke, who also requested that her real name
not be published, hired Alphonso to stop power of sale proceedings
against her. Seven years ago, back when she had a good job as the
manager of a daycare centre, Locke purchased a 900-square-foot bungalow
near the Scarborough GO station for $285,000. She took out a mortgage
with Royal Bank, the kind that’s no longer permitted under today’s
rules: a five per cent down payment ($14,000) and a 40-year
amortization. After about 18 months, her life became a litany of
misfortune. Her partner, whose name wasn’t on the mortgage but who was
helping to pay the bills, died. Then she lost her job. A succession of
basement tenants were always late with their rent. Since Locke had no
money to maintain the house, it began to fall into disrepair. “I was
always on the phone with Royal Bank, making arrangements for late
payments,” Locke, now 51, recalls. “Then my tenants wouldn’t pay their
rent. I felt like I was working so other people could enjoy my house.”
When Royal Bank finally sent in the lawyers, Locke found Alphonso’s
website. She was ready to sell, and she gave Alphonso permission to
negotiate with her creditors on her behalf. “I’m not a lawyer, but I
know many of the real estate lawyers in town and they know me,”
Alphonso says. “And I know exactly how the process works. So I go to
them and I tell them that the homeowner has a new plan, and I lay it
out for them.” In Locke’s case, the plan looked like this: Alphonso
would extend her a short-term second mortgage of $25,000, which he
would use to fix the house up before putting the property up for sale.
“Usually I do only as much as I have to do to get the house ready,”
Alphonso says. “We are always working against time. If there’s any
delay, the legal proceedings can pick up again.”
Locke never touched a penny of Alphonso’s $25,000 loan. He disbursed
the money himself, hiring crews and paying for supplies, which is how
he always operates. He brought in a dumpster and filled it with the
detritus belonging to her deadbeat tenants. Alphonso also cleaned up
the enclosure and the garage, which had turned into a junkyard. He tore
down a smoking shed Locke’s tenants had built on the front porch. He
gave the place a fresh coat of paint. He then hired a real estate agent
to put the house on the market at a price designed to spark multiple
bids.
In theory, once Alphonso closes a deal like this, all the lawyers and
creditors get paid—including Alphonso, of course, for all his services.
“I need to be able to make at least $6,000 on a job to take it on,” he
says. “Ideally, the fees should amount to between $10,000 and $15,000.”
On the surface, there’s something unsavoury about Alphonso’s business
model, which profits from people in dire straits. But it’s wishful
thinking to believe that Locke, or anyone in her situation, with their
financial and personal lives in disarray, can somehow pull themselves
together and, in the space of four to six weeks with lawyers
threatening eviction, do all the things Alphonso does. His presence
changes the nature of the sale, and the behaviour of all the parties
involved, because he is an active agent in maximizing the value of the
property—the magic ingredient missing from most power of sale
proceedings.
Do you miss owning your own house?
Locke’s house sold last June for $475,000, and she walked away with
$112,059 in her pocket, more than eight times her initial down payment.
That’s after the proceeds from the sale had cleared away all her
mortgage and personal debt, including the $14,250 she paid Alphonso.
“It was more than worth it,” she says. “The fact is that I didn’t have
the money to do the work that needed to be done.” And who else was
going to lend it to her, when Royal Bank had already written her off?
Locke now lives in a basement apartment in Mississauga, debt-free for
the first time in her adult life. “Friends ask me, ‘Do you miss owning
your own house?’ The answer is no. I couldn’t be happier.”
The decrepit condition of the Millers’ home presented a far greater
challenge than Locke’s. By the time Alphonso got involved, Toronto
Hydro had cut the Millers off, and the house was a maze of
half-demolished walls from Aaron’s attempted renos. “I told the real
estate agent to wear a hard hat when she went in,” Alphonso says. There
was no point spending any money to fix it up because, well, where to
start? The best Alphonso could do was a basic cleanout and cleanup. The
house would have to be sold as-is. Its only saving grace was the fact
that it was on a good street in a good neighbourhood. Similar homes in
the area were by then selling for well above $650,000. Alphonso put a
stop to the legal proceedings against the Millers. He extended them a
$70,000 loan to put a down payment on another, much cheaper house,
which allowed them to move out right away. Without that loan they’d
have been evicted, penniless and homeless with their kids until the
house sold, and no one knew how long that would take.
The Millers cleared out in late September 2014 and the house went up
for sale. It sold for $555,000, of which $465,000 was used to pay out
their outstanding mortgage, property taxes, and legal and professional
fees. There was enough left over for the Millers to pay back the
$70,000 and pocket roughly $18,000 in cash.
From left: Just
before the owner of this home near Danforth and Jones tried to sell, he
was evicted. He owed $180,000 on a second mortgage. The place sold for
$787,500 in May 2015; Middle: The owner of this Scarborough condo fell
behind on two mortgages, refused to sell and was evicted. The place
sold under power of sale for $302,500 in February 2015; The owners of
this home near Eglinton and Caledonia were evicted last summer after
falling behind on their mortgage. The house sold under power of sale
for $750,000. (Images: Dave Gillespie)
two crucial lessons for homeowners
The Millers’ story offers two crucial lessons for homeowners in this
city. The first is absolute: don’t take on more debt than you can
afford. The second is situational, a reflection of this unique moment
in Toronto’s history. If you’re already in over your head, sell now
while prices are inflated.
The Canadian housing market is overvalued by as much as 20 per cent,
according to the International Monetary Fund; the Bank of Canada puts
it higher—at 30 per cent. The Economist says 35. And two cities,
Toronto and Vancouver, are the ones whipping up the most froth. Home
prices in the GTA experienced double-digit increases in August, with
detached homes in Toronto now averaging over $1 million and those in
the suburbs averaging $733,000. Also in August, CMHC issued a report
indicating the Toronto market was at high risk for a correction. What’s
unclear is when house prices will adjust, how quickly and by how much.
For the time being, high prices have the ability to forgive even the
most egregious disasters of household negligence. The Millers are the
perfect example. They bought a bad property and over the course of a
decade made it worse. Yet at the time they sold, it had appreciated by
an astonishing 80 per cent. “If the market isn’t strong, they lose
everything,” says Alphonso.
And if the market isn’t strong, chances are Alphonso doesn’t help them
out. Alphonso is a nice guy, but he’s not a saint. He extended that
bridge loan to the Millers only because he was confident the house
would sell at a high enough price to pay him back, with interest. If
prices had fallen by, say, 30 per cent last year, the Millers’ home,
instead of selling for $555,000, would have sold for less than
$400,000. Their debts would have swallowed every last penny from the
sale of the house and left them on the hook to their lenders for tens
of thousands more. They’d never have been able to pay it, of course, so
their lenders would have lost money too.
the Toronto market is defying gravity
“This is not a normal, healthy real estate market,” says David Madani,
a former Bank of Canada senior economist who now works for the private
research firm Capital Economics. He has been issuing warnings about the
market since 2011, which was around the time prices became unmoored
from such key indicators as income and housing rents. He believes the
Toronto market is defying gravity, and he does not fall for the hoary
talking point parroted by every real estate agent and mortgage broker
in the city: home prices will keep rising because the population keeps
growing, providing a constant influx of new demand for existing supply.
What keeps the housing market so hot is not population growth, but
credit growth. “The amount of credit households are allowed to borrow
is the more important factor,” Madani says. “Homebuyers and investors
believe that house prices will keep rising indefinitely, or remain high
permanently.” So they keep asking to borrow more, and lenders keep
creating loans to satisfy the demand.
Low rates keep prices high.
The bubble has never been more buoyant, and low interest rates are its
helium. Low rates keep prices high. They make borrowing attractive,
whether it’s prime or non-prime. They also keep default rates down:
everyone can afford their house when interest rates are at all-time
lows. Right now, every mortgage looks great on paper and every
homeowner is worthy of their loan.
But that could all change in an instant. As Madani puts it, “You never
know the true quality of a loan until you get an economic shock.” The
trigger could be a rise in interest rates, which will increase monthly
payments for anyone with a variable-rate mortgage. It could be a hard
landing for the economy of China, whose stock market took a beating
throughout the summer and whose ripple effects could spread globally
just as the U.S. subprime crisis did. It could be a worsening of the
recession here at home. Ironically, notes Madani, the only things
keeping the Canadian economy from total collapse right now are the
Toronto and Vancouver real estate markets.
Whatever the shock is, it will hit subprime borrowers first
The Bank of Canada continues to predict a “soft landing” for the real
estate market, in which construction slows, sales decline gradually and
prices decrease slightly. But the riskier the loans get, the less
likely a soft landing becomes. Whatever the shock is, it will hit
subprime borrowers first, followed in close order by non-prime
borrowers. Mortgage lenders will realize what’s happening and act
rationally. They will be less patient with borrowers in arrears,
because they will want to get those homes up for sale before prices
decline by too much, in order to recoup their investment. Even if
borrowers are making their payments, when renewal time comes at the end
of the one-year term, lenders can simply decline to renew and call in
the loan, forcing homeowners to find a new lender—fat chance in a
market that’s begun its downward descent—or put the house up for sale.
The worst-case scenario
That’s when we will find out whether or not our housing market is as
bad as the American market was in 2008. The worst-case scenario will
unfold like this: a wave of homes will flood the listings, forcing
prices down even faster. Households that are overburdened with debt
will end up with negative equity. Bankruptcies will spike. The
institutions that cater to subprime borrowers will take their lumps as
they write off their bad loans. Those that are publicly traded will see
their stock prices plummet. Some of them might fail, which will put
stress on the rest of the financial system. The system as a whole is
absolutely guaranteed to withstand the shock, simply because the
government will bail it out before allowing it to fail. But if you
think that’s good news, talk to your American cousins about what life
was like in 2009.
Whether it’s a hard or a soft landing, when it comes, Aaron and Jenna
Miller plan to watch it unfold from their new home. Their search for a
more affordable place led them further and further from Toronto. They
fell in love with a two-and-a-half-storey, four-bedroom home northeast
of the city, which they bought for $199,000. Even there, they won’t be
immune to the shock. Because of all their troubles with their previous
mortgages, the banks still won’t look at them. They are still with a
private mortgage lender, and Aaron continues to move from contract to
contract in his work. But with smaller payments, at least they have a
fighting chance of keeping their home. When he reflects on his litany
of first and second mortgages in Toronto, and the way they ballooned
far beyond his ability to pay for them, he says, “It’s absolute lunacy
that we were able to stay in the house as long as we did.” As for
having to leave the Toronto real estate market behind, the timing
couldn’t have been better.
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