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Mortgage Brokering in Ontario

Agent Edition
- TENTH Edition

Joseph J. White

Copyright 20082016 by Joseph J. White. All rights reserved. Printed in Canada. No part of this
publication may be reproduced or distributed in any form or by any means, or stored in a database or
retrievalsystem,withoutthepriorwrittenpermissionoftheauthor.

ISBN9781988049038031516

Mostrecentupdate:February,2016

This publication is intended to provide accurate information at the time of publication regarding the
mortgage industry in Ontario. Legal and other decisions related to financial transactions should be
completedonlyafterseekingadvicefromacompetentprofessionalpersonandshouldnotbebasedon
informationcontainedherein.Neitherthepublishernortheauthorisengagedinrenderinglegalorother
professionaladvice.Theeventsandcharactersinthisbookarefictitious.Anyresemblancetopersons,
livingordeadispurelycoincidental.

Acknowledgements

Ivebeenblessedtohaveworkedwithsomeoftheindustrystopprofessionalswhohaveboth
mentored me and shared with me their experience and knowledge over the years. In
researchingthisbook,Ivereliedonmanydifferentsources,whichIvehighlightedthroughout.

My special thanks to my editor, Susan Horne, for her patience, technical writing expertise,
dedicationandfriendship.

My thanks to all of the students of the Real Estate and Mortgage Institute of Canada Inc.,
Seneca College and the consortium of Ontario Colleges through Ontario Learn who have so
richlyenhancedmycareer,andwhoconstantlychallengemyknowledgeandassumptions.

SpecialthankstotheOntarioRealEstateAssociationforpermissiontousetheiragreementof
purchaseandsaleform.

Sincere thanks to all of my colleagues for their constant support, input and dedication to our
industry.

Mythankstomycoverdesigner,SanaZaidiforbringingafreshnewlooktothisbook.

Finally,IwouldliketothankmyincrediblewifeJenniferforherunwaveringsupport.Without
herIwouldnotbethemanIamtoday.

About the Author

JosephJ.Whitehasbeeninvolvedinthemortgageindustryforover22years.Hebeganhis
careerasamortgageagent,andinthemortgagelendingsectoroftheindustryhehasheld
positionsasNationalSalesManagerandVPofSaleswithtwonationalmortgagelenders,and
hasownedamortgageinvestmentcorporation.

Intheindustrysmortgagebrokeringsectorheisalicensedmortgageagentandhasbeena
partneratasuccessfulmortgagebrokerage,principalbrokeratacommercialbrokerage,and
ownerofhisownboutiquebrokerage.

Asaneducator,Mr.Whitehasbeeneducatingthemortgageindustryforover14years,wasa
professorandprogramcoordinatoratSenecaCollegeandiscurrentlyPresidentoftheReal
EstateandMortgageInstituteofCanadaInc.(REMIC).Mr.Whitehasdevelopedseveralcourses
forSenecaCollegeaswellasthemortgageagentandbrokercourses,writtentwotextbooks
usedinthemortgageindustryandbyover20Ontariocolleges,aswellasseveralbusiness
focusedbooksandebooks.Hehasinstructedovertwelvethousandstudentsandin2003won
theExcellenceAwardforteachingandleadershipexcellenceatSenecaCollege.Hecanbe
contactedatjoe.white@remic.ca

TableofContents
Acknowledgements.........................................................................................................................iii
AbouttheAuthor............................................................................................................................iii
I n t r o d u c t i o n ............................................................................................................................1
Chapter1:MarketOverview

LearningOutcomes.........................................................................................................................3
Introduction............................................................................................................................3
1.1 ACareerasaMortgageAgent...............................................................................................3
Pauseforclarificationtermmortgageagentandmortgagebroker......................4
1.2 KeyParticipants......................................................................................................................5
Foryourinformation.....................................................................................................5
SuccessTipRealestatesalespeople.............................................................................6
PauseforclarificationLoantoValue(alsoreferredtoasLTV).....................................7
1.3 HistoryoftheMortgageIndustryinOntario.........................................................................8
1.4 MarketDemographicsandTrends.......................................................................................12
Population............................................................................................................................12
SizeoftheMortgageMarket...............................................................................................13
CharacteristicsofaMortgageAgentsClient......................................................................13
TheAverageCanadiansCreditScore..................................................................................17
PauseforclarificationCreditscore.............................................................................17
1.5 TheCommercialMortgageMarket......................................................................................18
SuccessTipCommercialtransactions.........................................................................20
1.6 InvestinginMortgages.........................................................................................................20
PrivateLending....................................................................................................................20
SyndicatedMortgages.........................................................................................................21
MortgagesasInvestments..................................................................................................21
PauseforclarificationPowerofSale..........................................................................22
PauseforclarificationDiscount...................................................................................23
IndirectInvestinginMortgages...........................................................................................24
1.7 RealEstateandMortgageInstituteofCanadaInc.(REMIC)................................................24
1.8 MortgageAssociationsandProfessionalDesignations........................................................25
1.9 ChoosingaBrokerage...........................................................................................................25
1.10 KeyTermsandDefinitions...................................................................................................29
1.11 ReviewQuestions.................................................................................................................34
ShortAnswerQuestions......................................................................................................34
Appendix1:Schedule1Banks.......................................................................................................35
Appendix2:Schedule2Banks.......................................................................................................36
Appendix3:Schedule3Banks.......................................................................................................37

Chapter2:BasicMortgageConcepts

39

LearningOutcomes.......................................................................................................................39
Introduction..........................................................................................................................39
2.1 WhatisaMortgage?............................................................................................................40
Definition.............................................................................................................................40
PauseforclarificationTitle..........................................................................................40
2.2 CollateralMortgages............................................................................................................40
2.3 WhatisaMortgageAgent/Broker?.....................................................................................41
2.4 TheMortgageContract........................................................................................................42
TheStandardChargeTerms................................................................................................42
BorrowerCovenants............................................................................................................42
LenderCovenants................................................................................................................43
2.5 MortgageRegistrationDocumentation...............................................................................44
TheCharge/Mortgage.........................................................................................................44
TheCollateralCharge/Mortgage.........................................................................................46
TheDischargeofCharge......................................................................................................48
2.6 MortgageRanks...................................................................................................................50
2.7 WhyisMortgageFinancingNeeded?..................................................................................50
PauseforclarificationDownpayment........................................................................51
PauseforclarificationDownpaymentrequirementsforinsuredmortgages............51
2.8 ThePurposesofUsingaMortgage......................................................................................51
Purchase..............................................................................................................................51
Refinance.............................................................................................................................51
SuccessTipHomeBuyersProgram(HBP)..................................................................52
SuccessTipHomeBuyersTaxCredit(HBTC).............................................................52
EquityTakeOut(ETO).........................................................................................................52
BridgeFinancing..................................................................................................................52
2.9 ConventionalandHighRatioMortgages.............................................................................53
HighRatioMortgage............................................................................................................53
PauseforclarificationSelfinsuredlender..................................................................54
ConventionalMortgage.......................................................................................................54
2.10 KeyTermsandDefinitions...................................................................................................56
2.11 ReviewQuestions.................................................................................................................58
ShortAnswerQuestions......................................................................................................58
Chapter3:AdvancedMortgageConcepts

59

LearningOutcomes.......................................................................................................................59
3.1 FinancialComponentsofaMortgage..................................................................................59
TheFaceValue.....................................................................................................................59
TheTerm..............................................................................................................................59

TheAmortization.................................................................................................................60
TheInterestRate.................................................................................................................60
TheCompoundingFrequencyoftheInterestRate.............................................................60
PaymentAmount.................................................................................................................60
3.2 TypesofMortgageProducts................................................................................................61
ThePartiallyAmortized,BlendedConstantPaymentMortgageFixedRate....................61
ThePartiallyAmortized,BlendedConstantPaymentMortgageVariableRate...............62
SuccessTipDeterminingaborrowersneeds.............................................................66
ThePartiallyAmortized,BlendedVariablePaymentMortgageVariableRate................66
TheInterestOnlyMortgage................................................................................................66
ForyourinformationInterestRates...........................................................................67
TheHomeEquityLineofCredit(HELOC).............................................................................68
TheInterestAccruingMortgage..........................................................................................69
TheReverseMortgage.........................................................................................................70
TheStraightLinePrincipalReductionMortgage.................................................................70
TheGraduatedPaymentMortgage.....................................................................................71
3.3 MortgageOptions................................................................................................................72
1. PrepaymentOptions.......................................................................................................72
a) FullyOpen.......................................................................................................................72
b) PartiallyOpen.................................................................................................................73
CalculatingthePrepaymentPenalty.............................................................................73
c) ClosedMortgagePrepaymentOption............................................................................73
SuccessTipDefiningaClosedMortgage.................................................................74
2. RepaymentOptions........................................................................................................74
a) PeriodicPaymentIncrease.............................................................................................75
b) AcceleratedMortgagePayment.....................................................................................76
SuccessTipPaymentfrequency..................................................................................79
c) LumpSumPayments......................................................................................................79
d) ExtendedAmortization...................................................................................................80
3. CashBackOption............................................................................................................81
4. CombinedorBundledOption.........................................................................................82
5. PortabilityOption...........................................................................................................83
6. AssumabilityOption........................................................................................................83
KeyTermsandDefinitions.............................................................................................................85
3.4 ReviewQuestions.................................................................................................................89
ShortAnswerQuestions......................................................................................................89
Chapter4:PropertyOwnershipinOntario

90

LearningOutcomes.......................................................................................................................90
4.1 Property..........................................................................................................................90

RealProperty.......................................................................................................................90
PersonalProperty................................................................................................................90
Ownership.........................................................................................................................90
EstatesinLand......................................................................................................................90
FeeSimpleEstate.................................................................................................................90
LeaseholdEstate..................................................................................................................91
LifeEstate/LifeLease.........................................................................................................91
SuccessTipLifeEstate/LifeLease.............................................................................92
CondominiumOwnership....................................................................................................92
Encumbrances......................................................................................................................92
Mortgages............................................................................................................................92
Easements............................................................................................................................92
RestrictiveCovenants..........................................................................................................93
BuildingSchemes.................................................................................................................93
CoOwnershipofRealProperty............................................................................................93
TenancyinCommon............................................................................................................93
JointTenancy.......................................................................................................................94
JudgmentsandLiens............................................................................................................94
Judgments............................................................................................................................94
Liens.....................................................................................................................................95
KeyTermsandDefinitions...................................................................................................96
ReviewQuestions.................................................................................................................98
ShortAnswerQuestions......................................................................................................98

4.2
4.3

4.4
4.5

4.6

4.7

4.8
4.9

Chapter5:RegulationandLegislation

99

LearningOutcomes.......................................................................................................................99
Introduction..........................................................................................................................99
PauseforclarificationDisclosure................................................................................99
PauseforclarificationRegulate................................................................................100
5.1 TheRegulator:FSCO..........................................................................................................100
TheCommission................................................................................................................100
FinancialServicesTribunal(Tribunal)................................................................................100
TheSuperintendentandStaff...........................................................................................100
SummaryoftheActandRegulations................................................................................101
5.2 ActivitiesthatareRegulated..............................................................................................102
5.3 Licensure..........................................................................................................................103
PauseforclarificationLicensure...............................................................................103
FourLicenses.....................................................................................................................104
PauseforclarificationCorporations,partnershipsandsoleproprietorships...........104
Restrictions........................................................................................................................104

ExemptionstoLicensure....................................................................................................104
PauseforclarificationVendortakeback..................................................................105
GettingandKeepingaLicense...........................................................................................105
HavingaLicenseIssuedbyFSCO.......................................................................................106
FSCO'sPublicRegistry........................................................................................................106
ProhibitedActivities..........................................................................................................107
PauseforclarificationProhibitedactivities..............................................................107
ComplianceandEnforcement...........................................................................................107
PauseforclarificationTrustfunds............................................................................108
PauseforclarificationAdministrativepenalties.......................................................108
HavingaLicenseSuspendedorRevokedbyFSCO............................................................109
5.4 TheMortgageBrokerageLicense.......................................................................................110
LicensingRequirements(Sections13,Regulation408/07)...........................................110
PauseforclarificationErrorsandomissionsinsurance(E&O)................................111
PauseforclarificationPrincipalbroker.....................................................................111
SuitabilityforLicensing(Sections13,Regulation408/07)............................................111
StandardsofPractice(Regulation188/08).......................................................................112
PublicRelations.................................................................................................................112
ComplaintsProcess............................................................................................................112
CustomerRelations...........................................................................................................112
ReturnofDocuments(Section17,Regulation188/08)....................................................113
InformationabouttheBrokerage......................................................................................113
FeesandPayments............................................................................................................113
PauseforclarificationRemuneration.......................................................................114
DutiesinParticularTransactions.......................................................................................114
Disclosure..........................................................................................................................114
PoliciesandProcedures.....................................................................................................115
RecordKeeping..................................................................................................................115
PauseforclarificationTradecompletiondate..........................................................115
ReverseMortgages............................................................................................................116
ComplianceReview............................................................................................................116
5.5 TheMortgageAgentLicense..............................................................................................116
StandardsofPractice.........................................................................................................117
5.6 TheMortgageBrokerLicense............................................................................................118
5.7 ThePrincipalBroker...........................................................................................................119
5.8 TheMortgageAdministratorLicense.................................................................................119
5.9 Summary..........................................................................................................................120
5.10 ExternalResources.............................................................................................................120
5.11 KeyTermsandDefinitions.................................................................................................121
5.12 ReviewQuestions...............................................................................................................126

TrueorFalseQuestions.....................................................................................................126
ShortAnswerQuestions....................................................................................................127
Appendix1:FSCOOrganizationChartasofNovember23,2015..............................................128
Chapter6:TransactionOverview

129

LearningOutcomes.....................................................................................................................129
Introduction........................................................................................................................129
6.1 WhoistheClient?..............................................................................................................129
6.2 TheRoleoftheMortgageAgentasAdvisor......................................................................130
LenderExpectations..........................................................................................................130
BorrowerExpectations......................................................................................................131
SuccessTipActinthebestinterestsoftheclient....................................................133
SuccessTipServiceisthekey...................................................................................133
SuccessTipStayuptodateonlendersproducts....................................................134
SuccessTipAdoptthefourborrowerexpectations.................................................135
6.3 TheStepsinaBrokeredTransaction..................................................................................135
PauseforclarificationOriginationsoftware...............................................................136
PauseforclarificationAppraisal................................................................................136
PauseforclarificationAmortizationschedule..........................................................137
6.4 KeyTermsandDefinitions.................................................................................................139
6.5 ReviewQuestions...............................................................................................................141
ShortAnswerQuestions....................................................................................................141
Chapter7:InsuranceintheMortgageIndustry

142

LearningOutcomes.....................................................................................................................142
Introduction........................................................................................................................142
7.1 MortgageDefaultInsurance..............................................................................................142
WhatisMortgageDefaultInsurance?...............................................................................142
Background........................................................................................................................142
HowMortgageDefaultInsuranceWorks..........................................................................143
Programs............................................................................................................................144
CMHC.................................................................................................................................144
SuccessTipPurchaseplusimprovementsprogram..................................................145
GenworthFinancial............................................................................................................145
CanadaGuaranty...............................................................................................................145
DefaultManagementPrograms(alsoknownasworkoutoptions)...............................146
7.2 MortgageCreditorandLifeInsurance...............................................................................147
WhatisMortgageCreditorInsurance?.............................................................................147
WhatisLifeInsurance?......................................................................................................148
SuccessTipPartnerwithaprofessional...................................................................149

WhatinsuranceisbestforyourClient?............................................................................150
PropertyInsurance.............................................................................................................151
WhatisPropertyInsurance?.............................................................................................151
Whyisitnecessary?..........................................................................................................151
TypesofInsurance.............................................................................................................151
TitleInsurance....................................................................................................................154
WhatisTitleInsurance?....................................................................................................154
TypesofPolicies................................................................................................................154
SolicitorsOpiniononTitlevs.TitleInsuranceAComparison........................................155
PauseforclarificationSolicitorsOpiniononTitle................................................155
TheCostofTitleInsurance................................................................................................156
MakingaClaimonaTitleInsurancePolicy.......................................................................156
TheHistoryofTitleInsurance............................................................................................156
ProvidersofTitleInsurance...............................................................................................157
SuccessTipSuggesttitleinsurancetoyourclients...................................................157
ErrorsandOmissionsInsurance.........................................................................................158
WhatisErrorsandOmissionsinsurance(E&O)?...............................................................158
KeyTermsandDefinitions.................................................................................................159
ReviewQuestions...............................................................................................................165
ShortAnswerQuestions....................................................................................................165

7.3

7.4

7.5
7.6
7.7

Chapter8:CalculatingaMortgagePayment

166

LearningOutcomes.....................................................................................................................166
Introduction........................................................................................................................166
8.1 TheComponentsofaMortgagePayment.........................................................................166
8.2 ConfiguringtheHP10BII.....................................................................................................167
8.3 InterestRates.....................................................................................................................170
PauseforclarificationEquivalentinterestrates.......................................................172
8.4 ConvertinganInterestRatewiththeHP10BII...................................................................172
PauseforclarificationEinyourdisplay.................................................................174
PauseforclarificationRoundinginterestrates........................................................174
8.5 CalculatingaMortgagePaymentwiththeHP10BII...........................................................176
PauseforclarificationBEGINinyourdisplay........................................................178
PauseforclarificationRoundingamortgagepayment............................................179
SuccessTipN.............................................................................................................180
PauseforclarificationTermseffectonamortgagepayment.................................180
8.6 CalculatinganInterestOnlyMortgagePayment...............................................................181
8.7 UsingtheSHARPEL738.....................................................................................................182
8.8 UsingtheTexasInstrumentsBAIIPlus...............................................................................185
8.9 AdvancedMortgageCalculations.......................................................................................188

AcceleratingaMortgage...................................................................................................188
PauseforclarificationUsingthe+/Key...............................................................188
CalculatingtheOutstandingBalance(OSB)ofaMortgage...............................................189
PauseforclarificationImportantnoteabouttheHP10BII+....................................189
PauseforclarificationRoundingoutstandingbalances............................................190
Calculatingtheprepaymentpenaltyonapartiallyopenmortgage..................................193
3MonthsInterestPenalty................................................................................................193
InterestRateDifferential...................................................................................................194
8.10 Conclusion.......................................................................................................................194
SuccessTipPractice!.................................................................................................195
8.11 KeyTermsandDefinitions.................................................................................................196
8.12 ReviewQuestions...............................................................................................................198
ShortAnswerQuestions....................................................................................................198
Chapter9:AttractingaClient

199

LearningOutcomes.....................................................................................................................199
Introduction........................................................................................................................199
9.1TheImpactofRegulationandLegislation.............................................................................200
TheCanadianCodeofAdvertisingStandards...................................................................200
PauseforclarificationAdvertisingStandardsCanada..............................................202
Legislation..........................................................................................................................202
PublicRelationsMaterials:AgentsandBrokers................................................................202
PauseforclarificationExamplesofpublicrelationsmaterials.................................202
PublicRelationsMaterials:MortgageBrokerages............................................................203
Misleading,DeceptiveandFalseAdvertising....................................................................204
AdvertisingTipsCompetitionBureauofCanada............................................................206
9.2BusinessDevelopmentforMortgageAgents........................................................................207
MissionandVisionStatements.........................................................................................207
BusinessCards...................................................................................................................208
UniqueFormsofBusinessCards.......................................................................................209
SuccessTipBusinesscards........................................................................................210
Networking........................................................................................................................210
SuccessTipNetworking.............................................................................................211
TheMarketing/AdvertisingofIntangiblesorServices......................................................211
Marketing:theArtofDifferentiation................................................................................212
SuccessTipMakethephonering!............................................................................214
DatabaseMarketing..........................................................................................................214
Referrals.............................................................................................................................215
SuccessTipGettingfamilyandfriendsmortgages..................................................215
9.3KeyTermsandDefinitions.....................................................................................................216

9.4ReviewQuestions..................................................................................................................218
ShortAnswerQuestions....................................................................................................218
Chapter10:FirstContact

219

LearningOutcomes.....................................................................................................................219
Introduction........................................................................................................................219
10.1TheInitialTelephoneCall....................................................................................................219
PauseforclarificationCallscripts.............................................................................220
10.2IncomingCallScript.............................................................................................................221
TipsforSuccess..................................................................................................................223
10.3OutgoingColdCallScriptforReferrals................................................................................224
PauseforclarificationColdcalls...............................................................................224
10.4KeyTermsandDefinitions...................................................................................................226
10.5ReviewQuestions................................................................................................................227
ShortAnswerQuestions....................................................................................................227
Chapter11:TheInitialConsultation

228

LearningOutcomes.....................................................................................................................228
Introduction........................................................................................................................228
11.1RequiredDocumentation....................................................................................................228
DocumentationforallTransactions..................................................................................229
SpecificDocumentationforaPurchase.............................................................................229
SpecificdocumentationforaRefinance,EquitytakeOutandSwitch..............................230
11.2FileCreation.........................................................................................................................230
FileChecklist......................................................................................................................230
FileWorksheet...................................................................................................................232
SuccessTipIsyourclientworkingwithsomeoneelse?...........................................233
11.3MeetingtheClient...............................................................................................................233
FirstImpressions................................................................................................................233
PauseforclarificationOpenendedquestion...........................................................234
TheClientsHome..............................................................................................................234
PauseforclarificationDecisionmaker.....................................................................234
TheMortgageAgentsOffice.............................................................................................235
AnotherOutsideLocation..................................................................................................235
11.4IdentityVerification.............................................................................................................235
11.5TheApplicationForm..........................................................................................................236
SectionbySectionApplicationAnalysis............................................................................239
PauseforclarificationCoapplicantsandguarantors...............................................240
TipsforaCompleteApplication........................................................................................246
11.6DeterminingtheApplicantsNeeds....................................................................................246

11.7KeyTermsandDefinitions...................................................................................................249
11.8ReviewQuestions................................................................................................................251
ShortAnswerQuestions....................................................................................................251
Chapter12:ApplicationAnalysisBorrowerDocuments

252

LearningOutcomes.....................................................................................................................252
Introduction........................................................................................................................252
12.1 FraudandForgery..............................................................................................................252
12.2 IncomeDocumentation......................................................................................................253
T4A.....................................................................................................................................253
SuccessTipSIN...........................................................................................................255
T4.......................................................................................................................................256
SuccessTipEIpremiums...........................................................................................259
SuccessTipIncometaxrates....................................................................................260
JobLetter...........................................................................................................................261
Paystub..............................................................................................................................264
NoticeofAssessment(NOA).............................................................................................266
BusinessLicense................................................................................................................267
FinancialStatements.........................................................................................................268
12.3 PropertyDocumentation...................................................................................................271
MultipleListingService(MLS)...........................................................................................271
AgreementofPurchaseandSale.......................................................................................272
12.4 OtherDocumentation........................................................................................................278
GiftLetter...........................................................................................................................278
PropertyAssessment.........................................................................................................279
MortgageStatement.........................................................................................................281
TaxBill................................................................................................................................283
CondominiumStatusCertificate........................................................................................284
SampleStatusCertificate...................................................................................................284
CertificateofIndependentLegalAdvice(ILA)...................................................................287
SampleCertificateofIndependentLegalAdvice...............................................................287
CreditorInsuranceApplication..........................................................................................288
SuccessTipAnswerhonestlyinthecreditorinsuranceapplication.........................288
SampleCreditorInsuranceApplication.............................................................................289
12.5 Summary..........................................................................................................................292
12.6 KeyTermsandDefinitions.................................................................................................293
12.7 ReviewQuestions...............................................................................................................295
ShortAnswerQuestions....................................................................................................295

Chapter13:ApplicationAnalysisApplicationRatios

299

LearningOutcomes.....................................................................................................................299
Introduction........................................................................................................................299
13.1 LoantoValueRatio(LTV)...................................................................................................299
PauseforclarificationThe/character..................................................................300
CalculatingtheLTVofa1stMortgage................................................................................300
PauseforclarificationConvertingdecimalstopercentages....................................300
PauseforclarificationEinyourdisplay.................................................................301
CalculatingtheLTVofa2ndMortgage.............................................................................301
CalculatingtheLTVofAdditionalMortgages....................................................................302
UsingtheLTVtoCalculateaMaximumMortgageAmount..............................................302
13.2 GrossDebtService(GDS)andTotalDebtService(TDS)Ratios..........................................303
CalculatingtheGrossDebtServiceRatio(GDS)................................................................303
TheComponentsofGDS....................................................................................................304
PauseforclarificationFrequencyofpaymentsinGDS.............................................305
SuccessTipIfGDSisaboveindustrystandard..........................................................306
GDSandSecondMortgages..............................................................................................306
CalculatingtheTotalDebtServiceRatio(TDS):PreQualifying.........................................307
SuccessTipOutstandingbalanceorcreditlimitintheTDS?....................................308
CalculatingtheTotalDebtServiceRatio(TDS):Verifying.................................................310
SuccessTipIfTDSisaboveindustrystandard..........................................................310
13.3 CalculatingtheMaximumMortgageAmount....................................................................311
13.4 LTV,GDSandTDSQuickReferenceGuide.........................................................................312
13.5 KeyTermsandDefinitions.................................................................................................313
13.6 ReviewQuestions...............................................................................................................314
Chapter14:ApplicationAnalysisBorrowerCredit

316

LearningOutcomes.....................................................................................................................316
Introduction........................................................................................................................316
14.1 CreditBureaus....................................................................................................................316
14.2 CreditReports....................................................................................................................317
SampleCreditReportProvidedtoConsumers..................................................................317
SampleCreditReportProvidedtoEquifaxMembers........................................................319
EquifaxCreditReportLegend............................................................................................324
TradeInformationDescriptions.........................................................................................327
TradeInformationRatings.................................................................................................328
CreditRatingExamples......................................................................................................328
EquifaxGlossaryofTermsUsedinaCreditReport...........................................................329
InterpretingaCreditReport..............................................................................................330
SuccessTipQuestiondiscrepancies..........................................................................332

SuccessTipCollections..............................................................................................334
SuccessTipNotes......................................................................................................335
SuccessTipQuestioningcreditissues.......................................................................336
14.3 CreditScoresandAnalysis..................................................................................................337
UnderstandingaCreditScore............................................................................................337
ItemsthataffectaCreditScore.........................................................................................339
14.4 KeyTermsandDefinitions.................................................................................................341
14.5 ReviewQuestions...............................................................................................................343
ShortAnswerQuestions....................................................................................................343
Chapter15:ApplicationAnalysisTheProperty

344

LearningOutcomes.....................................................................................................................344
Introduction........................................................................................................................344
15.1 AppraisalBasics..................................................................................................................344
TheAppraiser.....................................................................................................................344
Accreditations....................................................................................................................345
TheAppraisal.....................................................................................................................346
TheValueofaProperty.....................................................................................................347
15.2 CalculatingtheMarketValueofaProperty.......................................................................347
PauseforclarificationThenumberofcomparables.................................................349
15.3 TheTypesofAppraisals......................................................................................................350
DesktopAppraisal(alsoreferredtoasaSalesDataReport)............................................350
DrivebyAppraisal.............................................................................................................350
FullAppraisal.....................................................................................................................351
15.4 KeyTermsandDefinitions.................................................................................................360
15.5 ReviewQuestions...............................................................................................................362
ShortAnswerQuestions....................................................................................................362
Chapter16:ChoosingaLender

363

LearningOutcomes.....................................................................................................................363
Introduction........................................................................................................................363
16.1 TypesofLenders................................................................................................................363
PrimeMortgageLending...................................................................................................364
SubPrimeMortgageLending(alsoreferredtoasSelfInsuredLending)......................364
ThePrivateMortgageMarket...........................................................................................365
SuccessTipSubprimelenders.................................................................................365
16.2 UnderstandingLenderGuidelines......................................................................................365
ProductSheets...................................................................................................................366
RateSheets........................................................................................................................367
SuccessTipIfyoureunsure......................................................................................367

16.3 ChoosingaLender..............................................................................................................368
PauseforclarificationLoyaltyorpointsprogram.....................................................368
16.4 KeyTermsandDefinitions.................................................................................................369
16.5 ReviewQuestions...............................................................................................................371
ShortAnswerQuestions....................................................................................................371
Chapter17:SubmittingtheApplicationandObtainingaCommitment

372

LearningOutcomes.....................................................................................................................372
Introduction........................................................................................................................372
SuccessTipOnlysubmittoonelender.....................................................................372
17.1 SubmittingtheApplication.................................................................................................373
17.2 Investor/LenderDisclosure................................................................................................374
WhatMustbeDisclosed....................................................................................................374
HowDisclosureMustbeMade..........................................................................................377
WhenDisclosureMustbeMade.......................................................................................377
TheInvestor/LenderDisclosureStatementforBrokeredTransactions............................378
17.3 TheCommitmentLetter.....................................................................................................392
SuccessTipDoublecheckthecommitmentletter....................................................392
17.4 ADeclinedApplication.......................................................................................................396
17.5 KeyTermsandDefinitions.................................................................................................397
Conditions
397
UFFI(Ureaformaldehydefoaminsulation)
397
17.6 ReviewQuestions...............................................................................................................398
ShortAnswerQuestions....................................................................................................398
Chapter18:BorrowerDisclosure

399

LearningOutcomes.....................................................................................................................399
Introduction........................................................................................................................399
18.1 AmendmentsToOntarioRegulationsJanuary,2016......................................................400
18.2 CompletingtheBorrowerDisclosureDocument...............................................................401
WhatMustbeDisclosed....................................................................................................401
1. Feesandpaymentsassociatedwiththemortgage................................................401
PauseforclarificationFeesarenotregulated..........................................................401
2. Therelationshipbetweenthebrokerageandlenderundertheproposed
mortgage402
3. Theroleofthebrokerage......................................................................................403
4. Thenumberoflendersthebrokeragerepresentedduringthepreviousyear......403
5. PotentialConflictsofinterest.................................................................................404
PauseforclarificationConflictofinterest................................................................404
6. Risksassociatedwiththeproposedmortgage......................................................404
7. Termsandconditionsoftheproposedmortgage.................................................406

8. Estimatedcosts......................................................................................................407
9. Thecostofborrowing............................................................................................407
PauseforclarificationThecostofborrowing:dollarsandcents.............................407
PauseforclarificationCalculatingtheAPR/costofborrowing.................................408
CostofBorrowing/APRIncludedandExcludedItems....................................................408
DisclosureunderSpecificCircumstances..........................................................................409
1. DisclosureFixedinterestmortgageforafixedamount.......................................409
2. DisclosureVariableinterestmortgageforafixedamount..................................410
3. DisclosureLineofcredit.......................................................................................411
4. DisclosureCreditcardapplications......................................................................412
5. DisclosureCreditcards.........................................................................................413
HowDisclosureMustbeMade..........................................................................................414
WhenDisclosureMustbeMade.......................................................................................414
PauseforclarificationWhatdisclosuredocumentsmustbegiventothe
borrower?....................................................................................................................414
18.3 SampleBorrowerDisclosure..............................................................................................414
18.4 BorrowerDisclosureChecklist............................................................................................423
18.5 Summary..........................................................................................................................424
18.6 KeyTermsandDefinitions.................................................................................................425
18.7 SAMPLEBORROWERDISCLOSUREFILOGIX.....................................................................426
18.8 ReviewQuestions...............................................................................................................428
TrueorFalseQuestions.....................................................................................................428
ShortAnswerQuestions....................................................................................................428
Chapter19:ClosingtheTransaction

429

LearningOutcomes.....................................................................................................................429
Introduction........................................................................................................................429
19.1 EstimatingClosingCosts.....................................................................................................429
CommonClosingCosts......................................................................................................429
SuccessTipClosingCostWorksheet.........................................................................434
19.2 ElectronicLandRegistration...............................................................................................434
19.3 TheClosingProcess............................................................................................................435
PauseforclarificationSubsearch..............................................................................437
19.4 TheInterestAdjustmentDate(IAD)...................................................................................438
19.5 KeyTermsandDefinitions.................................................................................................443
19.6 ReviewQuestions...............................................................................................................444
ShortAnswerQuestions....................................................................................................444
Appendix1:AcknowledgmentandDirection..............................................................................445
Appendix2:DocumentRegistrationAgreement(DRA)..............................................................447
Appendix3:ClosingCostsWorksheet.........................................................................................449

Chapter20:ContractLaw

450

LearningOutcomes.....................................................................................................................450
Introduction........................................................................................................................450
20.1 WhatisaContract?............................................................................................................450
PauseforclarificationRealestatecontractsmustbeinwriting..............................451
20.2 TheElementsofaValidContract.......................................................................................451
TheOffer............................................................................................................................451
AcceptanceoftheOffer....................................................................................................451
IntentiontoCreateaLegalRelationship...........................................................................452
TheLegalCapacitytoEnterintoaContract......................................................................452
LegalityRequirements.......................................................................................................452
ExchangeofConsideration................................................................................................453
20.3 ContractualDefects............................................................................................................453
Misrepresentation.............................................................................................................453
Duress................................................................................................................................454
UndueInfluence................................................................................................................454
UnconscionableActs..........................................................................................................454
Mistake..............................................................................................................................454
MistakeofLaw.............................................................................................................454
MistakeofFact............................................................................................................454
ThePartiestoaMistake..............................................................................................454
20.4 ContractualRights..............................................................................................................455
PrivityofContract..............................................................................................................455
VicariousPerformance......................................................................................................455
Assignment........................................................................................................................456
20.5 DischargingaContract.......................................................................................................456
Performance......................................................................................................................456
Agreement.........................................................................................................................457
Waiver..........................................................................................................................457
MaterialAlterations.....................................................................................................457
Right...................................................................................................................................458
OptiontoTerminate....................................................................................................458
ConditionPrecedent....................................................................................................458
ConditionSubsequent.................................................................................................458
Frustration.........................................................................................................................458
OperationofLaw...............................................................................................................459
20.6 BreachofContractandContractualRemedies..................................................................459
Damages............................................................................................................................459
SpecificPerformance.........................................................................................................459
SubstantialPerformance...................................................................................................459

QuantumMeruit................................................................................................................460
Injunction...........................................................................................................................460
Rescission...........................................................................................................................460
20.7 KeyTermsandDefinitions.................................................................................................461
20.8 ReviewQuestions...............................................................................................................464
ShortAnswerQuestions....................................................................................................464
Chapter21:MortgageRemedies

465

LearningOutcomes.....................................................................................................................465
Introduction........................................................................................................................465
21.1 PowerofSale......................................................................................................................465
PowerofSaleProcess........................................................................................................466
21.2 ForeclosureandotherRemedies.......................................................................................469
Foreclosure........................................................................................................................469
OtherRemedies.................................................................................................................469
WorkingwiththeLender...................................................................................................470
SuccessTipIfyourclientisabouttomissapayment..............................................470
21.3 KeyTermsandDefinitions.................................................................................................471
21.4 ReviewQuestions...............................................................................................................472
ShortAnswerQuestions....................................................................................................472
Chapter22:MortgageFraud

473

LearningOutcomes.....................................................................................................................473
22.1 WhatisMortgageFraud?...................................................................................................473
22.2 TypesofMortgageFraud...................................................................................................474
FraudforCriminalActivities..............................................................................................474
FraudforProfit..................................................................................................................475
FraudforShelter................................................................................................................478
22.3 TheImpactofMortgageFraud..........................................................................................480
22.4 FraudPrevention................................................................................................................480
StepsinFraudPrevention..................................................................................................480
FraudWarningSigns..........................................................................................................481
22.5 TheLandTitlesAssuranceFund.........................................................................................482
22.6 AdviceforClients................................................................................................................482
22.7 KeyTermsandDefinitions.................................................................................................485
22.8 ReviewQuestions...............................................................................................................487
ShortAnswerQuestions....................................................................................................487
Chapter23:EthicsandMortgageBrokering

488

LearningOutcomes.....................................................................................................................488

Introduction........................................................................................................................488
23.1 WhatisEthics?...................................................................................................................488
23.2 TheCoreValuesandBeliefsoftheMortgageIndustry.....................................................488
BorrowerExpectations......................................................................................................489
LenderExpectations..........................................................................................................489
23.3 TheDecisionMakingModel...............................................................................................490
23.4 CaseStudy1.......................................................................................................................492
23.5 CaseStudy2.......................................................................................................................494
23.6 Conclusion.......................................................................................................................496
23.7 KeyTermsandDefinitions.................................................................................................497
23.8 ReviewQuestions...............................................................................................................498
ShortAnswerQuestions....................................................................................................498
CaseStudy

499

ScenarioandSupportingDocuments499
CaseStudy1Questions.....................................................................................................512
SectionOne:CompletetheMortgageApplicationForm...........................................512
SectionTwo:ShortAnswerQuestions........................................................................514
SectionThree:BorrowerDisclosure............................................................................515
SectionFour:FinancialCalculations...........................................................................516
CaseStudy1AnswerGuide...............................................................................................521
SectionOne:CompletetheMortgageApplicationForm...........................................521
SectionTwo:ShortAnswerQuestions........................................................................523
SectionThree:BorrowerDisclosure............................................................................524
SectionFour:FinancialCalculations...........................................................................525
TableofFigures.........................................................................................................................527
Index530

Introduction

Introduction

Welcometotheexcitingworldofmortgagebrokering!

Thisbook,theupdatededitionofthelastpublicationofMortgageBrokeringinOntarioAgent
Edition, has been written to assist you in meeting the educational requirements to become
licensed as a mortgage agent in Ontario. Since the publication of the First Edition, the new
Mortgage Brokerages, lenders and Administrators Act, 2006 (while 2006 is part of the
legislationstitle,itactuallydidntcomeintoeffectuntil2008)alsoreferredtoastheMBLAAhas
been fully enacted, with the last piece of legislation coming into effect as of January 1, 2009.
There have been several significant changes, all reflected in this book, to brokering in this
province, such as changes to disclosure requirements for borrowers and Investors, marketing
andtheuseofspecifictitlesbybrokersandagents,tonamebutafew.TheMBLAAalsoraises
the bar for both consumer protection and professionalism in the industry by promoting
appropriate training as well as the licensing of mortgage agents to meet both the regulators
andtheindustrysdemandforqualityprofessionalstoservicethemortgagemarket.Inaddition,
theindustryhasundergonesignificantchanges.Ithassurvivedthemortgagecrisis,experienced
regulatory changes that have impacted how Ontarians borrow, and have seen market
participantsleavetheindustrywhilenewoneshaveenteredit.

Theoneconstantinourindustry,asinlife,ischange.Changecanhaveapositiveornegative
impact, depending on how we respond to it. To be successful you will have to surpass the
minimum requirements for licensing and learn how to respond to the industrys changes, and
thats where additional, practical, real life information in this book will be of great interest to
you!

Ihaveorganizedthisbookinawaythatpreparesyoutocompleteamortgagetransactiontoa
professionalstandard.Toassistyoufurther,IveaddedSuccessTipsthroughout.Theseare
designedtoprovideyoupracticalsuccessstrategiesthatIhavegatheredfrommyownyearsof
experienceaswellasthoseofmyfriendsandcolleaguesintheindustry.Whennewtermsare
introducedIveaddedPauseforclarification,designedtoquicklydefinethenewterm.

The opportunities in this industry are endless the mortgage brokerage industry has many
diverse participants and offers those involved incredible opportunities for long, rewarding
careers. My own career has spanned over two decades, including positions on both the
brokering and lending sides, with both brokerages and lenders. Having begun as a mortgage
agent,Iwentontomanagemortgageagentsfortwolargebrokerages.Ivebeenapartnerina
brokerageandheldthepositionsofVicePresidentofSalesandNationalSalesManagerfortwo
nationallenders.IveownedaMortgageInvestmentCorporation(MIC)andanAdministration
company and am now President of the Real Estate and Mortgage Institute of Canada Inc. In
addition,IspenttwelveyearsatSenecaCollegeasanInstructor,ParttimeProgramCoordinator
anddevelopedboththemortgageagentandmortgageagentcoursesforlicensingpurposesin
Ontario.

The need for mortgage agents has never been greater! There are more lenders than ever
before,evenwiththerecenteconomiccrisis,butthepublichaslittleornoknowledgeofthem.
Toillustratethispoint,takeamomenttolistthenamesofallofthelendersthatyouknowor
have heard about. How many can you think of? In fact, there are dozens of lenders in the
Canadian mortgage market. This incredible number of lenders provides consumers with an

Introduction

overwhelmingarrayofchoicefortheirmortgagefinancing,andyetthemajorityofconsumers
areunawareofthem.Thetypicalconsumerneedstheassistanceofaknowledgeableandskilled
advisor to find a suitable product from among the various options available. In many cases
consumers require nonconventional lending unique, innovative products that serve their
particularneeds.Again,theconsumerneedsaprofessionalmortgageagentwithknowledgeof
andaccesstotheseproducts.

Fraudisagrowingconcern.Theprofessionalmortgageagentmustbetrainedtobealerttored
flags indicators of potential fraud. Fraud has no place in an industry with professional
standards. By acquiring and maintaining clear personal standards and ethical values,
professionalsensurethattheindustrycontinuestobeheldinhighregardbyconsumers.The
professionalmortgageagentplaysakeyroleinensuringahealthyfutureforthewholeindustry.

It is my hope that this text will provide you valuable insights into the mortgage brokerage
industryandwillcontinuetoserveasapracticalreferenceguidewhichwillbeofbenefitonan
ongoingbasis.

Ifirmlybelievethateveryconsumer,notjustthosewhohavebeendeclinedbytheirinstitution,
shoulduseaqualifiedmortgageagentoragent.Ihavehadthehonourandpleasureofworking
withandmanagingsomeofthemostprofessionalandethicalagentsinourindustry.Theyhave
actedandcontinuetoactasambassadorsonourbehalf,increasingthepublicsawarenessand
respectofourindustry.Whiletheregulatoryrequirementsdiscussedthroughoutthistextwill
helpraisethestandardsofprofessionalismforourindustryasawhole,regulationisnotthesole
answer.

In my opinion, to increase market penetration from the current level of approximately 30%
requiresachangeinthepublicsattitudeaboutourindustry.Everybrokerandagentwhoacts
withthehighestlevelsofintegrity,ethicsandprofessionalismisanambassadorforourindustry,
increasing consumer confidence in our abilities and reinforcing the belief that we are here to
serve them, not ourselves. Unfortunately every broker and agent who acts unethically or
unprofessionallytarnishesthereputationoftheindustryasawhole.Simplystated,thereisno
place in our industry for those who would tarnish our reputation by taking advantage of the
public.Brokeragesandlendersmustcontinuetohaveandexpandupontopdownphilosophies
thatrewardethicalandprofessionalbehaviourandraisethestandardofprofessionalismabove
whattheMBLAA,itsRegulationsandtheregulatorrequire.Insodoingourindustrywillshatter
that30%ceiling,aneventthatislongoverdue.

JosephJ.White

Chapter1:MarketOverview

Chapter 1: Market Overview


LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Describethepotentialofacareerasamortgageagent
ListanddescribethekeyparticipantsinOntariosmortgagemarket
DiscussthehistoryofthemortgageindustryinOntario
DiscussthemarketdemographicsandtrendsthataffecttheOntariomortgagemarket
Definethecommercialmortgagemarketandexplainthedifferencesbetweenitandthe
residentialmortgagemarket
Explaintheprivatelendingmarket
Discussthebenefitsandchallengesofinvestinginmortgages
Explainthedifferentmethodsofinvestinginmortgages
ExplaintheroleoftheRealEstateandMortgageInstituteofCanadaInc.
ListanddescribethedifferentmortgageassociationsoperatinginOntario
Listanddescribethedifferentprofessionaldesignationsawardedbythemortgage
associationsinOntario

Introduction

TheOntariomortgagemarketisavastanddiverseindustrycomprisedofdozensoflendersand
otherkeyparticipantsinthemortgageprocess.

Thefollowingsectionswillbreakdownthemarketintoitsdifferentsegmentsandattemptto
providecontextforthefinancingactivitiesintheprovince.Ofcoursetounderstandthemarket,
themainparticipantsinthemarketmustbediscussed,whichbringsustoourfirstsection.

1.1

A Career as a Mortgage Agent

Acareerasamortgageagentcanbebothfinanciallyandpersonallyrewarding.Astheindividual
responsibleforbringingborrowersandlenderstogether,youwilltypicallybecompensatedby
thelenderintheformofafindersfeeorcommissionbasedonanumberofbasispoints(bps)
multipliedbytheamountofthemortgage.Inothercases,whereyouaredealingwitha
borrowerwhodoesntqualifywithatraditionallender,youmayarrangethemortgagewitha
privatelender.Inthiscaseyouwouldchargetheborrowerabrokeragefeethatwouldbe
deducteddirectlyfromthemortgageproceeds.

Whiletheroleofthemortgageagentwillbediscussedinmoredetaillater,itisusefultodiscuss
thepotentialincomeofamortgageagentsothatyouhaveaclearerpictureofthepotential
earningsattainableshouldyoudecidetomakethisyourcareer.

First,itisimportanttobemindfulofthefactthatyourroleistoalwaysdowhatisinthebest
interestsofyourclients,whilebeingconcernedwithyourownincomelast.Inthiswayyouwill
alwaysbeconductingyourselfinaprofessionalandethicalmanner.

Chapterr1:MarketO verview

Pa
auseforcla
arification
ntermm
mortgagea
agentandmortga
age
broker
InOntariothere
earetwolice
ensesthatallo
owindividuallstobrokeramortgage:m
mortgage
agentandmorttgagebroker.Thedifferen
ncebetweenthesetwoliccensesisthatamortgage
broker,inaddittiontobeingabletobroke
ermortgages,,canalsobetthePrincipalBrokerofa
mo
ortgagebroke
erage.Eachm
mortgagebro
okeragemusthaveonePriincipalBrokertoensure
thaatthebrokerrage,itsagenttsandbrokerrscomplywitththeapprop
priatelegislatiionand
reggulations.

wecantakeaalookatatyp
picaltransactiion.Thetypicalfindersfeeeor
Withthisinmindw
comm
missionpaidb
bylendersinttodaysmarke
etplaceis85basispoints((.85%),which
hisreferredto
as85bps.Ifyouh
havearranged
damortgageintheamounntof$300,0000,thenyourbrokerage
would
dbepaidafin
ndersfeeof8
85bpsx$300
0,000,or.00885x300,000w
whichequals$2,550.

Mortggageagentsw
workonacom
mmissionsplitwiththeirbbrokerage.Fo
orexperienceedmortgage
agenttsthesplitcanbe,onaverrage,85/15(theagentreceeives85%ofthecommission).This
would
dequatetoacommissionpayabletoyo
ouof$2,167. 50.Fornewmortgageagentsthesplitt
willtyypicallybelesssuntilthebrrokeragehasdeterminedtthattheagen
nthasgainedan
appro
opriatelevelo
ofexperience
e.

Theaveragetransaactionwilltakkeapproximaately6hoursttocomplete(thisisanaveerage;some
willbe
elongerwhileothersshorrterandthisaamountoftim
meistypicallyyspreadoverrseveraldayss).
Bydivvidingthecom
mmissionbytthenumbero
ofhours($2,1167.50/6)weecandeterm
minethatyou
would
dhaveearned
d$361.25perhourforthistransaction .Ifanagent weretoaverrage1
transaactionperday,hisorherincomewould
dbeapproxim
mately$520,2200peryear($2,167.50x
20businessdaysp
permonthx1
12months).

Nowtthatwevediscussedtheu
upperendofanagentsin comepotenttial,letsdiscu
usstherealityy
forne
ewagents.

Anew
wagentwilltyypicallynothaveanincom
meforthefirs tthreemonthsofhisorhercareer.It
takestimetofindclients,thenittakestimetocloseorfuundthetransaaction,follow
wedby
receivvingyourcom
mmission.An
newagentsho
ouldexpectttoseeaninco
omeaftertheefirstthree
months,andshoulldbe,givenin
ndustryaveraages,aimingffor3fundedttransactionsp
permonthatt
theen
ndofhisorherfirstyear.Anaverageo
of3fundings permonthw
wouldequalanincomeof
$78,0
030peryear.

Ofcoursetheseareonlyaveragges.Ahighlysuccessfulaggentmayearn
nsubstantialllymorethan
thisamountinhisorherfirstye
ear,whileano
otheragentm
mayearnsubsstantiallylesss.

Asyoucontinueon
nyournewcaareerpathasamortgageaagentitisimportanttono
otethatmanyy
agenttsearnsixfigu
ureincomesw
whileothersd
donot;thep otentialisdirrectlyrelated
dtothetime,
efforttandexpertisse,amongoth
herfactors,oftheagent.

Asyoucansee,thiiscanbeane
extremelyrew
wardingcareeer.Agentshaavethepoten
ntialtoearn
significantincomesswhilehelpin
ngborrowersfindtheprodductthatbesstsuitstheirn
needsand

Chapterr1:MarketO verview

mstances.Inperformingyyourdutiesprrofessionally andethicallyyouwillearn
ntherespect
circum
ofyou
urindustrype
eers,anddevvelopafulfillin
nglifelongcaareer.

willbeworkingg.
Ournextstepistoinvestigatetthemarketinwhichyouw

1.2

Key Pa
articipants
s

Them
mortgagemarrketinOntarioiscomprise
edofseveralkkeyindustryp
participants.Inadditionto
them
mortgageagen
nt,whoserole
ewillbediscu
ussedthroug houtthistexttbook,thefollowing
particcipantsarevittaltotheindu
ustryandarepartofthepprocessoflan
ndownership.

Institu
utionallende
er
Thele
enderisthecornerstoneo
ofthemortgaggeindustry. Lendersareggenerallygroupedintotwo
o
maincategories:in
nstitutionalandprivate.

Institu
utionallendersrepresenttthemajorityoflendersin Ontario,butprivatelendeershave
alwayysbeenandw
willmostlikelyyalwaysbeaanecessaryprrovideroffun
ndsforborrow
werswho
dontqualifythrou
ughinstitution
nallenders.

Institu
utionallendersconsistofSSchedule1,2
2and3banks,,creditunion
ns,loanandtrust
comp
panies,finance
ecompaniesorothercorp
porationsconnstructedtoleendmoneyonrealestate..
Anyle
endermayalssobereferred
dtoasthemortgagee.

Fo
oryourinfo
formation

Un
ndertheBankkAct,banksaaredefinedass:
Schedu
ule1(banksth
hatareCanad
dianowned)
Schedu
ule2(branche
esorsubsidiariesofforeig nbanks)
Schedu
ule3(foreignownedbankssoperatinginnCanada)
AllistofcurrenttSchedule1,2and3bankksislocatedinntheAppend
dix

Privattelender
APrivvatelenderistypicallyanindividualinve
estorwithfu ndswhowou
uldliketoinveestin
mortggages.Thisin
ndividualwillusuallyinvestthroughhis orherlawyeerwhomayhaveclients
requirringmortgage
efinancingorramortgageagent.Hiso rherpurposeemayvarybu
utnormallyan
investtorwillinvesttin2ndmortggagesduetottheirhigherraateofreturnwhencompaaredto1st
mortggagesandoth
herpotentialtypesofinvestmentssuchhasGICsorbonds.

AnyP
Privatelenderrmayalsobereferredtoaasthemortgaagee.

Borro
ower
Theborroweriscaalledthemorttgagorandistheindividuaalorindividuaalswhoaretaakingthe
mortggageloanand
dpledgingthe
eirpropertyaassecurity.

Institu
utionalMortgageOriginator
Severralfinancialin
nstitutionsno
owhavetheirownMortgaggeOriginationteams,ofteenreferredto
o
asRoadWarriors,whoactivelyseekborrowersforthem..TheseOrigin
natorsareco
ompensatedb
by
ndarenotcon
nsideredtobebrokeringaamortgagetrransactionsin
ncetheyare
theirinstitutionan

Chapterr1:MarketO verview

der.Themajordifferentiaatingfactorb etweenanin
nstitutionalm
mortgage
usingonlyonelend
origin
natorandam
mortgageagen
ntisthat,whilebothared edicatedtop
providingthebestsolution
ns
tothe
eirclients,insstitutionalmo
ortgageorigin
natorscanon lyplacetheirrclientswithtthelenderbyy
whom
mtheyareem
mployedandtthereforedonothaveacceesstoallofth
hedifferentp
products
availaableinthemaarket.

RealEEstateSalesp
person
TheR
RealEstateSalespersonisttheindividuallwhobrokerssthepurchasseandsaletraansaction
betwe
eenavendor(seller)andtthepurchaserr.Thisindividdualisemployedbyalicen
nsedReal
Estate
eBroker,hasmetlicensinggguidelinesaandisamembberofalocalRealEstateB
Board.

RealEEstateSalespe
ersonsareavvitallinkinth
heprocessof purchasingandsellingreaalestateand
areth
hereforeofco
onsiderableim
mportanceto
othemortgaggeagentinreegardstoobtaainingclients..

MoreinformationonRealEstatteSalespersonscanbefouundthroughttheOntarioR
RealEstate
Assocciation(OREA)atwww.ore
ea.com.

Su
uccessTipRealesta
atesalespeople
AltthoughthenumberofrealestatesalespeopleissignnificantintheeOntariomarrket,before
yo
ouattemptto obtainclienttsfromthemkeepthe8020ruleinmin
nd:80%oftrransactions
are
etypicallydo
oneby20%offasalesforce
e.Youshoulddfocusontheesuccessfulreealestate
salespeopletogetthemostreferralbusin
nesspossiblee.

RealEEstateAppraiiser
TheR
RealEstateAp
ppraiseralsop
playsavitalro
oleinthereaalestateprocess,especialllyfromthe
standpointofthem
mortgageage
ent.TheAppraiserdeterm
mines,intheccaseoffinanccing,the
marke
etvalueofthepropertyto
obemortgage
ed.RealEstaateAppraiserssdonothaveetobe
licenssedinOntario
o,butunlessttheyhaveap
professionalddesignation,n
nolenderwillaccepttheir
appraaisalforfinancingpurposes.

There
eareseveralm
methodsused
dtodetermin
nethemarkettvalueofap
property,asw
wellasseveral
metho
odsofcompletinganapprraisal.Thesetopicswillbeecoveredintthechapter,A
Application
AnalyysisTheProperty.

Home
eInspector
Home
eInspectionsbeganasaco
onsumerservviceinthe19770sandhaveegrowninpopularitysincee
then.AqualifiedH
HomeInspecttorwilladvise
ethehomep urchaser/ho
omeownerinregardsto
theco
onditionofth
hehomeandadviseregard
dingissuessuurroundingitsscondition.TThecondition
n
ofthe
ehomenaturallyaffectsth
hemarketvalue.

MoreinformationonHomeInspectorsinOn
ntariocanbe foundthrougghtheOntarioAssociation
n
ofHomeInspectorrs(OAHI)atw
www.oahi.ca.

MortggageDefaultInsurer
TheM
MortgageDefaaultInsurerp
providesmorttgagedefaulttinsurancepo
oliciestolend
derstypically
offeringhighratiomortgages,aalthoughdefaaultinsuranceecanbeprovvidedonamo
ortgageloano
of
oantovalue. ThemaininssurersintheO
Ontariomarkketincludethegovernmen
ntinsurer,thee
anylo

Chapterr1:MarketO verview

daMortgageandHousingCorporation(CMHC)andtthetwoprivaateinsurers,G
Genworth
Canad
FinancialCanadaaandCanadaGuarantyMorttgageInsurannceCompanyy(CanadaGuaaranty).

Pa
auseforcla
arification
nLoanto
oValue(alssoreferred
dtoasLTV
V)
Alloantovalueistheamoun
ntoftheloanormortgageetothevalueofthepropeerty.For
example,ifthemortgageis$
$200,000and
dthevalueoffthepropertyyis$400,000
0thenthe
loaantovalueis200,000dividedby$400,000whicheqquals50%.Thhisisexplaineedindetailin
chapter13.

MortggageDefaultInsurancepro
ovidesprotecctionforthel enderinthecaseofmortggagedefault
bythe
eborrower.TTypicallythelenderwillpaassthecostoofthisinsuran
ncepolicyontothe
borro
ower,whoben
nefitsfromth
hepolicybyb
beingabletoggetahighloaantovaluem
mortgageat
conve
entionalratess.

Lawye
er
Areallestatelawye
eristheprofe
essionalinvolvedinareal estatetransaactionwhopeerformsthe
follow
wingtasks:
Ne
egotiatingand
ddraftingAgrreementsofP
PurchaseanddSale
Actingforbuyersorsellerso
onneworresalehome,coondominium,,orcommerccialpurchasess
orsales
owersorlend
dersonmortggagetransactiions,includin
ngpreparingd
documents
Actingforborro
andregisteringdocuments

MortggageCreditorrInsurer
Amorrtgagecredito
orinsurerisaaninsurerthaatprovidesa policytothemortgagebo
orrowerso
thatu
uponaclaim((inthecaseo
ofdeath;thereareadditionnalcreditorin
nsurancepoliciesavailablee)
them
mortgageloanispaidbyao
onetimelum
mpsumpaymeenttothelen
nder.Thisinssuranceis
speciffictothemorrtgageloan.

TitleIInsurer
ATitle
eInsurerisan
ninsurerthattprovidesap
policywhichpprovidescoveeragefortheinsuredstitlee.
Itcancompensatetheinsuredfforreallossessassociatedw
withcoveredissuesfound
dinthetermss
ofthe
epolicy.Fore
example,ifth
hereisanoldmortgageonntitlethatwaasneverdisch
hargedand
thispreventsthep
propertyfrom
mbeingconve
eyedtothepuurchasers,theetitleinsuran
ncepolicywilll
takesstepstoreme
edythissituattion.

Italso
oassistsinstrreamliningtheclosingproccess(thepro cessofthelaawyerclosingthemortgage
transaaction),prote
ectsagainstfrraudandforggeryandisav ailableonpurchases,refin
nancesandto
o
home
eownerswhodidnotobtaiinatitleinsurancepolicyooneitheroftthoseoccasions.

MortggageAdminisstrator
AMortgageAdmin
nistratorisap
personorenttitythatservi cesamortgageloanonbeehalfof
anoth
her.Forexam
mple,aMortggageAdministtratormayprrocesspaymeents,renewalssand
dischaarges,provide
ecorrespond
denceandactttocollectmoortgagearreaarsforalendeerthathas
contraactedthem.

Chapter1:MarketOverview

UndertheMortgageBrokerages,lendersandAdministratorsAct,2006,Mortgage
AdministratorsarelicensedinOntario.Regulation406/07ofthislegislationdefinesaMortgage
AdministratorasonewhoisTakingsteps,onbehalfofanotherpersonorentity,toenforce
paymentbyaborrowerunderamortgage.

1.3

History of the Mortgage Industry in Ontario

Althoughitmightnotmakeasignificantdifferencetoaborrower,thefactisthatWilliamthe
ConquerorsvictoryoverEnglandsarmyattheBattleofHastingsin1066hashadaninfluence
onhowlandisownedandmortgagedinCanadatodaybyresultingintheimpositionofthe
Frenchfeudalsystemoflandownership.

ThissystemwasbasedontheprinciplethatalllandwasultimatelyownedbytheCrownand
individualcitizenscouldonlyobtainrightstousethislandbasedonagreementmadewiththe
Crown,usuallyformilitaryserviceorforotherfeudalservices.

InCanada,thissystemwasincorporatedintotheBritishNorthAmericaAct,1867whichwas
laterrenamedtheConstitutionAct,1867.UnderthislegislationtheCrown,beingtheultimate
landownerinCanada,grantedrights,calledpatents,toCanadianstouselandinexchangefor
clearingthelandandbuildingashelter.

TheCrownwouldusuallygrantupto100acrefarmlotstosettlersarrivinginthelatterpartof
the18thcenturyandretainedtimberandmineralrightstotheland.Thishadtheresultof
grantinganinterestinthelandthatwaslessthanfullownership,whichallowedtheownerof
theserightstheuseofthelandbutnottheultimateownership.

InOntarioandtherestofCanada,wherenoinitialpatentwasgrantedforapieceofland,no
privateownershipcouldresult.Thisisthecase,eventothisday.

IntodaysOntario,theCrownownsfullresidualinterestsinlandwhichiswhatallowstheCrown
toexpropriatelandforitsownuse.ConsideringthattheCrownistheresidualownerofthe
land,expropriationorrequiringthecurrentownerofthelandtosellthepropertybacktothe
Crownmakessense.Examplesofthiscanbeseenonaregularbasis,whentheCrown,usuallyin
theformofamunicipality,expropriatesapieceoflandtobuildanewroad.Thiscanalsobe
foundtohappenwhenapropertyownerfailstopaytheirpropertytaxes.Themunicipalitythen
hastherighttotakethepropertyandsellittorecoverthosetaxes.

ThemortgagemarketinOntariohasundergonesignificantchangesduringthelastfewdecades,
beginningwiththeintroductionofbankmortgagelendinginthe1960s,followedbyinsured
mortgagesandtheinfluxofsubprimelendersmorerecently.

OriginallymortgagelendinginOntariowasprovidedbylifeinsurancecompanies.Theyhad
significantdepositspaidbythepremiumsoftheirpolicyholderswhichallowedthemtolend
theseamountstoindividualswishingtopurchaseland.UpuntilamajorchangeintheBankAct,
Bankswerenotpermittedtolendonresidentialmortgages.

However,thewritingwasonthewall,sotospeak,asbankswereinamuchgreatercompetitive
positiontodominatethemortgagemarketduetotheirbranchnetwork.Banks,having

Chapter1:MarketOverview

branchesinvirtuallyallcommunitiescouldservicetheircustomersmuchmoreefficientlythan
lifeinsurancecompaniesandhadmuchgreaterdirectaccesstopotentialborrowers.

In1954theBankActwaschangedtoallowbankstolendonresidentialmortgages;however
therewasalimittotheamountofinterestthattheycouldcharge.Thislimitwassetat6%.
Unfortunatelythemarketatthetimesawinterestratesatsuchapointthatitwasunprofitable
forbankstolendbasedonthatconstraint,sothemarketremaineddominatedbylifeinsurance
companiesuntilthatcapwasremoved.

Thatoccurredin1967whentheBankActwasonceagainamended.Thisamendmentremoved
the6%capandvirtuallyovernightthebanksbecamethepredominantsourceofmortgagefunds
inOntario.

Todaybanksaccountforapproximately61%ofallmortgagesheldinCanadaandhaveavirtual
lockonmortgagelending.

Inreferringbacktothe1970s,itcanbeseenwhythemortgagebrokeragecommunity,inits
infancy,wasnotnecessarilyamajorbenefittoconsumers.Themarketwasdominatedbythe
mainbanksthatofferedstandardmortgageproducts,namely25yearamortizations,5year
fixedratetermswithmonthlypaymentsandstandardrepaymentoptions.

Ifaborrowerwantedamortgagewithalowrateofinterest,heorshewouldbeobtainingit
fromhisorherbank.Ifthatbankdeclinedtheirapplicationtheywouldbasicallybedeclinedby
theotherbanks,sincealloftheirlendingcriteriawerevirtuallyidentical.

Themortgagebrokeragecommunityrosefromtheneedofborrowerstoobtainfinancingifand
whentheyweredeclinedbythebank.Typicallymortgageagentsofferedtheborroweraprivate
mortgageatahigherinterestrateandchargedafeetoarrangethisfinancing.Inother
scenarios,borrowerswouldfinancetheirhomepurchasefromfriendsorfamilyiftheydidnt
qualifyattheirbank.

Inessencemortgageagentsofferedafringeserviceinthemortgagemarketthatwouldnt
changeforsometime.IntheUnitedStates,themortgagemarketwastravelingadifferent
route.Themortgagelendingmarketquicklybecameinundatedwithsmaller,regionallenders
whichprecipitatedtheneedformortgageagentstoassistconsumersinchoosingtheright
lenderandproductthatmatchedtheirneeds.

ThemortgageindustryinOntariocancurrentlybesaidtostillbeinitsinfancy.Inthelate1980s
mortgageagentswerestillprimarilybeingusedassourcesofprivatemortgagefundsforthose
declinedbythemajorinstitutionallenders,butthatwasdueforachange.

Asfurtherlegislativechangeswerebeingmadethatallowedaninfluxofmortgagefundsinto
Canada,thenumberoflendersalsobegantoincrease.Nondeposittakinginstitutionsbeganto
permeatetheOntariomarket,providingoptionsthatbegantoreflectthematuringrealestate
market.Theseoptionsgaveborrowersalternativestoabankmortgageandbeganthe
competitiveprocessofproductinnovationthatisevidentintodaysmarket.

Comparedtotheoptionsavailabletotodaysconsumer,the1970sand1980sweretheStone
Age,whilethiscanbecomparedtotheIndustrialorGoldenAgeofmortgagelending.

10

Chapter1:MarketOverview

Wheretherewasonlyahandfuloflendersthen,therearedozensofinstitutionallendersin
todaysmarketinadditiontoprivateandnoninstitutionalsourcesofmortgagefinancing.
Unfortunatelytherehasalsobeenaslightreturntomoreconventionallendingpracticesdueto
themarketmeltdownintheUnitedStatessubprimemortgagemarket.

WhilenotdirectlyimpactedbytheAmericanmortgagemarketinrecentdecades,theproblems
facedbyourneighbourstothesouthin2007havehadasignificantimpactonoursubprime
mortgagemarket.

Tobeginwith,itisnecessarytounderstandwhatconstitutesasubprimemortgage.

TheSubPrimeMortgageMarket
TheSubPrimeMortgageMarket,alsoreferredtoastheAlternativeMortgageMarket,Non
ConformingMortgageMarketorBtypelendinghasbeenwithussincetheearlydaysofour
industrywhenborrowerswhoweredeclinedbytheirbankhadtoseekfinancingfromprivate
lenders.Thiswastypicallyduetoincomeorcreditissuesthatdisqualifiedthemfromtraditional
mortgagelending.

InrecentyearstheOntariomarkethasseensignificantchangesinitsworkforceand
demographics.Forexample,therehasbeena40%increaseinselfemployedindividualsinthe
workforcesincethelate1980s1.Sincemosttraditionallendersdidnothaveproductsforthese
borrowers,theywererelegatedtoobtainingprivateornoninstitutionalfinancing.

AsthistrendincreasedandasnewlendersenteredtheCanadianmortgagemarket,products
thatcateredtotheselfemployedwereintroduced.Overtimetheseproductsbecamemore
aggressive,allowingforprogramsthatpermittedborrowerstosimplystatetheirincome
withouthavingtoproveit.Theconceptbehindtheseprogramswasthat,iftheborrowerhad
goodcreditandotherassetsthatwouldbeevidencethattheyhadsufficientincometomeet
theseobligations,thentheyhadtheabilitytorepayamortgage.

Simplyputaborrowerwouldberequiredtowritealetter,oftenreferredtoasaselfdeclared
incomeletterstatingwhattheirgrossincomewasfortheyear.Thatamountwouldthenbe
usedtodetermineiftheyqualifiedforthemortgagebasedonratiosusedtocalculateloan
amounts.Therewasnot,andstillisnt,incomeverificationunderthisprogram.

TheseprogramswereintroducedintheUnitedStatesbeforetheywerepickeduponinCanada.
Inaddition,theAmericanmarketwasprovidingloanstoborrowersthatwerefarmore
aggressivethancouldbefoundintheCanadianmarket.Whileinterestonlyloanswerebeing
introducedinCanada,theywereamountingtonearlyonethirdofallnewmortgagesin2005in
theUnitedStates.

OurAmericancounterpartswerealsoofferingnegativeloantovaluemortgages.Inother
words,anAmericanborrowercouldborrowinexcessof100%ofthevalueoftheirhome.
Considerthenthatborrowerswerebeingallowedtostatetheirownincomes,andin
conjunctionwithincomefraud(borrowersusingfalseincomeverification),manyAmerican
lenderswereprovidingmortgagestoborrowerswhoinessencecouldnotaffordthoseloans.

StatisticsCanada

Chapter1:MarketOverview

11

Justascrucialwasthefactthatlenderswereofferingteaserrates(over90%ofsubprime
mortgagein2006wereadjustableratemortgageswithteaserrates)totheseborrowers.A
teaserratewasaratethatbeganlowbutthatwouldincreaseovertime.Thisresultedina
mortgagepaymentthatwaslowforthefirstfewyears,butthatwouldincreaselater.Although
borrowerscouldaffordtheseteaserratepayments,affordabilitybecameaproblemwhenthe
ratesincreased.

Youmaywonderwhyanyonewouldgetamortgagethatwouldbecomeunaffordable.The
answerwassimple.Lendersandbrokerstoldborrowersthatbeforetheirrateswentupthey
wouldgetrefinancedintoanewteaserratemortgage,therebyavoidingtherateincrease.
Unfortunatelythatwasntthecase,asthehotAmericanhousingmarketcooledandprices
begantodip.Becauseofthis(andotherreasons)lenderswouldnotrefinance,leaving
borrowerswithincreasedmortgagepaymentsthatmanycouldnotafford.

In2007thedefaultratiosonthesesubprimemortgagesbegantorise.Astheyincreasedmore
borrowersbegantowalkawayfromtheirhomes,basicallytellingtheirlenderthattheycouldno
longeraffordthepayments.ThiscausedAmericanlenderstotakeoverthesepropertiesand
foreclose,meaningthattheytooktitlefromtheoriginalhomeownerandsoldtheproperty.

ThefirstmajorindicatorofmarkettroubleoccurredinCalifornia,wherethisbecamean
increasingtrend.Asthenumberofpropertiesbeingforeclosedincreased,thenumberofhomes
intherealestatemarketincreased,andsupplybegantooutpacedemand.Basiceconomics
dictatesthatwhensupplyisgreaterthandemand,pricestendtofallinanattemptbythe
markettorestoreequilibrium.

Withfallingprices,morehomeownersfoundthemselveswithpaymentsthattheycouldnt
affordandpropertieswheretheyowedmorethanthehousewasworth.Thisresultedina
downwardspiralwherelendershadtoforecloseonaneverincreasingnumberofproperties.
Theresultwasthatmanylendershadtowriteoffbillionsofbadmortgagedebtthatwas
unrecoverable.Inandofitselfthismightnothavecausedamajormeltdowninthemarket.
Lendershavehadtowriteoffbaddebtsbefore.Howeverthewaymanyoftheselenders
obtainedthefundsthattheyusedtolendtoborrowerswasbasedonasystemthathadthem
borrowingmoneytolend.

Inotherwords,anonbanklenderwouldfindamajorinstitutionthatwouldprovidethemwitha
lineofcredit(referredtoasawarehouselineofcredit).Thislenderwouldthenmakeloansto
borrowersandeventually,oncethelineofcreditwasfull,sellthemortgagesinapooltoother
investors,suchasbanksorpensionfunds.Thisprocessisreferredmosttypicallytoas
securitization.

Thewayalenderinvolvedinthisprocesswouldmaketheirmoneywouldbefromupfront
lendersfeesthattheychargedinadditiontoservicingtheloan,ifapplicable,onbehalfofthe
investororpurchaserofthepoolofmortgages.

Howeveroncetheratesofdefaultbegantoskyrocketonthesemortgagesthepotentialsbuyers
oftheseloanpoolsdriedup.Themarketthenhadlenderswithlinesofcreditthattheycouldnt
repaysincetherewasvirtuallynoonetopurchasethesepoolsofmortgages.

Thesubprimemortgagemeltdownof2007hadbegun.

12

Chapterr1:MarketO verview

emostCanadianslookedo
onwithintere
estintheearl ypartof20007,theimpacttonthe
While
Canad
dianmarketw
wasntimmed
diatelyforese
een.Thesubprimemortggagemarketin
nCanadawass
lessaggressivethaanitscounterpartintheUnitedStatesaandthereforeelesslikelyto
oseethesam
me
typesofdefaultrates.

Byallaccountsthe
eCanadiansu
ubprimemarketwasntexxhibitingthessamenumberofbadloanss
andth
hereforeshou
uldnotbesubjecttothessameproblem
msassociated
dwiththeAm
mericansub
prime
emarket.Thisoutlookwassoonprovedtobeerronneous.

Thew
worldwidemarketforpurcchasingsubp
primepoolsoofmortgagesvirtuallyshuttdown.
Investtorsandlendersalikeweresoparanoid
daboutsubpprimelossesttheywereexp
periencingin
theUnitedStatestthattherewaasavirtualmo
oratoriumonnbuyingsubp
primepoolso
ofmortgages,,
includ
dingCanadian
npools.

Thish
hashadasign
nificantimpacctontheCanaadiansubpri memarketw
withafewsub
bprime
lende
ersexitingthe
emarketaltoggether,otherrsadoptinga moreconservvativeapproaachtolendingg,
whileothersstillsiimplystruggliingtostayinbusiness.Deeposittakinginstitutions,o
ontheother
hand,,havenotsee
enthesamettypesofvolattilityintheCaanadianmarkketduetotheeirrelianceon
n
depossitsfromconssumersasthe
esourceofth
heirmortgageeloans.Thisoldfashioneedwayof
lendin
nghasserved
dthemwellan
ndshouldallo
owthemtow
weatherthissubprimesttorm.

Aslon
ngasCanadiaanconsumersscontinuethe
eirstrongrec ordofrepayingmortgagedebt,Canadaa
willco
ontinuetobe
eaprofitablemarketforle
enders.

1.4

Markett Demogra
raphics an
nd Trend
ds

ThesttudyofOntarriosdemograaphicsisrequ
uiredtodevel opanundersstandingofth
hemakeupoff
them
marketanditspotentialfro
omthestandp
pointofmorttgagefinancin
ng.

Pop
pulation
Thefo
ollowingfigurreillustratestthebreakdow
wnoftheCannadianpopulaationbyproviinceand
territo
ory,asofJulyy1,2013.Withapproximaately39%ofCCanadaspop
pulation,them
mortgage
marke
etinOntarioisthelargestinCanada,re
epresentingaapproximatelyy40%ofallm
mortgages
appro
ovedintheco
ountryin2010
0.AlthoughQ
Quebecrankssnextinpopu
ulation,then
nextlargest
provin
nceformortggagefinancinggwasAlbertaa,followedclooselybyBritishColumbia,then
Quebec2.

StatisticsCanada,P
Preliminaryposstcensalestimates

1
13

Chapterr1:MarketO verview
Figure13Population
nandAgeDistrib
butionbyProvin
nceandTerritorry

July1,20133

Allages

0to14

15to64

65andolderr

Cana
ada

35,158,304
4

16.1

68.6

15.3

Median
Age
40.2

Albe
erta

4,025,074
4

18.2

70.6

11.2

36

BritishColumbia

4,581,978
8

14.8

68.8

16.4

41.7

Man
nitoba

1,265,015
5

18.7

66.9

14.4

37.7

New
wBrunswick

756,050

14.7

67.7

17.6

43.9

New
wfoundlandan
ndLabrador

526,702

14.5

68.4

17.1

44.2

NortthwestTerrito
ories

43,537

21.1

72.8

6.1

32.4

Nova
aScotia

940,789

14.3

68

17.7

43.8

Nuna
avut

35,591

30.8

65.7

3.5

25.4

Onta
ario

13,537,994
4

16.2

68.6

15.2

40.3

145,237

15.8

66.9

17.3

43.1

Quebec

8,155,334
4

15.4

68

16.6

41.6

Saskkatchewan

1,108,303
3

18.8

66.7

14.4

37.1

36,700

16.7

73.4

9.9

38.9

PrincceEdwardIslland

Yuko
on

Size
e of the Mortgage
M
Market
AsofMay,2014th
hesizeoftheCanadianmo
ortgagemarkeet,intermso
ofthevalueo
ofall
outstaandingmortggagesinthecountywasesstimatedat$11.235trillion4.Thetotalreesidential
mortggagecreditou
utstandinginCanadahasrrisensignificaantlysince19981,increasingbyover
850%in25years.

Asthe
efollowingfiggureillustrate
es,thelendin
ngmarketisddominatedbyythechartereedbanks,who
o
accou
untfornearlyhalfofalloutstandingmo
ortgagesinannygivenyear..CreditUnio
onsarea
distan
ntsecond.

Cha
aracterist ics of a Mortgage
M
e Agents Client
Appro
oximately30%
%ofOntariocconsumersussedamortga geagentin2014,anumbeerthathas
remaiinedconsistentforthepasstseveralyeaars,while50%
%usedabankk.

Accorrdingtoarece
entMortgage
eConsumerSSurveybyCM HC,theaveraagemortgageeagents
clienthadthefollo
owingcharactteristics:
51%hadahousseholdincomeunder$60,0
000while49%
%hadaninco
omeover$60
0,000
44%werebetw
ween35and5
54yearsold,w
while34%weere18to34yyearsoldand22%were
over55yearsold

3
4

StatisticsCanada,h
http://www.staatcan.gc.ca/pu
ub/91215x/20013002/t588eeng.htm#T588FN1
CMH
HC,CanadianHousingObservver,http://www
w.cmhcschl.gcc.ca/odpub/pd
df/68189.pdf

14

Chapter1:MarketOverview

19%wereselfemployed
92%offirsttimepurchaserswhousedamortgageagentwereeitherratherortotally
satisfied
87%ofrepeatpurchaserswhousedamortgageagentwereeitherratherortotallysatisfied
87%ofrefinancerswhousedamortgageagentwereeitherratherortotallysatisfied
80%ofrenewerswhousedamortgageagentwereeitherratherortotallysatisfied.

Ofallconsumers,
81%ofrenewersremainedwiththeircurrentlenderindicatingthatservicewastheirmajor
reasonforthisloyalty
65%ofrepeatpurchasersremainedwiththeircurrentlenderindicatingthatservicewastheir
majorreasonforthisloyalty
65%ofrefinancersremainedwiththeircurrentlenderindicatingthatservicewastheirmajor
reasonforthisloyalty
58%offirsttimepurchasersremainedwiththeircurrentinstitutionindicatingthat
relationshipwastheirmajorreasonforthisloyalty,followedcloselybyrate.

Inaddition,68%ofallconsumersindicatedthattheywantedtopayofftheirmortgageas
quicklyaspossible.However,only27%ofconsumersactuallyusedprepaymentoptionsin2009.
AccordingtoanRBCSurvey,34%ofrespondentssaidtheydidntuseprepaymentoptions
becausetheydidnthavethemoneytotakeadvantageofprepaymentoptions,while30%had
otherdebtstheywantedtopayofffirstand20%wantedtoinvestbeforeprepayingtheir
mortgage.ThefollowingchartillustratesthenumberoffamiliesbyincomesegmentinCanada.
2012isthelatestdatethatdataisavailablefromStatisticsCanada.

15

Chapter1:MarketOverview
Figure2ResidentialMortgageCreditbyLenderbyYear5

ResidentialMortgageCredit
byLenderbyYear
($millions)
$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0
1985

1990

1995

2000

2005

2010

2011

2012

LifeInsuranceCompanies

CharteredBanks

TrustandMortgageLoanCompanies

CreditUnionsandCaissesPopulaires

Securitization

MBS

PensionFunds

Totals

2013

StatisticsCanada,ResidentialMortgageCredit,http://www.statcan.gc.ca/tablestableaux/sum
som/l01/cst01/fin21eng.htm

16

Chapter1:MarketOverview

Figure36FamilyIncome,byFamilyType

Total,allincomegroups
Under$10,000
$10,000andover
$15,000andover
$20,000andover
$25,000andover
$30,000andover
$35,000andover
$40,000andover
$45,000andover
$50,000andover
$60,000andover
$70,000andover
$75,000andover
$80,000andover
$90,000andover
$100,000andover
$150,000andover
$200,000andover
$250,000andover

Familyincome,byfamilytype
(Couplefamilies)
2008
2009
2010
7,832,060
7,926,210
7,989,380
194,670
199,350
189,700
7,637,400
7,726,860
7,799,670
7,527,140
7,613,770
7,695,970
7,374,900
7,459,680
7,552,050
7,177,060
7,262,910
7,355,530
6,876,780
6,958,650
7,045,540
6,549,220
6,620,770
6,708,710
6,228,650
6,288,200
6,383,220
5,900,920
5,949,750
6,052,150
5,571,420
5,611,520
5,719,630
4,915,080
4,939,370
5,059,180
4,277,270
4,292,660
4,420,250
3,969,160
3,982,590
4,111,920
3,672,840
3,684,990
3,815,020
3,119,370
3,129,560
3,258,520
2,626,660
2,636,310
2,761,360
1,063,240
1,072,990
1,148,440
476,110
476,050
510,820
261,300
256,550
274,930

2011
8,091,960
182,900
7,909,060
7,811,680
7,676,700
7,497,090
7,199,220
6,864,160
6,540,470
6,217,470
5,893,430
5,246,310
4,617,280
4,313,490
4,018,690
3,462,890
2,960,190
1,276,150
576,700
309,200

2012
8,169,080
181,120
7,987,950
7,896,460
7,768,900
7,604,140
7,334,630
7,006,160
6,685,630
6,368,450
6,050,800
5,414,280
4,793,640
4,492,200
4,198,650
3,642,000
3,135,540
1,395,820
641,950
341,540

Mediantotalincome$
75,880
75,320
76,950
79,530
81,980
Note:Familyincomeisthesumoftheincomesofallmembersofthefamily.
1.Acensuscouplefamilyconsistsofacouplelivingtogether(marriedorcommonlaw,includingsamesex
couples)livingatthesameaddresswithorwithoutchildren.Beginningin2001,samesexcouples
reportingascouplesarecountedascouplefamilies.
Source:StatisticsCanada,CANSIM,table1110012.
Lastmodified:20140723.

StatisticsCanada

1
17

Chapterr1:MarketO verview
Figure47MedianTotalIncome,byFFamilyType,byProvinceandTeerritory

Mediantotallincome,byfaamilytype,by provinceandterritory
2008
8
2009
2010
2011

2012

Canada

68,860

68,410

69,860

72,240

7
74,540

Newfoundlan
ndandLabrado
or

59,320

60,290

62,580

67,200

7
70,900

PrinceEdwarrdIsland

61,010

62,110

63,610

66,500

6
69,010

NovaScotia

61,980

62,550

64,100

66,030

6
67,910

NewBrunswiick

59,790

60,670

62,150

63,930

6
65,910

Quebec

63,830

64,420

65,900

68,170

7
70,480

Ontario

70,910

69,790

71,540

73,290

7
74,890

Manitoba

64,530

65,550

66,530

68,710

7
70,750

Saskatchewan

69,800

70,790

72,650

77,300

8
80,010

Alberta

86,080

83,560

85,380

89,830

9
94,460

BritishColum
mbia

67,890

66,700

66,970

69,150

7
71,660

Yukon

85,070

84,640

86,930

91,090

9
94,460

NorthwestTe
erritories

98,530

98,300

101,010

105,560

1
106,710

Nunavut

58,590

60,160

62,680

65,280

6
65,530

The Average
e Canadia
ans Cred
dit Score
Itisoffparticularin
nteresttonottethathistoriicallythemajjorityofmorttgageagentssurveyed
believvethattheavverageCanadianhasacred
ditscorenearr650.Inactu
uality,thefacctisquite
different,withtheaveragecred
ditscoreofCaanadiansbeinngapproximaately740.Thefollowing
hillustratesth
hebreakdown
nofbeaconscores(acred itscoreusedinEquifaxsccreditreport))
graph
bypercentageofthepopulationaccordingtoEquifaxCannada.

Pau
useforcla
arification
Creditsccore
Acrreditscore,caalledBeaconScorebyEquifaxandEmppiricaScorebyyTransunion,,isa
num
mericalrepressentationofaanindividualsoverallcreddit.

While
ethereareno
ostatisticsavaailabletoindicatetheave ragebeaconscoreofatyp
picalmortgagge
broke
eragesclientss,anecdotale
evidencepoin
ntstothefacttthatthemajjorityofbrokkerage
businessisintherrangeof650aandbelow.TThiswouldinddicatethatbrrokeragesareemissingthe
majorrityofCanadianswithgoodtoexcellenttcredit.

Oneffactorbehindthistrendmaaybethatmaanybrokerag esfocusoncconsumersattheloweren
nd
ofthe
ecreditspectrum.Thiscan
nbeevidence
edbycommoonadvertisinggfoundinmaany
publiccationsthataadvertisemorrtgagesavailaabletoconsum
merswithpo
oorcredit,preevious
bankrruptcies,nonverifiableinccome,andsoon.

StatisticsCanada

18

Chapterr1:MarketO verview

hemortgageb
brokerageind
dustrytobreaakthroughthhe30%markeetpenetrationnumber,a
Forth
parad
digmshiftmayyberequired
d:fromfocussingonthose declinedbytthebankstotthosewhoarre
appro
ovedbythebanks.Allane
ecdotalinform
mationtends topointtoth
hefactthatth
hemajorityof
consu
umers,ifapprrovedbytheirbank,willob
btaintheirm ortgagefinan
ncingthereassopposedto
fromamortgageaagent.

Figure5Distribution
nofCanadianBeeaconScores

Distrribution of Canadian
C
B
Beacon Sco
ores
source: Equifax Canada,, 2015

30%
%

%
27%
24%

25%
%
1 9%

20%
%
15%
%
11%
10%
%
5%
%
0%
%

6%

6%

550 to 599

600 to 649

5%

4%

549 and
below

65
50 to 699

700 to 749

750 to 799

800 to 84
49 850 and over

1.5

The Co
ommercia
al Mortgag
ge Marke
et

Them
mortgagemarrketinOntariocanbedivid
dedintotwo majorareaso
ofexpertise:commercial
andre
esidentialfinaancing.Ofco
ourse,ineithe
erspecializatiiontherecan
nbesubspecializations.In
n
otherwords,acom
mmercialmorrtgageagentmayfocusonnfinancingind
plexesas
dustrialcomp
oppossedtoapartm
mentbuildings.Likewise,aamortgageaggentspecializzinginresidentialfinancing
mayd
decidetofocu
usonrefinanccing,renewalls,etc.

Itsim
mportanttoke
eepinmindtthatcommerccialmortgageefinancing,allthoughverylucrative,is
alsoe
extremelyspe
ecialized.Itissnotuncomm
monforacom
mmercialtransactiontotakkethree
monthsorlongerttobecompletted.Inadditiion,ifamortggageagentw
whohasnotco
ompleteda
comm
mercialtransaactionbeforeattemptsone
e,thatbrokerrisapttofind
dthatthereaaresubstantiaal
differences,fromtthesecurityo
orpropertyinvolved,toth eunderwritin
ngprocess.A
Acommon
phrassethatyoud
dontknowwhatyoudonttknowarew
wordstorememberforco
ommercial
transaactions.Aressidentialbrokkerwithnoco
ommercialexxperiencemayattempttoapplythe
reside
entialprocessstothecomm
mercialtransaactionbecausseheorshed
doesntrealizethe
differences.Thisccanonlyleadtoconfusionandfrustrati onforboththebrokerandthe
borro
ower.

Chapter1:MarketOverview

19

Herearesixofthemajordifferencesbetweencommercialandresidentialtransactions.

Property
Thepropertytypesofacommercialtransactionaresignificantlydifferentfromresidential.Ina
commercialtransactionICI,orIndustrial,Commercial,Investmenttypepropertiesarebeing
dealtwith.Thesecaninclude:
Apartmentbuildings
Officebuildings
Stripplazas
Shoppingmalls
Warehouses
Factories
Recreationalpropertiessuchasagolfcourse,etc.

Tobeabletoprovidesoundadvicetothepotentialborrower,themortgageagentmusthave
intimateknowledgeoftheworkingsofthepropertythatisthesubjectofthefinancing.Without
suchknowledgethebrokerwillultimatelyfailtoasktheappropriatequestions.

Appraisal
ToappraisearesidentialpropertyinOntariowillnormallycostintherangeofafewhundred
dollars,dependingonwherethepropertyislocated.Forexample,intheGTAanappraisalmay
costslightlylessthanthreehundreddollars.Inacommercialtransactionanappraisalmaycost
fromalowof$2,000toahighof$50,000,dependingonthepropertyandthescopeofthe
appraisal,andmaytakeuptothreemonthstocomplete.Itisimportanttoknowwhatappraisal
requirementsareinvolved,basedonthepotentiallender,beforerequiringaclienttopaysucha
significantamountforanappraisal.

EnvironmentalAssessment
InmanycasesatleastaPhase1ESA(EnvironmentalSiteAssessment)willberequiredbythe
lender.Thisistodeterminewhetherthereareanycontaminatesintheproperty.Ifthereare,a
Phase2andPhase3mayberequired,whichcantakeseveralmonthstocompleteandseveral
thousanddollarsincosts.

Income
Todeterminetheviabilityofacommercialmortgagerequest,thebrokermustlookatthetype
ofproperty.Ifitisanincomingproducingpropertysuchasanapartmentbuilding,thenthe
IncomeApproachofappraisingapropertywillbeused.Thebrokermustbefamiliarwiththe
NetOperatingIncome,howtostandardizeitandwhatshouldbeusedandexcludedwithinit.If
itisnotincomeproducing,thentypicallythebrokerwillhavetoobtainfinancialstatements
fromthecorporationapplyingforthemortgageandbeknowledgeableenoughtodecipherand
interpretthemaccurately.

Lenders
ThecommerciallendingmarketinOntarioandCanadaasawholeisquitesmall,limitingthe
numberofoptionsavailabletoabroker.Thishasalsoresultedincommerciallendersbeingvery
selectiveaboutwithwhomtheydeal.Mostcommerciallendersdonotlikedealingwith
inexperiencedbrokers.Theyalsohavecertainrequirementsregardingapplicationsubmissions
towhichbrokersmustadhere.

20

Chapterr1:MarketO verview

ng
Timin
While
eatypicalresidentialtranssactioncanbe
ecompleted withintwow
weeks(someccanbefunded
d
quicke
erwhileothe
ers,suchaspu
urchasesmayycloseafew monthsafterrtheinitialap
pplication)
comm
mercialtransaactionscantakeanywhere
efromthreem
monthstoayyear,dependiingonthe
typeo
ofthetransacctionanditsccomplexity.

Su
uccessTipCommerrcialtransa
actions
Ifyyouarenewttothemortgaagebrokerageindustryor ifyouhaven
notbrokeredacommerciaal
traansactionbeffore,seekthe
eadviceofyoursupervisorr,manager,o
orBrokerbefo
ore
proceeding.Co
onsidercobro
okeringtheapplicationwi thacommerrcialmortgageebrokerand
withyou.Inaabestcasesccenario,askh
himorherto
askhimorherttosplittheirccommissionw
einvolvedintthetransactio
onsothatyou
umightlearn fromanexperiencedBroker.
be

1.6

Investin
ng in Morrtgages

Priv
vate Lend
ding
Inthe
emortgagebrrokerageindu
ustry,theprivvatelendingm
markethasallwaysbeenandcontinues
tobeamajorsourrceoffundsfo
ormanymorttgageagents..Untiltherecentinfluxoffinstitutionall
subp
primelendersintothemarrket,theprim
marysourceoffmortgagefin
nancingforb
borrowerswho
weredeclinedbyb
banks,trustcompanies,an
ndcreditunioonswasprivatelenders.

Aprivvatelenderisbestdescribe
edasanindivvidualwhole ndshisorherownmoneyytoapropertty
owne
er,securingth
hisloanbyam
mortgage.MostprivateleendersinOntaarioaresoph
histicatedand
d
havemanycharactteristicsthatresembleinsttitutionallen ders.Aprivaatelenderwillunderwritea
owersapplicaationbasedonhisorherin
ncomeandcrredit,andtheeproperty.H
However,
borro
where
easaninstitutionallenderrwillbaseitsdecisionprim
marilyonabo
orrowerscred
dit,aprivate
lende
erwillbasehissorherdecissionprimarilyyonthepropeerty.Thisisssimilartoinsttitutionalsub
prime
elenders.Wh
hiletheselenderswillconssideraborrow
werscredit,mostprivatelenderswill
ignore
ederogatorycreditandbaasethedecisiiontolendprrimarily,andinmanycasessolely,on
theprropertyandttheloantovaalueoftheloaan.Mostprivvatelendersw
willnotlendaabove85%
loanttovalue,exce
eptinrarecirccumstances.

Manyywellestablisshedmortgaggeagentshavveprivatelendderswithwhomtheycurrrentlydeal
withaandareoften
napproachedbyindividualslookingtollendmoney.

Example
MalikkAdamshasaahomevalued
dat$200,000
0withacurreentmortgageeof$155,000.Mr.Adams
hasm
missedseveralpaymentsonhismortgaggeinthepastttwelvemontthsandiscurrrentlythree
monthsinarrears.Heiscurren
ntlybehindon
nhistwocredditcardpaym
mentsandalth
houghupto
onhiscarloan,hasmissed
dtwoofthose
epaymentsinnthepasttw
welvemonths..His
dateo
mortggagecameup
pforrenewaltwomonthsagoandhisccurrentinstitu
utionallenderisrefusingtto
renew
wthemortgagge.

Theotherinstitutio
onallendershehasapproachedhaveaalsodeclinedMalikduetohispoor
credittandthefacttthatheiscurrentlyindeffaultonhism
mortgage.Maaliksbankerssuggestedthaat
Malikkapproacham
mortgageage
entforthefin
nancing,whic hMalikhasd
done.

Chapterr1:MarketO verview

2
21

Inthissscenario,themortgageaagentwasablletogetMali kamortgageefromaprivaatelenderforr
85%o
oftheproperttyvalue,whicchallowedM
Maliktoconsoolidatehisoth
herdebtsand
drefinancehiss
mortggage.Thismo
ortgagewasaanintereston
nlymortgagewithaoneyyeartermataarate3%
above
ecurrentbankpostedrate
esandalende
ersfeeof2%
%ofthetotalmortgageam
mount.
Becau
useprivatelenderstypicallydonotpayfindersfeess,themortgaggeagentcharrgedafeeof
2%offthetotalmo
ortgageamou
unt.

Syn dicated Mortgage


M
es
Anoth
heroptionforraprivatelen
nderistoinve
estinasingleemortgagew
withotherprivvatelenders.
Forexxample,ifadeveloperrequirestwomillliondollarstoobeginconsttructionofaccondominium
m
building,thedevellopermaygotoamortgaggeagenttoobbtainthatfun
nding.Mostiinstitutional
erswontlend
dmoneytoadeveloperforsoftcosts,ssuchasmarkeeting,etc.and
difthe
lende
developerdoesnthaveenough
hmoneyofitssown,itmayyneedadditio
onalsoftcostfundingto
getth
heprojectstarted.

Howe
evermostprivvatelendersw
willnothavetwomillionddollarstoinveest,sothemo
ortgageagentt
mayggather10ofittsprivatelenders(itcanb
beasfewastw
woorasman
nyasnecessary)topool
theirmoney.Thisisreferredto
oasasyndicatedmortgagee.Onemorttgagewillberregisteredon
n
titleh
howeverallofftheinvestorrsareincludedinthatmorrtgage.

Morrtgages as
a Investm
ments
Tounderstandwhyyprivateinve
estorswilllen
ndmoneytobborrowersthroughmortgaages,itis
imporrtanttounde
erstandthech
haracteristicsofamortgaggeasaninvesstment.

Rateo
ofReturn
Theprincipalreaso
onthataninvvestorwilllen
ndtoaborrow
werisbasedo
ontherateofreturn.A
privattelendercantypicallyexpecttoreceive
earateofretturnfarinexccessoftraditional
investtmentvehicle
eswithlimitedriskincomparisontoot herhighreturninvestmen
ntslikethe
stockmarket.

Forafirstmortgagge,aprivatele
enderwilltraaditionallychaargeinexcesssof7%intereest,andas
highaas9%interestt,whileonassecondmortggageinterest ratesof13%
%andhigheraaretypical,
makin
ngsecondmo
ortgagesthevvehicleofcho
oiceamongm
mostprivateleenders.

Inadd
ditiontoahiggherrate,mo
ostprivatelen
nderswillcha rgealenderssfee.Thisreepresentsan
amou
untequaltoacertainperce
entageofthe
etotalmortgaage(usuallyb
between1and4%)andis
deducctedfromthe
emortgageprroceeds.Aprivatelendersfeeisalsorreferredtoassabonus,
which
hisanadditio
onalincentive
efortheprivaatelenderto lendmoneyttoasubprim
meborrower.

Securrity
Itisofftenassumed
dthatmortgaagesaresafeinvestmentsbecausethessecurityfortheloanisa
prope
erty.Howeve
er,thisassumptionissome
etimesfaulty..Theprivateelendersmorrtgagewillbee
based
donamaximumloantovaalue,setathisorhermaxiimumrisktolerance.Thisistypically
85%loantovalue.Asdiscussed
dearlier,aloantovalueissbasedonth evalueoftheeloantothe
valueoftheprope
erty,expressedasapercen
ntage.Thereffore,themaxximumloanamountis
determinedbythe
epropertysvvalue.

22

Chapterr1:MarketO verview

musthave
Toensurethathisorherinvestmentisadequatelyproteccted,theprivvatelenderm
confid
denceinthevvalueofthep
propertybefo
oreheorshe makesthefin
naldecisiontolend.In
orderrtodetermine
ethevalue,theprivatelen
nderwillrequuestthatafullappraisalbecompleted
onthe
eproperty.TTofurtherpro
otecttheprivatelender,h eorshewillu
usuallyonlyd
dealwithan
appraaisalfirmthattisfelttoberreliable,accurateandconsservativeand
dthattheprivvatelender
hasde
ealtwithinth
hepast.

Eventthoughtheprivatelender mayhavean
naccurateap praisaldonettodetermineetheexact
marke
etvalueoftheproperty,thatwillbelitttleconsolatiooniftherealestatemarkeettakesa
down
nturnandpropertypricesffall,especiallyyiftheloant ovalueis85%
%oftheoriginalappraised
d
value.

Example
Toillu
ustratethispo
oint,letusco
ontinuewithttheExample.
MalikkAdamsreceivedaprivate
emortgagetw
woyearsagointheamoun
ntof$170,000that
represented85%o
oftheappraissedvalueatthetimethem
mortgagewassfunded.Sin
ncethattime,,
Malikkhasonceagaainfailedtom
makehismorttgagepayme ntsandthep
privatelenderrhas
underrtakenstepsttosellthepro
opertyandre
etrievehisinvvestment.Todoso,theprrivatelender
hasre
etainedalawyerwhoishaandlingthepo
owerofsalepprocessasweellasaRealEstate
Salesp
personwhow
willbesellingthehouseon
nbehalfofth eprivatelend
der.

TheR
RealEstateSalespersonhassinformedth
heprivatelennderthatthevvalueofthep
propertyhas
declin
nedoverthep
pastyearastthemarkethaastakenadow
wnturn.ThepricethattheRealEstatee
Salesp
personissugggestingthattthepropertyb
besoldforis$185,000.Iffthatsalepricceisrealized,,
theprrivatelenderwillloseapproximately$2
2,780.Acosttanalysisreveealsthattheprivate
lende
ersrateofretturnisreduce
edfrom9%to
oapproximattely7.4%(exccludingthebo
onus).

Pau
useforcla
arification
PoweroffSale
Thetermpowerofsalerefersstotheproce
essbywhich alendercanobtaintheam
mountlent
totheborrowerandassociate
edcosts,inclu
udingunpaidinterest,upo
ondefaultbythe
borrower.More
einformationonthiscanb
befoundinthhechapterMo
ortgageRemeedies.

Hereisthebreakdownofthatttransaction.A
Althoughthissisatheoreticalbreakdow
wn,itis
evidentthatiftherreisadecreaseinthevalu
ueoftheproppertyaloanttovalueof85
5%doesnot
necesssarilymeantthatthelende
ersinvestme
entissafe.Fuurther,consid
derthepotentiallossesif
theorriginalappraisalhadbeenincorrectand
dthevalueoffthepropertyytoohigh.Ittshouldnow
beevidentwhyanaccurateapp
praisalissoim
mportantinaaprivatemorttgage.

Outstandingmortggagebalance
$170,0000(balanceissthesameasstheadvancee
sinceit isaninteresttonlymortgaage)

MortggageArrears
$3,755..22(basedon
n3monthsoffmissed
interesttonlypaymeents)

CollecctionCosts
$475.000

RealEEstateFees
$11,1000(6%ofthessaleprice)

Chapterr1:MarketO verview
LegalFees

$2,450

$187,7880.22

2
23

Totaltoberepaidfromprocee
eds

Challe
engesforthe
ePrivatelend
der
Althoughprivatem
mortgagescan
noffertheprrivatelenderaahigherrateofreturnwitthrelatively
lowriskbasedonaanaccurateaappraisalandaconservativveloantovalue,therestillremain
challe
engesfortheprivatelende
er.

Risk
AssessingtheR
eterminingthheprobabilityythattheborrrowerwill
Thefirstchallengeisassessingttherisk,orde
etermsthataaresetoutin themortgaggecontract.TThisrequires
repayythemortgaggeloanonthe
theprrivatelendertounderstan
ndtheunderw
writingprocesss(theprocesssofassessin
ngthemerits
ofanapplication)aaswellasbeingabletoan
nalyzetheborrrowerscred
dit,incomean
nddebt
heprivatelen
nderisnotsophisticatede noughtocom
mpletetheseanalyses,theen
servicceratios.Ifth
heorshewillhave
etorelyonth
heirmortgage
eagenttomaakearecomm
mendation.

SiggnificantCapiitalOutlay
Toinvvestinamorttgage,aprivaatelenderwilltypicallybe requiredtoinvesttensof
fthousandsof
dollarrsasopposed
dtohundredssofdollars.TThismakesinvvestinginmo
ortgagesdifficcultforthe
smallinvestor.

Re
einvestmento
ofReturn
Thenextchallenge
eishowthep
privatelenderrwillreinvesttthereturno
onhisorherinvestment.
equiretensoffthousandsoofdollarstoadvanceandtthetypical
Sincemortgageloaansusuallyre
repayymentisamo
onthlyamoun
ntofinteresto
only,itwilltaakesometimeebeforetheprivatelendeer
canaccquireenoughmonthlypaaymentstoinvestinyetannothermortggage.Inthem
meantime,thee
monthlyreturnsw
willhavetobe
einvestedinaaninvestmenntvehiclewith
hlowerratesofreturn
sincetheinvestme
entamountisssolow.Thissisnotthecaasewithsomeeotherinvesttmentssuch
asmu
utualfundsth
hatwillreinve
estprofitsasttheyoccur.

LacckofLiquiditty
Unlike
ethestockexxchange,therreisnocentraalexchangetthatdealswitthmortgages.Aprivate
lende
ercannotlisth
hisorhermo
ortgageforsaleinacentra lregistry,sincenoneexistt.Theresultis
that,ifaprivatelenderwishesttosellhisorh
hermortgageeheorshemustlocateap
potential
buyerrthrougham
mortgageagen
ntorotherso
ource,possibl yevenhavinggtoadvertisee.Thetime
involvvedinthispro
ocessmaybelengthyandcausethepriivateinvestorrtoloseotheerinvestmentt
opporrtunitiesand//orresultinssellingthemo
ortgageataddiscounttoreecovertheirin
nvestment
morequickly.

Pau
useforcla
arificationDiscountt
Thetermdiscoun
ntreferstoanamountthaatissubtracteedfromthessalepriceofaamortgage
tom
makeitmoreattractivetoabuyer.The
econceptissiimilartoobtaainingapieceeof
merrchandisefromaretailerforapricelow
werthanitso riginal;inoth
herwords,itiisonsale.

24

Chapterr1:MarketO verview

Indi rect Inve


esting in Mortgage
M
es
Tobeabletomitiggatethechallengesidentiffiedabove,aprivatelendeermaydecideetoinvestina
poolo
ofmortgages,suchasmorrtgagebacked
dsecuritiesoorinaMortgaageInvestmen
nt
Corpo
oration(MIC).

MortggageBackedSecurities(M
MBS)
Amorrtgagebacked
dsecurityisaaninvestmen
ntinapooloffamortizedreesidentialmo
ortgages
insure
edthroughCM
MHCunderth
heNationalH
HousingAct(N
NHA).NHAM
MBSissuersareapproved
byCM
MHCandmustbeacharteredbank,atrrustcompanyy,aninsuranccecompany,aacaisse
popullaire(meaningpeoplesb
bankinFrencch),acredituunion,oraloaancompany.

offerarateofreturnsimilartoGICsandhigherthannGovernmen
ntofCanadaB
Bondsthat
MBSo
haveequivalentte
erms,althoughlowerthanprivatemorttgageloans.

Theyanswertheisssueofliquidiitybybeingaabletobesolddeasilyandttheissueofseecurityby
beingfullyguarantteedbytheG
Governmento
ofCanada.M
MBSarenotlim
mitedtothem
maximum
insuraableamountof$100,000p
providedbyttheCanadaD epositInsuranceCorporattion.

Sincebeinglaunch
hedin1987byyCMHC,MBSShavebecom
meverypopullarwithover47,000
investtorsinvestinggover27billio
ondollarsinttheNHAMBSSprogram.

MortggageInvestm
mentCorporattion(MIC)
Amorrtgageinvestmentcorporaation(MIC)issacorporatioonthatenableessmallinvesstorstoinvest
inadiversifiedpoo
olofmortgaggesonresiden
ntialrealesta tewiththeb
benefitofusin
ngthe
corpo
orateformby purchasingssharesintheccorporation.AMICisgen
nerallytreated
dasaconduitt
forincometaxpurrposes.Itsinccomemaybeflowedthrouughtoitsshareholdersand
dtaxedin
theirhandswithou
uttaxattheccorporateleve
el.

Oneh
hundredperccentofaMICsannualnetincomemusttbedistributtedtoitssharreholdersin
thefo
ormofadivid
dend.

AccorrdingtotheIn
ncomeTaxAcct,aMICmussthaveatleasst20shareho
olderswithno
oindividual
shareholderownin
ngmorethan25%oftheM
MIC.Inadditiion,atleast550%oftheMIICsassets
mustbecomprised
dofresidentialmortgagess.

1.7

Real Es
state and
d Mortgag
ge Institu
ute of Can
nada Inc. (REMIC)

TheR
RealEstateandMortgageInstituteofCaanadaInc.(REEMIC)isanattionalorganizzation
dedicatedtoprovidingthemorrtgageandreaalestateinduustrieswithreesourcesdesiignedto
increaasemarketpe
enetrationan
ndthesuccessofitsmembbers.Foundeedin2008byJosephJ.
White
e,REMICisamembershipdrivenorgan
nizationthatffocusesonth eneedsofaggentsand
broke
ersbyprovidingeducation,trainingand
dawealthof resourcesforritsmemberss.

etradeassociationslikeCA
AAMPandIM
MBArepresenttthemortgaggeindustryto
oregulators,
While
REMIC
Csfocusison
nassistingitssmembersinbuildingthei rbusinessesbyprovidingarichsupplyy
ofeassilyaccessible
eresources.TTheseresourcesfocuson marketing,ad
dvertising,seelling,sourcing
businessusingavaarietyofstrattegies,aswellasotherareeasvitaltoan
nagent/brokeerssuccess.

Chapter1:MarketOverview

25

MoreinformationcanbefoundonREMICbyvisitingitswebsiteatwww.remic.ca

1.8

Mortgage Associations and Professional Designations

MortgageassociationshavebecomemuchmoreprevalentinOntariooverthepastseveral
years.Providingavoicefortheirmembersaswellasindustrynetworkingevents,they
representasignificantportionofOntariosmortgagebrokeringcommunity.

AssociationofMortgageInvestmentProfessionals(AMIPROS)www.amipros.org
TheAssociationofMortgageInvestmentProfessionals,AMIPROS,anonprofitorganization,is
thenationalassociationforandcollectivevoiceofthemortgageinvestmentindustry.The
Associationrepresentsseveralmortgageinvestmentdisciplines,includingsyndicated
mortgages,privatemortgagesandothermortgageinvestmentvehicles.

AMIPROSsetshighqualityindustrystandardsdesignedtoprotectinvestorsandensurethe
continuedintegrityoftheindustry.AMIPROSdesigneesarecommittedtopromotingthe
industrywithintegrity,fairnessandprofessionalism.AMIPROSofferstheCertifiedMortgage
InvestmentProfessional(CMIP)designation.

MortgageProfessionalsCanada,akaTheCanadianAssociationofAccreditedMortgage
Professionals(CAAMP)www.caamp.org
CAAMP,anationalassociation,wasfoundedin1994astheCanadianInstituteofMortgage
agentsandLenders(CIMBL)andunderwentanamechangein2006.Theyonceagain
underwentanamechangein2016andarenowcalledMortgageProfessionalsCanada.They
haveapproximately10,500membersthroughoutthecountry.

TheyoffertheAccreditedMortgageProfessional(AMP)designation.Thisdesignationwas
launchedinJanuaryof2004andasof2015theassociationhasapproximately2,200AMPs
(downfrom3,400in2011).

TheIndependentMortgageagentsAssociationofOntario(IMBA)www.imba.ca
Foundedin2000,IMBAisaprovincialassociation.IMBAhasover1,800membersinOntario.

1.9

Choosing a Brokerage

Choosingabrokerageforwhomtoworkcanbeadifficultprocessifyoudontknowwhat
questionstoaskorwhattolookfor.WithseveralhundredbrokerageslicensedinOntario,you
certainlyhavechoice,sothefirsttipinchoosingabrokerageistoensurethatyouinterviewwith
severalbeforedecidingwhichonetojoin.

Besuretotreatyourfirstcontactandinterviewthesameasyouwouldanyotherinterview.
Whenmakingyourinitialinquirybesuretousepropergrammar,punctuationandifusingemail
formatitcorrectly.Bepreparedtosubmityourresumebeforeyourinterview.Attheinterview
dressprofessionally,bringacopyofyourresumeandbepreparedtoanswerquestions,
includingwhyyoufeelyoullbeasuccess.

26

Chapter1:MarketOverview

YoucanuseFSCOswebsitetosearchforbrokeragesandtheircontactinformation,aswellas
onlinesearchengineslikeGoogle,andothermediumslikenewspapersandtheYellowPages.
Youmayalsowishtocallanagentwhoworksforthebrokerageyoureconsideringtolearnof
hisorheropiniononthebrokerage.

InadditionIsuggestaskingsomeorallofthefollowingquestionssothatyoucangetafeelfor
whatthebrokeragehastoofferandyoucancomparedifferentbrokeragesbeforemakingyour
finaldecision.Decidingwhichofthefollowingquestionsismostimportanttoyouisapersonal
decisionandwillchangefrompersontoperson.Keepinmindthatthecommissionrate
shouldntbeyouronlyconsideration.Youneedtolookateverythingincontext,determine
whatisultimatelyinyourbestinterestsandthendecidewhereyouwanttowork.Attheendof
thefollowingformthereisaspotforyourgeneralcommentsonthebrokerageaswellasany
additionalquestionsthatwerenotincludedinthisguide.

Question
Commission

Answer

1. Whatisyourcommissionsplit?

2. Doyoupayvolumebonus?

3. Doesthecommissionsplitand/or
volumebonusvarybasedon
production?Ifso,whatarethelevels?
4. Doyouhaveaminimumlevelof

productionthatImustmeettoremain
anagentwithyou?

Costs
5. Whatarethecoststojoin?

6. HowmuchdoesyourErrorsand
OmissionsInsurancecost?
7. Howmuchdoesacreditbureaureport
cost?
8. DoIhavetobeamemberofCAAMP
orIMBA?
9. Doyouchargeagentsanyothercosts?
Ifso,whatarethey?

Contract

10. DoyouhaveanagentcontractthatI
havetosign?
11. Doesthecontracthaveatermduring
whichIcannotworkforanother
brokerageifIleave?
12. HowmuchnoticemustIgiveifI
decidetoleave?

Chapter1:MarketOverview

Training

13. Doyouprovidetraining?

14. Ifso,atwhatlocationorisitonline?

15. Ifso,onwhattopics?

16. Ifso,howoften?

17. Ifso,isthereacosttome?

18. Doyouhavelendersattendmeetings
toprovideagentswithinformation?

19. Ifso,howoften?

20. Ifso,atwhatlocation?

PoliciesandProcedures
21. Doyouprovideacompliancemanual
soImawareofyourcompliance
policies?
22. DoyouprovideafilechecklistsoI
knowwhatIhavetosubmittoget
paid?
23. DoyouhaveaPoliciesandProcedures
Manualforyouragents?
Website

24. Doyouprovidemewithawebsite?

25. CanIchangeitscontent?

26. Doyouprovideupdatedcontent?

27. Isthereanycost?

28. Doesithaveanonlineapplicationthat
submitstheapplicationtome?

Support
29. DoyouprovidehelpondealsthatIdo
notknowwhichlendertouse?
30. Doyouhaveacentralunderwriting
departmentthatcanhandleadeal
thatIcantdo?Ifso,whatismy
commissionsplit?
31. WhatisyourprocessifIdisagreewith
alenderthatdeclinesanapplication?
32. Doyouprovideofficespaceformeto
meetwithclients?Ifso,istherea
cost?

27

28

Chapter1:MarketOverview
33. Doyouadvertise?Ifso,doIgetany
leadsfromyouradvertising?Isthe
commissionsplitdifferentonthese
leads?

General

34. Howlonghaveyoubeeninbusiness?

35. Arethereanylendersyoudonotdeal
with?Why?
36. Doanylendersnotdealwithyou?
Why?

37. Whatoriginationsoftwaredoyouuse?
38. Doyouprovidetrainingonusingthat

softwareandifso,when,whereandis
thereacost?
AdditionalQuestions(usethissectiontolistanyadditionalquestionsyoumayhave)

GeneralNotes(Usethissectiontomakenotesonyourimpressionofthebrokerageand/or
provideanyotherinformationrelevanttomakingyourdecision)

Chapter1:MarketOverview

29

1.10 Key Terms and Definitions

Btypelending
Mortgagelendingtoborrowerswhohaveimpairedcreditorsomeotherimpairmentthat
preventsthemfrombeingabletoqualifyfortraditionallendingproducts

AlternativeMortgageMarket
Amarketforborrowerswhodonotqualifyfortraditionallendingproducts

AMPDesignation
TheAccreditedMortgageProfessionaldesignationawardedbyCAAMP

Bank
AninstitutionapprovedasaScheduleI,II,orIIIBankundertheBankAct.Schedule1Banksare
Canadianowned,whileScheduleIIBanksaresubsidiariesofforeignownedBanksandSchedule
IIIBanksareforeignownedBanks.

BankAct
ThelegislationthatgovernscharteredbanksinCanada

Borrower
Theindividualresponsibleforthereceiptandrepaymentofmortgageproceeds

BritishNorthAmericaAct,1867
OnMarch29,1867,theBritishParliamentpassedtheBritishNorthAmericaAct,which
establishedtheprovisionsoftheConfederationoftheProvinceofCanada(Ontarioand
Quebec),NewBrunswickandNovaScotiaintoafederalstatewithaparliamentarysystem
patternedontheBritishmodel.TheActestablishedthedivisionofpowersbetweenthecentral
Parliamentandtheprovinciallegislatures.Thefederalgovernmentwasresponsiblefor,among
otherthings,bankingbusiness,criminallaw,thepostoffice,thearmedforces;theprovinces
couldlegislate,amongotherthings,propertylaw,contracts,andlocalwork.

CommercialMortgages
Acommercialmortgageissimilartoaresidentialmortgage,exceptthecollateralisacommercial
buildingorotherbusinessrealestate,notresidentialproperty.

ConstitutionAct,1867
TheConstitutionAct,1867(formerlycalledtheBritishNorthAmericaAct,1867,andstillknown
informallyastheBNAAct),constitutesamajorpartofCanada'sConstitution.TheActentailsthe
originalcreationofafederaldominionanddefinesmuchoftheoperationoftheGovernmentof
Canada,includingitsfederalstructure,theHouseofCommons,theSenate,thejusticesystem,
andthetaxationsystem.Itreceiveditscurrentnamein1982,withthepatriationofthe
constitution(originallybeingenactedbytheBritishParliament).

30

Chapter1:MarketOverview

CPMADesignation
TheCertifiedProfessionalMortgageAgentdesignationawardedbyIMBA

CPMBDesignation
TheCertifiedProfessionalMortgageBrokerdesignationawardedbyIMBA

Crown
Theexecutivebranchofgovernment,theQueenactingthroughHerAgents(themembersofthe
Cabinet)

Demographics
Referstoselectedpopulationcharacteristicsasusedingovernment,marketingoropinion
research

ErrorsandOmissionsInsurance
Insurancethatprovidescoverageforerrorsoromissionsmadebyabrokerage,broker,agentor
Administrator.Thisinsurancemustcontainaprovisionforfraud.

Expropriate/Expropriation
Theactofapublicauthority(suchasfederal,provincial,municipalgovernmentsorotherbodies
empoweredbystatute)takingpropertywithouttheconsentofanownerthroughastatutoryor
commonlawprocess.Thisprocessinvolvesthepaymentofcompensationtotheownerbythe
authorityandtheownerhavingtherighttoclaimadditionalcompensationtobedeterminedby
thecourtsoranadministrativeboard.Compensationisintendedtomaketheownerwhole,in
lightofthelosssuffered.

FinancialStatements
Formalrecordsofabusiness'financialactivities.Thesestatementsprovideanoverviewofa
business'profitabilityandfinancialconditioninbothshortandlongterm.

Foreclosure
Alendersremedythatenablesthelendertoobtaintitletothedefaultedborrowersproperty
anddisposeofit.Anyprofitorlosswillbelongtothelenderwhiletheborrowerisfreeofthe
debt.

FSCO
TheFinancialServicesCommissionofOntario.Thisistheregulatorybodythatoverseesthe
mortgagebrokerageindustryandenforcestheMortgageBrokerages,lendersand
AdministratorsAct,2006(formerlytheMortgageagentsAct),aswellasseveralotherindustries
andActs.

HomeInspector
Ahomeinspectionisanoninvasiveexaminationoftheconditionofahome,ofteninconnection
withthesaleofthathome.Thisiscarriedoutbyahomeinspector,whousuallyhasspecial
equipmentandtrainingtocarryoutsuchinspections.

IMBA
TheIndependentMortgageagentsAssociationofOntario,theprovincialmortgageassociation
ofOntario

Chapter1:MarketOverview

31

IncomeApproach
Anapproachtocalculatingthevalueofanincomeproducingpropertythroughtheusageofthe
netoperatingincomeandcapitalizationratetypicalforthattypeofpropertyandtheareain
whichitislocated

Institutionallender
AlenderconsideredtobeaBank,LoanorTrustCompany,CreditUnionorcaissespopulaires.

InstitutionalMortgageOriginator
Anindividualemployedbyaninstitutionallendertoprovidesuitableborrowerstothat
institutionformortgagefinancing

Lawyer
Apersonlicensedtopracticelaw

LifeInsuranceCompany
Alicensedcompanyprovidinglifeinsurancetopolicyholders

MortgageAdministrator
Anindividualorbusinessthatprocessesmortgageloansonbehalfofanotherparty.

MortgageBackedSecurity
AninvestmentinapoolofamortizedresidentialmortgagesinsuredthroughCMHCunderthe
NationalHousingAct(NHA)

MortgageAgentorBroker
IndividualswhoareremuneratedfordealinginmortgagesortradinginmortgagesinOntario,as
employeesorotherwise.Amortgageagentmayholdthepositionofprincipalbrokerandmay
superviselicensedmortgageagents.Mortgageagentsmustbelicensed.

MortgageBrokerageCommunity
Themortgagebrokerageindustryasawhole

MortgageBrokerages,lendersandAdministratorsAct,2006
ThelegislationthatgovernsthemortgagebrokerageindustryinOntario.Thislegislationis
enforcedbyFSCOandreplacesthepreviousMortgageagentsAct.

MortgageagentsAct
ThelegislationpredatingtheMortgageBrokerages,lendersandAdministratorsAct,2006.This
legislationgovernedthemortgagebrokerageindustryinOntariountilJuly1st,2008andwas
enforcedbyFSCO.

MortgageDefaultInsurer
Aninsurerthatprovidesapolicytotheinsuredlender.Thispolicywillcompensatethelender
forlossesincurredinamortgagetransaction.Asof2011theinsurersthatareinOntarioinclude
CMHC,GenworthFinancialandCanadaGuaranty.

MortgageInvestmentCorporation(MIC)
Acorporationcreatedtoinvestinmortgages.Investorspurchasesharesinthecorporationand

32

Chapter1:MarketOverview

receiveincomethroughdividendpayments.

MortgageProfessionalsCanada,akaTheCanadianAssociationofAccreditedMortgage
Professionals(CAAMP)
Anationalmortgageindustryassociation

NationalHousingAct(NHA)
Thelegislationthatcreatedmortgagedefaultinsurancein1954

NonConformingMortgageMarket
Mortgageloansforborrowerswhohaveimpairedcreditorsomeotherimpairmentthat
preventsthemfrombeingabletoqualifyfortraditionallendingproducts

OntarioRealEstateAssociation(OREA)
AprofessionalassociationofOntarioRealEstatepractitioners

Premiums(LifeInsurance)
Paymentsmadeinreturnforapolicy

Privatelender
Aprivatelenderistypicallyanindividualinvestorwithfundswhowouldliketoinvestin
mortgages.Thisindividualwillusuallyinvestthroughhisorherlawyerwhomayhaveclients
requiringmortgagefinancingoramortgageagent.Hisorherpurposemayvarybutnormallyan
investorwillinvestin2ndmortgagesduetotheirhigherrateofreturnwhencomparedto1st
mortgagesandotherpotentialtypesofinvestmentssuchasGICsorbonds.

RealEstateandMortgageInstituteofCanadaInc.(REMIC)
Anationalorganizationdedicatedtoprovidingthemortgageandrealestateindustrieswith
resourcesdesignedtoincreasemarketpenetrationandthesuccessofitsmembers.

RealEstateAppraiser
Anindividual,usuallylicensed,whoprovidesareportillustratingseveralcomponentsofa
property,includingitsvalue,usuallyintheformofitsmarketvalue

RealEstateBoard
Anonprofitorganizationrepresentinglocalrealestatebrokersandagents,thatprovides
servicestoitsmembers

RealEstateBroker
AccordingtotheRealEstateandBusinessBrokersAct,2002,aBrokermeansanindividual
whohastheprescribedqualificationstoberegisteredasabrokerundertheActandwhois
employedbyabrokeragetotradeinrealestate.

RealEstateBrokerage
AccordingtotheRealEstateandBusinessBrokersAct,2002,aBrokeragemeansa
corporation,partnership,soleproprietor,associationorotherorganizationorentitythat,on
behalfofothersandforcompensationorrewardortheexpectationofsuch,tradesinreal
estateorholdshimself,herselforitselfoutassuch.
RealEstateLawyer

Chapter1:MarketOverview

33

Alawyerspecializinginrealestatelaw

RealEstateSalesperson/Salespersons
AccordingtotheRealEstateandBusinessBrokersAct,2002,anagentmeansanindividual
whohastheprescribedqualificationstoberegisteredasanagentunderthisActandwhois
employedbyabrokeragetotradeinrealestate.

ResidentialMortgages
Mortgagelendingonpropertiesthatarezonedresidential

Securitization
Thesellingofapoolofmortgagestoathirdparty

SubPrimeMortgage
Amortgageloanforaborrowerwhohasimpairedcreditorsomeotherimpairmentthat
preventshimorherfrombeingabletoqualifyfortraditionallendingproducts

SubPrimeMortgageMarket
Amarketforborrowerswhodonotqualifyfortraditionallendingproducts

TitleInsurer
Aprovideroftitleinsurance

TitleInsurance
Aninsurancepolicythatprovidesprotectionagainsterrorsintitlesuchassurveyerrors,zoning
infractionsandpropertyencroachments.Itcanalsoprotectthehomeowneragainstfraud.

34

Chapterr1:MarketO verview

1.11
1 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Wh
hatarethem
maindifferenccesbetweenSScheduleI,II andIIIBanks?

2. Lisstanddefinetthekeyparticcipantsinthe
eOntariomorrtgageindusttry.

3. Explainwhenan
ndwhybankssbeganlendingintheresiidentialmortggagemarket..

4. De
efinethesubprimemortgaagemarket.

esubprimem
marketintheUnitedState scollapsedin
n2007.
5. Explainwhythe

6. Wh
hatimpacthaastheU.S.subprimemarkketcollapsehhadontheOn
ntariomortgaagemarket?

7. Wh
hichtypeoflenderisthep
predominantlenderintheeCanadianmortgagemarkket?

8. Wh
hatsegmentoftheCanadianpopulatio
onhasaBeaconScoreof7750to799?

9. Wh
hatarethesixmajordifferencesbetwe
eenthecomm
mercialandreesidentialmo
ortgage
maarkets?

10. Whatisthetyp
W
picalmaximumloantovallueofaprivattemortgage??

11. Whatadvicew
W
wouldyougive
etoanindividualwishing toinvestinm
mortgages?

W
areavailableforinvestorswhowishto investinmortgagesbuth
havealow
12. Whatoptions
tolleranceforrissk?

13. Whatarethet
W
twomortgage
eassociationsscurrentlyinoperationinOntarioandwhatarethee
diffferencesbetw
weenthetwo
o?

14. Discusstherolleofprofessio
onaldesignattionsinthem
mortgageindu
ustryandexplainhowtheyy
are
eofbenefitto
othemortgageagent.

35

Chapter1:MarketOverview

Appendix 1: Schedule 1 Banks

Schedule1Banks8
AsatDecember31,2014

NameofBank
B2BBank
BankofMontreal
BankofNovaScotia(The)
BridgewaterBank
CanadianImperialBankofCommerce
CanadianTireBank
CanadianWesternBank
CFFBank
CitizensBankofCanada
ContinentalBankofCanada
CSAlternaBank
DirectCashBank
EquitableBank
FirstNationsBankofCanada
GeneralBankofCanada
HollisCanadianBank
HomEquityBank
LaurentianBankofCanada
ManulifeBankofCanada
NationalBankofCanada
Pacific&WesternBankofCanada
PresidentsChoiceBank
RedBrickBank
RogersBank
RoyalBankofCanada
TangerineBank
TorontoDominionBank(The)
ZagBank

ScheduleI,BankAct(1991,c.46)

HeadOffice
Ontario
Quebec
NovaScotia
Alberta
Ontario
Ontario
Alberta
Alberta
BritishColumbia
Ontario
Ontario
Alberta
Ontario
Saskatchewan
Alberta
Ontario
Ontario
Quebec
Ontario
Quebec
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Alberta

36

Chapter1:MarketOverview

Appendix 2: Schedule 2 Banks

Schedule2Banks9
AsatDecember31,2014

NameofBank
AmexBankofCanada
BankofAmericaCanada
BankofChina(Canada)
BankofTokyoMitsubishiUFJ(Canada)
BankOneCanada
BNPParibas(Canada)
BofACanadaBank
CitcoBankCanada
CitibankCanada
CTBCBankCorp.(Canada)
HabibCanadianBank
HSBCBankCanada
ICICIBankCanada
IndustrialandCommercialBankofChina(Canada)
J.P.MorganBankCanada
J.P.MorganCanada
KoreaExchangeBankofCanada
MegaInternationalCommercialBank(Canada)
ShinhanBankCanada
SocitGnrale(Canada)
StateBankofIndia(Canada)
SumitomoMitsuiBankingCorporationofCanada
UBSBank(Canada)
WalmartCanadaBank

ScheduleII,BankAct(1991,c.46)

HeadOffice
Ontario
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Ontario
BritishColumbia
Ontario
BritishColumbia
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Ontario
Ontario

37

Chapter1:MarketOverview

Appendix 3: Schedule 3 Banks

Schedule3Banks10
AsatDecember31,2014
NameofAuthorized
ForeignBank(FB)
BankofAmerica,
NationalAssociation
BankofNewYork
Mellon(The)
BarclaysBankPLC
BNPParibas
CapitalOneBank
(USA),N.A.
ChinaConstruction
Bank
Citibank,N.A.
ComericaBank
Coperatieve
CentraleRaiffeisen
BoerenleenbankB.A.
CreditSuisseAG
DeutscheBankAG
FifthThirdBank
FirstCommercial
Bank
JPMorganChase
Bank,National
Association
M&TBank
MapleBankGmbH
MerrillLynch
InternationalBank
Limited
MizuhoBank,Ltd.
NorthernTrust
Company(The)
PNCBank,National
Association

10

NameunderwhichFBis
permittedtocarryon
businessinCanada
BankofAmerica,National
Association
BankofNewYorkMellon
(The)
BarclaysBankPLC,Canada
Branch
BNPBaribas
CapitalOneBank(Canada
Branch)
ChinaConstructionBank
TorontoBranch
Citibank,N.A.
ComericaBank

TypeofForeign
BankBranch(FBB)

PrincipalOffice

Fullservice

Ontario

Fullservice

Ontario

Fullservice

Ontario

Fullservice

Quebec

Fullservice

Ontario

Fullservice

Ontario

Fullservice
Fullservice

Ontario
Ontario

Fullservice

Ontario

Lending

Ontario

Fullservice
Fullservice

Ontario
Ontario

FirstCommercialBank

Fullservice

BritishColumbia

JPMorganChaseBank,
NationalAssociation

Fullservice

Ontario

M&TBank
MapleBank

Fullservice
Fullservice

Ontario
Ontario

MerrillLynchInternational
BankLimited

Lending

Ontario

Fullservice

Ontario

Fullservice

Ontario

Fullservice

Ontario

RabobankNederland
CreditSuisseAG,Toronto
Branch
DeutscheBankAG
FifthThirdBank

MizuhoBank,Ltd.,Canada
Branch
NorthernTrustCompany,
CanadaBranch(The)
PNCBankCanadaBranch

ScheduleIII,BankAct(1991,c.46)

38

Chapter1:MarketOverview

RoyalBankof
ScotlandN.V.(The)
RoyalBankof
Scotlandplc(The)
SocitGnrale
StateStreetBankand
TrustCompany
U.S.BankNational
Association
UBSAG
MUFGUnionBank,
NationalAssociation
UnitedOverseasBank
Limited
WellsFargoBank,
NationalAssociation

RoyalBankofScotlandN.V.,
(Canada)Branch(The)
RoyalBankofScotlandplc,
CanadaBranch(The)
SocitGnrale(Canada
Branch)
StateStreet
U.S.BankNational
Association
UBSAGCanadaBranch
UnionBank,CanadaBranch

Fullservice

Ontario

Fullservice

Ontario

Fullservice

Quebec

Fullservice

Ontario

Fullservice

Ontario

Fullservice

Ontario

Lending

Alberta

UnitedOverseasBankLimited Fullservice

BritishColumbia

WellsFargoBank,National
Association,CanadianBranch

Ontario

Fullservice

Chapter2:BasicMortgageConcepts

39

Chapter 2: Basic Mortgage Concepts

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Explainthetermmortgage
Explaintheroleofamortgageagent
Explainwhatconstitutesthemortgagecontract
Describethedocumentsrelatedtotheregistrationanddischargeofamortgage
Explainhowmortgagesareranked,suchas1st,2ndandothermortgages
Describetheneedformortgagefinancing
Discussthetwomainpurposesofmortgages:purchasingandrefinancing
Differentiatebetweenaconventionalandhighratiomortgage
Differentiatebetweenastandardmortgageandacollateralmortgage

Introduction

TheOntariomortgagemarkethasexperiencedvariouschangesoverthepasttwodecades,with
theintroductionofnewmortgagebrokeringlegislationin2008,andmorerecentlywiththeloss
ofafewmortgagelenders,theintroductionofseveralnewlenders,changesinmanylenders
guidelinesandtheimplementationofseveralnewregulatorymodificationsregardingmortgage
financinginCanada,suchasalterationsofcertaindefaultinsurancepolicies.

ThemortgagebrokerageindustryinOntariohasalsoexperiencedavarietyofchangesoverthe
pastseveralyears.Whatwasonceasmall,fringeindustryhasgrownintothemainstream,
gatheringmoreacceptancebytheconsumerasawhole.

AlthoughtheindustrystillhasalongwaytogotoachievetheresultsofourAmerican
counterpartswhereitwasestimatedthatbetween75%and80%ofallmortgagetransactions
werebrokeredpriortothemortgagecrisis(statisticsarenotpreciseatthistime),theOntario
mortgagebrokerageindustryiswellonitsway.

Amajorreasonbehindthistransformationistheprofessionalismthatbothconsumersandthe
industryitselfhavebegundemandingofmortgageagents.Inacomplexmarketwhere
consumerchoiceformortgagefinancingismorediversethanatanyothertimeinhistory,ithas
becomenecessarytoupgradethetrainingavailabletotheindustry.

Asprofessionalstudentsofthemortgageindustry,allmustendeavourtokeepabreastofthe
innovationsinthemarket.Forthenewstudentorsomeonejustenteringtheindustry,itis
necessarytobeginwithafirmfoundationofknowledgerelatedtomortgagefinancingin
Ontario.

40

Chapter2:Bas
C
sicMortgageConcepts

2.1

What is
s a Mortg
gage?

Defiinition
AccorrdingtotheO
OntarioMortg
gagesAct,R.SS.O.1990c.M
M.40(thelegisslationthatgo
overns
mortggagesinOntaario),thewordmortgageissdefinedas, anychargeo
onanypropeertyfor
securingmoneyorrmoneyswo
orth.

Mostconsumersw
wouldnotneccessarilyunde
erstandthatttechnicaldefiinition.Inacttuality,a
mortggageiseviden
nceofadebt..Itisbothan
ninterestinlaandcreatedb
bythemortgaagecontract
andse
ecurityforad
debt.

Howe
ever,themorecommonde
efinitionofa mortgagestaatesthat:

Amorrtgageisaloaansecuredbyyrealproperrty

Thatisastraightfo
orward,simpledefinition,b
butthereism
moretoamortgagethantthis.This
definiitionmustbebrokendownintoitscore
ecomponentts.

Aloan
Thisistheamou
untofmoneyyadvancedto
oaborrower.

Secured
ThismeansthattaCharge(alegaldocume
entthatoutli nesthetermsoftheloan))isregistered
d
ontitleofthep
propertytose
ecuretheloan
n.Iftheborroowerdefaultsontheloan,thelender
hastherighttoexerciseitsinterestinthe
esecuritythrooughseveralmethods.

Pa
auseforcla
arification
nTitle
Tittleisatermthatreferstotheownershipofabundleeofrightsthaatitsownerh
hasina
property,typicaallyfeesimpleownership.Ifsomethinggisregistered
dontitleitmeansthatiit
officiallyregissteredagainssttheownersshipoftheproopertythrougghtheLandTTitlesOffice,
iso
wh
herepropertyyownershipisrecorded.

ealProperty
Re
Re
ealpropertyissthetermuse
edtodescribethehomeaandthelandu
uponwhichittresides.Itiss
alegaltermthaatdifferentiattesrealestate
eownershipffromothertyypesofpropeertysuchas
personalproperty.Personallpropertyisccomprisedof itemsthatarretypicallym
movable
pro
operty,alsoo
oftenreferred
dtoaschatte
els.

2.2

Collate
eral Mortg
gages

Unlike
eastandardmortgagethaatplacesachargeontitle,acollateralm
mortgage,wh
hichhasbeen
n
aroun
ndforyearsb
buttypicallyo
onlyusedforssecuredlines ofcredit,isaapromissorynotewitha
lienontheproperttyforthetotaalamountreggistered.Youucanregisterrmoredebtaagainstthe
prope
ertythanthepropertyisw
worthsinceno
ormalregulattorylimitation
nsonloantovaluesdono
ot
apply.

Chapter2:BasicMortgageConcepts

41

Forexample,TDBankchangedtheirmortgagelendingpracticesonOctober18,2010,changing
theirmortgagestocollateralmortgages.Theybeganregistering125%ofthepropertyvalue,
eventhoughthatamountmaynothavebeenadvancedtotheborrowerinitially.

Sincethecollateralmortgageallowsforthereadvancingofprincipal,likearevolvinglineof
credit,thebalancecanrise.Mostcharteredbankswillnotallowtransfersofcollateral
mortgagesfromothercharteredbanks.Thisresultsinadditionallegalfeesoverandabovewhat
arenormallychargedforastraighttransferonrenewalbecausethemortgagemustbefully
dischargedasopposedtosimplybeingtransferred.

Inaddition,collateralmortgagesallowlenderstolendmoremoneytoborrowers,basedontheir
qualifications,afterclosingwithoutregisteringanewmortgagebecausethecurrentmortgageis
registeredatahigheramountthanisadvanced.Theratecanalsobeincreasedbecausetherate
onthecollateralmortgageisalsoregisteredatahigheramountthanischarged.

Forexample,abankcanregisteramortgageat125%ofthevalueofthehomeandatprimeplus
10%,butmayonlyadvance80%ofthevalueofthehomeandchargeprimeatthetimeof
closing.Thisallowsforbothadditionaladvancesofprincipalandincreasesintherateduringthe
lifeofthemortgage.

Sincethemortgageisregisteredforsuchahighloantovalue,thehomeownerwontbeableto
takeoutasecondmortgage,regardlessofhowlowtheoutstandingbalanceisonthefirst
mortgage.Whilethistypeofsituationallowsforthehomeownertoborrowmorefundsafter
closingwithouthavingtodischargeacurrentmortgageandregisteranewone,italsocomes
withtheabovementionedrisk,makingitimportanttoexplainthistotheborrowerwhen
arrangingthistypeofproduct.

2.3

What is a Mortgage Agent/Broker?

Therearetwolicensesthatallowindividualstobrokeramortgage:mortgageagentand
mortgageagent.Thedifferencebetweenthesetwolicensesisthatamortgagebroker,in
additiontobeingabletobrokermortgages,canalsobethePrincipalBrokerofamortgage
brokerage.EachmortgagebrokeragemusthaveonePrincipalBrokertoensurethatthe
brokerage,itsagentsandbrokerscomplywiththeappropriatelegislationandregulations.

Forourpurposeswewillusethetermmortgageagentandmortgageagentinterchangeably,as
bothtermsrefertoalicensedindividualauthorizedtobrokermortgagesinOntario.

Amortgageagent/brokerisapracticingprofessional,licensedbytheFinancialServices
CommissionofOntario(FSCO)whoassessesaborrowersfinancialgoalswithrespecttoreal
estatefinancingand,afterdetailedanalysis,providessolutionstomeetthosegoalsbyactingas
anintermediarywiththeappropriatelendingsource.

Mortgageagentshavetwoclients:theborrower(theindividualreceivingthemortgage)andthe
lender(theproviderofthemortgage).Inordertomaintainahealthymarket,itisimperative
thatthebrokermarrytheborrowertothelenderbestsuitedforboth.

InOntario,thelegaldistinctionbetweenamortgageagentandamortgageagentisdetermined
bylicensing.UntilJuly2008,mortgageagentshadtobelicensedinOntariowhilemortgage

42

Chapter2:Bas
C
sicMortgageConcepts

ensed)bythe
eirbrokerwithhtheFSCO.A
Asamattero
ofinterest,the
agenttswereregisttered(notlice
termmortgageage
entdidnotevvenexistinO
OntariolegislaationuntiltheeMortgagea
agentsActwaas
replaccedbytheMortgageBrokkerages,lendeersandAdminnistratorsActt,2006(2006
6makesup
parto
ofthetitleandisnotwhen
nitwasenactted).

AsofJuly2008,un
ndertheMorttgageBrokera
ages,lendersandAdminisstratorsAct,2
2006,there
areth
hreedistinctlicensingcate
egorieswithre
egardstobrookering(thereeisalsoamortgage
admin
nistratorslice
ense,butthatdoesntaffe
ectbrokering activities).FForindividualssthereare
them
mortgageagen
ntandmortgaageagentlice
enses.Forannorganization
nthereisthemortgage
broke
eragelicense.

Thisle
egislationtakkesintoaccou
untthatthein
ndustryhasc hangedfromtheMomandPoptypee
broke
eragewhereaamortgageaggentwastypiicallyanindivvidual,totheeraoftheSuperBroker
where
ebrokeragestypicallyemp
ployfromsevveraltoseverralhundredm
mortgageagen
nts.

Thero
oleofthemo
ortgageagentt/brokerrevolvesaroundhhisorherabillitytoobtainaclientand
fulfillthefinancinggneedsofthaatclient.Inessence,ther oleofthemo
ortgageagenttinvolves
sellinggtherightproducttotheclient,andse
ellingthecliennttotherightlender.Forrthepurpose
ofsim
mplicity,thetiitlesmortgageagentandm
mortgageageentwillbeuseedinterchanggeably
throughoutthisbo
ook.

2.4

The Mortgage
M
Contractt

The Standarrd Charge


e Terms
TheStandardCharrgeTermsisaadocumentth
hatiscreateddbythelendeerandmustb
beregistered
withttheDirectoro
ofTitlesunde
ertheLandTittlesAct.MannylendersSttandardCharggeTermscan
n
bevie
ewedathttpss://www.teranetexpress.caa/content/tv user/schedules/ereg_fidocs.html

documentisthemortgagecontract.Itccontainsdetaailedinformattionontheleendersand
Thisd
borro
owersobligattions,referred
dtoascovenants,aswell astheremed
diesavailabletothelender
iftheborrowerdoesnotmeetttheseobligations.Acovennantisaprom
misetodoornotdo
something.Inam
mortgageconttract,boththe
emortgagee,,whoistheleender,andmortgagor,thee
borro
ower,havecovenantsthateachmustab
bideby.

Itisviitaltoundersstandthatthe
eborrower,w
whileatthelaawyerssignin
ngthefinaldo
ocumentation
n
toreggisterthemorrtgage,signsacceptanceo
oftheStandarrdChargeTerrms.Whatm
many
borro
owersfailtore
ealizeisthattheyhaveStaandardCharggeTermsonttheirmortgaggeandthat
theyo
outlinetherigghtsandresp
ponsibilitiesoftheborroweer.Contraventionofthettermsofthis
docum
mentisconsid
dereddefaulttandthelend
dercanexercciseitsrights,whichthebo
orrower
agree
esto,thatare
efoundinthissdocument.

Thefo
ollowingisab
breakdownofboththemo
ortgagorand mortgageeccovenantsaslistedinthe
Stand
dardChargeTTerms.

Borrrower Co
ovenants
When
naborrowerpledgeshiso
orherrealpro
opertyassecuurityforaloaanbyplacingamortgage
onthaatproperty,h
heorshehasseveralobliggations.

Chapter2:Bas
C
sicMortgageConcepts

4
43

epaytheloan
1. Re
Theborroweraagreestorepaaytheloanbaasedontheppaymentscheeduleoutlined
dinthe
contract.Failurretodosore
esultsintheborrowerdeem
medtobeindefaultorincontraventio
on
ofthetermsofthemortgage
econtract.

2. Inssuretheprop
perty
Theborroweraagreestokeep
padequatepropertyinsurranceonthepropertytop
protectthe
len
nderfromlosinghisorherrsecuritydue
etoafireoroothercovered
drisks.Iftheborrowerfails
tokeepinsuran
nceontheirproperty,thellenderwillcoonsiderhimo
orherindefau
ult.

3. Ma
aintaintheproperty
Theborroweraagreestokeep
ptheproperttyingoodsaleeableconditionincludingrepairinganyy
po
ortionofthep
propertythatrequiresit.FFailuretodo sowillresultinthelenderrconsidering
the
eborrowerto
obeindefaullt.

4. No
ottocommitwaste
Waasteisalegalltermwhichincludesactio
onsorconducctthatcouldresultindam
magetothe
pro
opertyoralo
ossofproperttyvalue.Com
mmittingwasttewillresultinthelenderconsidering
the
eborrowerto
obeindefaullt.Thismayincludesignifiicantrenovattions,suchasstheaddition
ofanotherstore
eytothebuillding.Thisisduetothefaactthatiftheborrowerrun
nsoutof
mo
oneyduringtherenovationanditremaainsincompleete,thevalueeofthepropeertywillbe
dim
minished.

axes
5. PayPropertyTa
Theborrowerissrequiredtopayhisorherpropertyta xesontime.Iftheborrow
werdoesnt
the
elendercanp
paythosetaxxes,addthem
mtotheborroowersmortgaageand/orco
onsiderthe
bo
orrowerindeffault.ThisisbecausetheM
Municipality canregisteraalienagainstthe
bo
orrowersprop
pertyforunp
paidtaxes.Th
hislienwillta keprecedencceoveranyo
other
mo
ortgagesregissteredontitle
ereducingthelendersse curity.

6. Followtheterm
msoftheStan
ndardCharge
eTerms
TheStandardChargeTermsisthedocum
mentthatmakkesupthebulkoftheconttract.Itisvitaal
tounderstandtthattheborro
ower,whileaatthelawyer ssigningthefinaldocumeentationto
reggisterthemo
ortgagesignsaacceptanceo
oftheStandarrdChargeTerrms.Thisdoccumentdetails
the
erightsandresponsibilitie
esoftheborrower.Contraaventionofth
hetermsofthisdocumentt
iscconsideredde
efaultandthe
elendercane
exerciseitsri ghts,whichttheborroweragreesto,
thaatarefoundiinthisdocum
ment.

Len der Cove


enants
Them
mortgagee,orrlender,alsohasseveralcovenantsby whichtheym
mustabide.TThefollowing
listsu
ummarizestho
osecovenantts.

1. Ce
ertificateofD
Discharge
On
ncethemortggageehasrecceivedfundstthataresufficcienttocomp
pletelyrepaythe
outstandingballanceofthem
mortgage,the
emortgageeisrequiredto
oprovidethemortgagor,o
or
bo
orrower,withaCertificateofDischargethatindicateesthattheam
mountborrow
wedhasbeen
rep
paidinfull.TThemortgage
eedoesnothaavetoregisteerthiscertificcateofdischaargeontitle,
wh
hichmeansth
hattheborrow
werisrespon
nsibleforhaviingthisregisttered.Ifthemortgageis

44

Chapter2:Bas
C
sicMortgageConcepts
beingrefinance
edbyanotherrlender,itissstandardproccedureforthenewlenderrtohavetheir
Solicitorclosinggthemortgaggeregisterthe
ecertificateoofdischargeb
beforetheyreegistertheir
newcharge.

2. Assignmentofmortgage
Themortgagorhastherighttorequestth
hatthemortggageeassigntthemortgageetoanew
len
nderaslongaasthemortgaagorsmortgaageisingood standingand
dthemortgaggorhasthe
rigghttoredeem
mthemortgagge.Fortheexxactlegislatioonreferringto
oassignmentts,refertothe
Mo
ortgagesAct,Part1,andSSection2.

3. Pro
ovideQuietP
Possession
Qu
uietPossessio
onisalegalte
ermthatrefle
ectstheright ofthemortggagortohavepossessiono
of
the
epropertyfre
eefrominterferencebyth
hemortgageee,exceptwheenindefault.

2.5

Mortga
age Regis
stration Document
D
tation

TheC
Charge/Mortggage
TheC
Charge/Mortggageistheinsstrumentthattisusedtoreegisterthedeebtorloanaggainstthe
borro
owersproperrty.Itformstthesecurityo
ofthedebt.

DischargeofC
Charge/Mortggage
TheD
Thisisstheinstrumentusedtod
dischargethedebtorloan againsttheb
borrowersprroperty.It
releassesthelendersinterestin
nthepropertyy.

CaseSStudyFigurres69
JackA
Adamscurren
ntlyhasaseco
ondmortgage
eonhiscond ominiumwithaprivateleender.You
havearrangedane
ewmortgagethroughSup
perBankfor$225,000thatJaackisusingto
opayoffthis
secon
ndmortgage.Figure6sho
owsthenewccharge/mortggagethatisbeeingregistereedonJacks
condo
ominiumwhilleFigure9showsthedisch
hargeofcharrgeregistered
dbytheprivaatelenders
lawye
er.IfJackwassgettingacollateralmortggage,thechaargewouldlooklikeitdoesinfigure7.

The Charge//Mortgage
e
Figure6Charge/Mortgage

LRO#80Charge/M
Mortgage

R
ReceiptedasA
AT1101777on20081010at16:15

yyyyymmddPage1of1
pplicant(s)hereebyappliestotheLandRegisstrar.

Theap

operties
Pro

Pin118
8720259LT
Interest/EstateFeeSimp le

UN
NIT6,LEVEL16
6,METROPOLITTANTORONTO
OCONDOMINIU
UMCORPORATTIONNO.811,
Descriiption
PTTLT2,PL1234,,CITYOFTORO
ONTOASDESC RIBEDINSCHEEDULEAOFD
DECLARATION
D1
167901TORON
NTO,CITYOFTO
ORONTO

Address
1211SUITE

04
4727SHEPPARD
DAVENUEEASST

TO
ORONTO

Chapter2:BasicMortgageConcepts

45

Chargor(s)

Thechargor(s)herebychargesthelandtothechargee(s).Thechargor(s)acknowledgesthereceiptofthe
chargeandstandardchargeterms,ifany

Name

ADAMS,JACK

AddressforService
4727SheppardAvenueEast

Toronto,Ontario

M1S5B2
Iamatleast18yearsofage.ThisdocumentisnotauthorizedunderPowerofAttorneybythisparty.

Chargee(s)

Name

AddressforService

Capacity

Share

SUPERBANK
5588KingStreetEast
Toronto,Ontario
L1L1L1

Provisions

Principal

$25,000.00

CalculationPeriod

semiannually,notinadvance

BalanceDueDate

20091031

InterestRate

14.75%

Payments

$338.26

InterestAdjustmentDate

20081010

PaymentDate

Lastdayofeachandeverymonth

FirstPaymentDate

20081130

LastPaymentDate

20091031

StandardChargeTerms

200033

InsuranceAmount

fullinsurablevalue

Guarantor

N/A

CurrencyCDN

Additional Provisions

ThisCharge/MortgageofLandsecuresthemoniesowingbytheChargortotheChargeefromtimetotime
uptothePrincipalAmountassetoutintheStandardChargeTerms.
Seeschedules

46

Chapter2:Bas
C
sicMortgageConcepts

Sig
gned By

Pau
ulJonathonJacobs
55MainStree
et
actingfor
Signed2008
81010

TorontoM1M
M1K1
Chargor(s)

Tel 4165559990
1
Fax4165559991


ocumentonbeehalfoftheChaargor(s)
Ihavvetheauthorittytosignandregisterthedo

Sub
bmitted By
PAU
ULJACOBS,
BAR
RRRISTOR&
SOLLICITOR
Tel 4165559990
1
Fax4165559991

55MainStree
et
TorontoM1M
M1K1

81010
Signed2008

Fee
es/Taxes/Pa
ayment
Statu
utoryRegistratio
onFee

$60.00

TotaalPaid

$60.00

CharrgorClientFileN
Number:

081823

File
e Number

The Collaterral Charg e/Mortga


age
Figure7CollateralC
Charge/Mortgag
ge

LRO#80Charge/M
Mortgage

R
ReceiptedasA
AT1101777on20081010at16:15

yyyyymmddPage1of1
pplicant(s)hereebyappliestotheLandRegisstrar.

Theap

Pro
operties

Pin118
8720259LT
Interest/EstateFeeSimp le

UN
NIT6,LEVEL16
6,METROPOLITTANTORONTO
OCONDOMINIU
UMCORPORATTIONNO.811,
Descriiption
PTTLT2,PL1234,,CITYOFTORO
ONTOASDESC RIBEDINSCHEEDULEAOFD
DECLARATION
D1
167901TORON
NTO,CITYOFTO
ORONTO

Address
1211SUITE

04
4727SHEPPARD
DAVENUEEASST

TO
ORONTO


argor(s)
Cha

Thech
hargor(s)hereb
bychargesthe landtothech
hargee(s).The chargor(s)ackknowledgestheereceiptofthee
charge
eandstandard
dchargeterms,ifany

ADAMS,JACK

Name

47

Chapter2:BasicMortgageConcepts

AddressforService
4727SheppardAvenueEast

Toronto,Ontario

M1S5B2

Iamatleast18yearsofage.

ThisdocumentisnotauthorizedunderPowerofAttorneybythisparty.

Chargee(s)
Capacity

Name

SUPERBANK

AddressforService
5588KingStreetEast

Toronto,Ontario

L1L1L1

Share

Provisions

Principal

$25,000.00

CalculationPeriod

SeeAdditionalProvisions

InterestRate

SeeAdditionalProvisions

PaymentDate

ONDEMAND

InterestAdjustmentDate

20081010

PaymentDate

Lastdayofeachandeverymonth

FirstPaymentDate

20081130

LastPaymentDate

20091031

StandardChargeTerms

201027

InsuranceAmount

fullinsurablevalue

Guarantor

N/A

CurrencyCDN

Additional Provisions

SeeSchedule1

Signed By
PaulJonathonJacobs
55MainStreet
actingfor
Signed20081010

TorontoM1M1K1
Chargor(s)

Tel4165559990
Fax4165559991

IhavetheauthoritytosignandregisterthedocumentonbehalfoftheChargor(s)

Submitted By
PAULJACOBS,
BARRRISTOR&

55MainStreet
TorontoM1M1K1

Signed20081010

48

Chapter2:Bas
C
sicMortgageConcepts

SOLLICITOR
Tel 4165559990
Fax4165559991
1

Fee
es/Taxes/Pa
ayment
Statu
utoryRegistratio
onFee

$60.00

TotaalPaid

$60.00

CharrgorClientFileN
Number:

081823

File
e Number

Figure8ScheduleforrCollateralCharge

The Discharg
ge of Cha
arge
Figure9Dischargeof
ofCharge

LRO#80DischarggeofCharge
R
ReceiptedasA
AT1101589on20081005at16:15

yyyyymmddPage1of1
pplicant(s)hereebyappliestotheLandRegisstrar.
Theap

Pro
operties

Pin
118720259
9LT
Interest/EstateFeeSimp le

UN
NIT6,LEVEL16
6,METROPOLITTANTORONTO
OCONDOMINIU
UMCORPORATTIONNO.811,
Descriiption
PTTLT2,PL1234,,CITYOFTORO
ONTOASDESC RIBEDINSCHEEDULEAOFD
DECLARATION
D1
167901TORON
NTO,CITYOFTO
ORONTO

Address
1211SUITE

04
4727SHEPPARD
DAVENUEEASST

TO
ORONTO

Chapter2:BasicMortgageConcepts

49

Document to be Discharged

RegistrationNo.

Date:

TypeofInstrument:

AT770911

20081005

Charge/Mortgage

Discharging Party(s)

ThisdischargecomplieswiththePlanningAct.Thisdischargedischargesthecharge.

Name

LENDER,PRIVATE

AddressforService
1299JohnStreet,Toronto,Ontario,L4B1B1

ThisdocumentisnotauthorizedunderPowerofAttorneybythisparty.

Thispartygivingthisdischargeistheoriginalchargeeandisthepartyentitledtofileaneffective
discharge.

Signed By

Lender,Private

1299JohnStreetactingforApplicant(s)Signed20081001
TorontoL4B1B1

Tel4165551255

Fax4165551266

Submitted By

LEGALWORKS,INC. 987AdamsStreet

TorontoM1M1K1

Tel4165556547

Fax4165556548

Signed20081005

Fees/Taxes/Payment

StatutoryRegistrationFee
TotalPaid

$60.00
$60.00

50

Chapter2:BasicMortgageConcepts

2.6

Mortgage Ranks

Therearedifferentranksofmortgages,referringtothenumberofmortgagesonthesame
property.

Afirstmortgagesimplymeansthatthemortgagewasregisteredfirst,orbeforeanyother
mortgagesontheproperty.Amortgageregisteredafterthefirstmortgageiscalledasecond
mortgage.Amortgageregisteredafterthesecondmortgagewouldbeconsideredathird
mortgage,andsoon.Ifaborrowerwhohasafirstandsecondmortgagepaysoffthatfirst
mortgage,thesecondmortgagewouldnowbecomethefirstmortgage.

Therankofthemortgagehasnothingtodowiththeamountofthemortgagebutinmostcases
lenderswillnotadvanceasecondmortgagethatislargerthanthefirstmortgageorthat
exceedsamaximumpercentageofthesizeofthefirstmortgage.

Typicallytheinterestrateonamortgagewillincreasewiththelevelofriskattachedtothat
mortgage.Asecondmortgageisconsideredriskierthanafirst,athirdmortgageriskierthana
second,andsoon.Thereasoningbehindthisisthatiftheborrowerdefaultedonthefirst
mortgage,thefirstmortgagelenderwouldbeginthepowerofsaleprocesstorecoverthe
moneyowingonitsmortgage.Oncethepropertyissold,theremainderoftheproceedsofthe
salewouldgototheothermortgageholders,suchasasecondmortgagelender.Thisisarisk
forthesecondmortgagelendersincetheremaynotbeenoughmoneyleftfromthesaleofthe
propertytofullypayofftheirmortgage.Tooffsetthisriskthesecondmortgagelenderwill
typicallychargeahigherinterestrate.

2.7

Why is Mortgage Financing Needed?

InOntario,housingcostshaverisenfromanaverageof$155,000in1995to$360,000in2010.
Thisrepresentsanannualincreaseof5.78%.Ifafamilyhadwantedtopurchaseahomein2010
andhadstartedsavingin1995,itwouldhavehadtosave$15,467peryear(assumingarateof
returnontheirsavingsof6%forthosefifteenyearstocomeupwiththefullpurchaseprice).
Thatequatesto$1,288.92permonth.TheaverageCanadianfamilysgrossincomeasof1995
wasapproximately$51,0001,or$4,250permonth.Theamountthatthisaveragefamilywould
havetospendtosavethisamountwouldbeequalto30%ofitsgrossincome.Consideringthat
thisfamilywouldstillberentingandusingconsiderablymoreofitsincome,itbecomesevident
astowhythereissuchasignificantneedformortgages.

Asitstands,thepercentageofsheltertoincomecosts(thepercentageofincomethatisused
topayforshelterorhousingcosts)wasapproximately21%in19952.Howeverthenumbersare
analyzed,theydonotaddup.ItisthereforenotplausiblefortheaverageCanadiantosavethe
purchasepriceofahome.

Inadditionithasbecomeincreasinglydifficultforindividualstosaveforadownpayment.In
fact,theaveragedebttoincomeratio(theamountofdebtcomparedtoincome,expressedasa

1
2

StatisticsCanada,
StatisticsCanada

Chapter2:Bas
C
sicMortgageConcepts

5
51

entage)fortheaverageCanadianhouse
eholdwasasttaggering1633%in20123,ccomparedto
perce
150%in2010,105%in1995and55%in19834.Thisgaveebirthtomorreaggressiveprograms
suchaastheNoMoneyDownmortgagewh
herethepurcchasercanob
btainamortgaagewithout
havingtoprovideaadownpaym
ment.

Pa
auseforcla
arification
nDownp
payment
Ad
downpaymentistheamo
ountofmoneyythatapurchhaserwillbeprovidingfromhisorher
proceeds(notb
borrowed)tow
wardsthepurchaseprice oftheproperrtybeingpurchased.

Pa
auseforcla
arification
nDownp
paymentreequiremen
ntsforinsu
ured
mortgag
ges
EfffectiveFebruary15,2016theminimum
mdownpaym
mentfornewiinsuredmortgages
inccreasedfrom5%to10%fo
ortheportion
nofthehouseepriceabovee$500,000.TThe5%
miinimumdown
npaymentforinsuredmortgagesremaainsforpropeertiesupto$5
500,000.For
example,apro
opertybeingp
purchasedforr$500,000w
wouldrequireaminimumd
down
paaymentof$25
5,000(.05x$500,000).Apropertybeinngpurchased
dfor$1,000,0
000would
req
quireaminim
mumdownpaaymentof$75
5,000(.05xtthefirst$500,,000plus.10xthenext
$5
500,000)

2.8

The Pu
urposes of
o Using a Mortgag
ge

There
earefourtypicalpurposessthatmortgaggesareused for.
1. Purchase
2. Refinance
3. Equitytake
eouts
4. BridgeFinaancing

Purc
chase
Peoplleusemortgaagestoassistinpurchasinggahomeinccombinationw
withadownp
payment,or
depen
ndingonthefinancingavaailable,theym
mayqualifytooborrowthecompletepurchaseprice.
Adow
wnpaymentistheamounttofmoneyth
hatthepurchaaserhastogiivetotheven
ndorincash.
Thebalanceofthe
epurchasepriceismadeupofamortgaage.

Refiinance
Ifabo
orroweralreaadyhasahom
me,heorshemaywishtorefinancetheeproperty.R
Refinancing
mean
nstoincreasethesizeofth
hemortgage,orrenegotiatteitinsomefashion.Ifheeorshe
decidestodothisduringthetermofthemo
ortgage,thatpersonmayh
havetopayapenaltyto
thele
enderforrepaayingthemorrtgagebefore
etheendoft hemortgagecontract,refferredtoas
thete
erm,unlessth
hecurrentmo
ortgageisfulllyopen.The refinancedm
mortgagewillreflectthe

3
4

http:://www.statcan.gc.ca/pub/75006x/20150
001/article/141167eng.htm
CBCNewsworld

52

Chapter2:Bas
C
sicMortgageConcepts

erscurrentraateofinterestt,whichmayormaynotbbelowerthantheborroweerscurrent
lende
rate.

Su
uccessTipHomeBuyersProgram(HBP
P)
Th
heCanadaRevenueAgenccy(CRA)hasaaprogramenttitledtheHom
meBuyersPrrogram(HBP))
thatallowsafirsttimebuye
ertouseupto
o$25,000ofttheirRRSPsaasadownpayymentwithou
ut
paayingtaxonthewithdrawaal.Theamou
untremoved mustberepaaidwithin15years.

pouse,orcom
RAdefinesaffirsttimebuyerasanindivvidualortheiindividualssp
mmonlaw
CR
paartnerwhohaasnotowned
dahomethatttheyoccupieedasaprincipalplaceofrresidence
du
uringtheperiodbeginninggJanuary1offthefourthyeearbeforeth
heyearoftheewithdrawal
an
ndending31daysbeforetthewithdraw
wal.

orexample,iffyouwithdrew
wfundsonM
March31,20115,thefouryyearperiodwouldhave
Fo
be
egunonJanuaary1,2011andwouldhavveendedonFFebruary28,2015.

Su
uccessTipHomeBuyersTaxxCredit(HB
BTC)
Fo
or2011andsubsequentye
ears,thefede
eralgovernmeentprovidesanonrefund
dabletax
credit,basedonanamountof$5,000,fo
orcertainhom
mebuyersthaatacquireaq
qualifying
ho
ome.TheHBTTCiscalculatedbymultipllyingtheloweestpersonaliincometaxraateforthe
ye
earby$5,000.Thecurrentmaximumcrreditis$750. Moreinform
mationcanbeefoundonthee
CaanadaRevenu
ueAgency(CR
RA)website.

Equ ity Take--Out (ETO


O)
Aneq
quitytakeouttiswhenabo
orrowerincre
easesthesizeoftheirmorttgageortakeesouta
secon
ndmortgageo
oranotherde
ebtagainstth
heproperty,ssuchasalineofcredit.An
nETOismost
oftenusedtoconssolidatehighe
erinterestrattedebtsuchaascreditcard
ds.Inthecaseeofpayingofff
otherdebts,onclo
osingthelawyyerissuesche
equestotheccreditorsbein
ngpaidoutfrromthe
proce
eeds.Borrowersmayalsotakeequityo
outoftheirprropertytopu
urchaseotherrassetssuch
asab
boatoracottaage,orforan
nyotherreaso
onasalloweddbytheirlend
der.

Brid
dge Finan
ncing
Bridge
efinancingisusedwhenaapersonissellingtheircurrrenthomeandbuyingan
newhome.In
n
somecasesabuye
ermayfindth
hatthehomethatisbeing soldhasaclo
osingdateaftterthehomee
hasingissetttoclose.Thissresultsintheehomeowneertemporarilyyowningtwo
o
thattheyarepurch
home
es.Theproble
emwiththisisthatnormaallythedown paymentforrthenewpurrchasewould
becomingfromth
hesaleofthecurrenthome.Withoutthhedownpaymentwhenthenewhomee
issettoclose,theborrowerwillllosethenew
whomeandfforfeitthedeeposit.Bridgeefinancingis
simplyyasecondmortgageplace
edonthefirsthomewhileewaitingforiittosell.Thissmoneyis
usedasthedownpaymentontthenewhome.Oncetheffirsthomeseellsthemortggageisrepaid.
Thisp
providesabrridgebetwee
enthetwoho
omes.

Chapter2:Bas
C
sicMortgageConcepts

2.9

5
53

Conven
ntional an
nd High Ratio
R
Morrtgages

Amorrtgagecanbe
edescribedasseitherconve
entionalorhiighratio.Todetermineho
owthe
mortggageisclassiffied,theloantovalueofth
hemortgagemustfirstbecalculated.
Thisisscalculatedb
bydividingthe
emortgageaamountbytheevalueoftheeproperty.
Example
hehad$50,000asadown
Ifabo
orrowerwishedtopurchasseapropertyyfor$400,0000andheorsh
n
payment,theloantovaluewou
uldbecalculaatedusingtheefollowingfo
ormula:

MorttgageAmoun t
Pro
opertyValue

Toob
btainthemorttgageamount,theamoun
ntofthedownnpaymentm
mustfirstbesu
ubtracted
fromthepurchase
eprice.

PurchasePrice
eDownPayment=Requ iredMortgaggeAmount

$400,000 $50,000=$3350,000

mortgageamo
ountisthend
dividedbythe
epropertyva lue(whichis,,inthiscase,thepurchasee
Them
price))
$350,000
$
$400,000
$

=0.875or87.5%loantoovalue

BillC37,enactediin2007bythefederalgovvernment,conntainslegislattionthatchan
ngedthe
definiitionofconve
entionalandh
highratiomo
ortgagesinCaanada.Byam
mendingsectio
on418,
subse
ection1ofthe
eBankAct,th
hefederalgovvernmentchaangedwhatcconstitutesahighratio
mortggageinCanad
dafrom75%lloantovalue to80%loan tovalue.

Thefo
ollowingisthetextoftheamendment:

allnotmakea
aloaninCanadaontheseecurityofresiidentialpropeertyinCanada
418.((1)Abanksha
forthepurposeofpurchasing,rrenovatingorrimprovingthhatproperty,orrefinancesuchaloan,iif
theam
mountoftheloan,togetheerwiththeam
mountthenooutstandingoffanymortga
agehavingan
n
equallorpriorclaim
magainsttheeproperty,wo
ouldexceed880percentoffthevalueoftheproperty
attheetimeofthelloan.

High
h Ratio Mortgage
M
Ahigh
hratiomortgageisamortgagethatexcceeds80%loaantovalue.TThisrefersto
oeithera
purch
hasewhereth
hepurchaserhaslessthan20%foradoownpaymenttor,inarefin
nancing
scenaario,whereth
hereislessthan20%equittyinthepropperty.Ifamortgageisprovvidedbya
federallyregulated
dbank,thatb
bankmustobtainmortgaggedefaultinsu
uranceontheeloanifthe
loane
exceeds80%loantovalue
e.Thisisimpo
ortantforan agenttoknowbecauseth
hepremium

54

Chapter2:Bas
C
sicMortgageConcepts

forthisdefaultinsuranceistypicallyaddedttothemortgaageamountaandwillincreaasethe
mortggagepayment.

ortgagedefau
ultinsurance
Ifthemortgageisnotprovidedbyafederallyregulatedbbank,thenmo
isnotrequired.M
Manylenderstthatdonotussemortgagedefaultinsurersrefertoth
heir
mortggagesasselffinsured.Th
hissimplyme
eansthatthe lenderwillch
hargealendeersfee
(referrredtoastheselfinsuredfee),typicallyysimilarinam
mounttoadeefaultinsurerrsfee.The
lende
erwilloftenusethesefeesstocreatearreservefundtthatcanbeaccessedtoheelpoffset
lossesssufferedbyaborrowersdefault.

Pa
auseforcllarification
nSelfinssuredlendeer
ASelfInsured
dlenderissim
mplyalenderrthatdoesnootusedefaulttinsurance,b
butthat
ch
hargesalende
ersfeeandp
poolsthismon
neyinareserrvefundtoheelpoffsettheerisks
asssociatedwith
hlendinghigh
hratiomortgageswithoutttheprotectio
onofdefaultinsurance.
Th
heamountoff thisfeeistyp
picallysimilarrtowhataboorrowerwouldpayfordeffault
insurance.

Moreinformationonmortgage
edefaultinsurrancemaybeefoundintheechapter,Inssuranceinthee
MortggageIndustryy.

Con
nventiona
al Mortga ge
Aconventionalmo
ortgageisone
ethatis80%loantovalue orless.Thissreferstoeith
herapurchasse
where
ethepurchasserhas20%o
ormoreforadownpaymeentor,incaseesofrefinancing,where
thereismorethan
n20%equityiintheproperrty.

5
55

Chapter2:Bas
C
sicMortgageConcepts

Over80%(80
0.1%
andhigher)LLTV
iscalledhiggh
ratio

HighRatio

100%
%LTV

80%
%LTV

Conventional

Upto
o80%LTTVis
aconvention
nal
mortgage
m
e

0%LTV

56

Chapter2:BasicMortgageConcepts

2.10 Key Terms and Definitions

1stMortgage
Thefirstmortgageregisteredontitleofaproperty

2ndMortgage
Amortgageregisteredontitleofapropertyaftera1stmortgage

3rdMortgage
Amortgageregisteredontitleofapropertyaftera2ndmortgage

Assignmentofmortgage
Thetransferenceofamortgagefromonelendertoanother

Charge/Mortgage
Thedocumentthatindicatesthatthereisadebtregisteredagainstthetitleofaproperty

Chattel
Personalproperty,movablepropertyandotherpropertynotdeemedtobefixtures

CollateralMortgage
Apromissorynotesecuredbyalienonthepropertyforthetotalamountregistered,whichmay
differfromthetotalamountadvanced.

ConventionalMortgage
Amortgagenotexceeding80%loantovalue

DischargeofCharge/Mortgage
Thedocumentthatindicatesthatadebthasbeenremovedfromthetitleofaproperty

DownPayment
Anamountofapurchasersmoneyprovidedtothevendorfromhisorherownresources(not
includedinamortgageloan).Undercertainprogramsthisamountmaybeborrowed.

EquityTakeOut(ETO)
Theremovalofequitybyrefinancingoftheproperty

InterestRate
Therateatwhichinterest,whichisafeepaidtothelenderforborrowingmoney,iscalculated

Mortgage
Theprovidingofrealpropertytoalenderassecurityinexchangeforadebt

Mortgagee
Thelender

Mortgagor
Theborrower

Chapter2:BasicMortgageConcepts

57

Payment
Aperiodicamount,indollars,requiredtobemadeinrelationtoamortgagecontract.A
paymentmaybeinterestonlyorablendofinterestandprincipal.

PersonalProperty
Everythingoneownsthatisnotrealproperty.Thatincludeschattelsandothergoods.Personal
propertyistypicallynotfixedinitslocationandnormallyhasashorterusefullifeexpectancy
thanrealproperty.

RealProperty
Landandeverythingaffixedtoit.Itisinafixedlocationandispermanent,remaining,toone
extentoranother,longafterthecurrentownershaverelinquishedtheirrightstoit.

SelfInsuredlender
Alenderthatdoesnotusedefaultinsurance,butthatchargesalendersfeeandpoolsthis
moneyinareservefundtohelpoffsettherisksassociatedwithlendinghighratiomortgages
withouttheprotectionofdefaultinsurance.Theamountofthisfeeistypicallysimilartowhata
borrowerwouldpayfordefaultinsurance.

StandardChargeTerms
Thetermsandconditionsofthemortgagecontract,includingtheremediesavailabletothe
lenderupondefaultbytheborrower

Term
Anamountoftimebeforethemortgagecontractmustberepaidorrenegotiated

Title
Atermthatreferstotheownershipofaproperty.Ifsomethingisregisteredontitleitmeans
thatitisofficiallyregisteredagainsttheownershipofthepropertythroughtheLandTitles
Office,wherepropertyownershipisrecorded

58

Chapter2:Bas
C
sicMortgageConcepts

2.11
1 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Disscussthedifferencebetwe
eenamortgageandacar loan.

2. Therearetwom
mortgagesreggisteredagain
nstthetitleoofBarbarasp
property.Oneewas
reggisteredonM
May20,2006andtheotherwasregiste redonMarch
h17,2005.W
Whichisthe1
1st
nd
mo
ortgageandw
whichisthe2
2 ?

3. Jon
nathanownsahousevaluedat$250,00
00withacur rent1stmortggagethathassabalanceoff
$190,000.Jonaathanhascred
ditcarddebtssof$12,500tthathewisheestoconsolid
dateby
e.WouldJonaathanrequireeaconventio
onalorhighraatio
inccreasinghisfirstmortgage
mo
ortgage?

4. De
escribethepu
urposeoftheCharge/Morttgage.

ontract.
5. Naameanddesccribethreeofthemainborrrowerobligaationsunderaamortgageco

6. Everymortgage
ecomeswithasetofStand
dardChargeTTerms.Discu
ussthepurposeofthis
do
ocumentanditsimportancceinthemorttgagetransacction.

Chapter3:AdvvancedMortggageConceptts

5
59

Chaptter 3: Advanc
A
ced Moortgagee Conceepts
Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Liistanddefineethefinancialcomponentsofamortgaage
Describethety
D
ypesofmortggagerepaymentplansanddexplainthebenefitsandrisksofeach
Describetheddifferentprepaymentoptioonsavailable toborrowerssandexplainthebenefits
an
ndrisksofeach
Describethec
D
cashbackoptionavailabletoborrowerssandexplainitsbenefitsaandrisks
Describeacom
D
mbinationorbundledmorrtgageandexxplainitsbeneefitsandriskss
Discussthepo
D
ortabilityoptio
onanddescribeitsbenefittsandrisks
Discusstheass
D
sumabilityop
ptionanddescribeitsbeneefitsandriskss

3.1 Financia
al Compo
onents off a Mortga
age

Thebasicpremisebehindeveryymortgageis theborroweerspromisettorepaytheaamount
borro
owed.Thereaareseveralco
omponentsto
oamortgage,,asisillustratedintheStaandardChargge
Termss,butatitsco
oreamortgaggepaymentissmadeupoffthefollowinggfinancialco
omponents:

The Face Va
alue
Thefaacevalueortthefaceamou
untofaloanisthetotalam
mountoftheemortgageth
hatis
registteredagainsttheproperty.Thisistheaamountthatttheborrowerrhascontracttedtorepay.
Itisim
mportantton
notethatthisamountisno
otnecessarilyywhatthebo
orrowerreceivves,butitis
theam
mountforwh
hichtheborro
owerisliable..

The Term
Them
mortgageconttractwillindicatethetime
ethattheconntractwillbeinforce.Afteerthistime
expire
esthecontractmusteithe
erbepaidinfull(referredttoaspayingtthelenderab
balloon
payment)orrenew
wedwiththecurrentlende
er.Theseareetheonlytwo
ooptionsthataborrower
has.

Refinaancingwiththecurrentlen
nderhasthesameeffectaasmakingab
balloonpaymentsincethe
mortggageispaido
outbythenew
wloan.Inesssence,thelennderisgivingitselftheballoon
payment.Thesam
meoccurswithaswitch,transferofthemortgagefro
omonelendeertoanother,,
orgoiingtoanothe
erlenderandgettinganew
wmortgage. Inthiscase,tthemortgageeispaidout
throughaballoonpaymentmad
debythenew
wlender.

60

Chapter3:AdvvancedMortggageConceptts

The Amortiz ation


Theco
ontractwillsttipulatetheaamortizationperiodfortheemortgage.Theamortizaationrefersto
o
theto
otalnumbero
ofyearsthatiitwilltaketofullyrepaythheamountbo
orrowed,and
drequiresa
blend
dedperiodicp
paymentofbo
othinterestaandprincipal. InterestAcccruingMortgaagesand
Intere
estOnlyMorttgagesdonotthaveanamo
ortizationperriodandared
discussedlateerunder
Type
esofContemp
poraryMortggageRepayme
entPlans.

The Interest Rate


Them
mortgageconttractalsostip
pulatestheam
mountofinteerestchargedtotheborro
ower,includin
ng
howtthisinterestisstobecalculaated.Slightvvariationsinttheratewillleeadtochangesinthe
paymentamountaaswellasthe
eamountpaid
dininterest.

Forexxample,amo
ortgagewithaafacevalueo
of$200,000a mortizedoveer25years,w
witha5year
termandarateof6%calculatedsemiannuaally,willresu ltinamonthlypaymento
of$1,279.62.
Overtthetermofthemortgage,,theborrowe
erwillrepay$$76,777.20,o
ofwhich$20,327.06willbee
applie
edtoprincipaaland$56,450.14willbeaappliedtointeerest.

Iftheratewere6.1
1%insteadoff6%,withallotherfactorssremainingth
hesame,theborrower
would
dbemakingp
paymentsof$
$1,291.53.O
Overthetermofthemortggage,theborrrowerwould
repayy$77,491.80,ofwhich$20
0,074.54wouldbeapplied toprincipalaand$57,417.26wouldbe
applie
edtointerestt.

This.1
1%increaseintheratefro
om6%to6.1%
%hasresulte dina$714.660increaseintheamount
paidd
duringthefirsst5yearsbyttheborrowerr,oranaveraageof$142.922peryear.

The Compou
unding Frrequency of the In
nterest R
Rate
Lende
ersmustindiccatetherateofinterestbe
eingappliedi neitherannu
ualorsemian
nnual
comp
pounding,asp
pertheIntereestAct,R.S.,1
1985,c.I15,ss.6;2001,c.4,s.92.Morreinformation
onthe
eeffectsofco
ompoundingfrequenciesm
maybefounddinthechaptter,Calculatin
ngaMortgagge
Payment.Thefollo
owingsection
noftheIntereestActclearlyystipulatesth
hat:

When
neveranyprin
ncipalmoneyorinterestseecuredbymo rtgageonreaalpropertyorrhypothecon
n
immo
ovablesis,bythemortgageeorhypothecc,madepayabbleonasinkiingfundplan,,onanyplan
underrwhichthepa
aymentsofprrincipalmoneeyandinteresstareblendeddoronanyplanthat
involvvesanallowanceofinteresstonstipulateedrepaymennts,nointeresstwhateversh
hallbe
charg
geable,payab
bleorrecovera
ableonanyp
partofthepriincipalmoneyyadvanced,u
unlessthe
mortg
gageorhypottheccontainssastatementshowingthe amountofthheprincipalm
moneyandthe
rateo
ofinterestcha
argeableonthatmoney,calculatedyeaarlyorhalfyeearly,notina
advance.
R.S.,1
1985,c.I15,s.6;2001,c.4,s.92.

Pay ment Am
mount
Theco
ontractwilllaayouttheam
mountofeach
hpaymentduuringtheterm
m,basedonth
hefacevalue,,
intere
estrate,paym
mentfrequency,andtheam
mortization. Itisofintereesttonotethatthetermiss
notussedinthecalculationofth
hepaymentaamount.The termisonlyo
ofinteresttothedateof
theco
ontractexpiryy.

Chapter3:AdvvancedMortggageConceptts

6
61

3.2 Types of Mortgag


ge Produ
ucts

Asam
mortgageage
entitwillbeyyourroletode
eterminetheemostapprop
priateproducctforyour
client.Todosoyo
ouwillneedto
ofullyundersstandyourcliientsneedsaandcircumstaances,which
isdisccussedindetaailinthechap
pteronthein
nitialconsultaation.Tobeaabletomakeaninformed
recom
mmendationttoyourclienttrequiresyou
utobewellveersedinalloffthecurrentproducts
availaable.Thissecctionexamine
esthetypeso
ofmortgagepproductsthatmaybeavailabletoyou
anddiscussestheb
benefitsandrisksofeach.Byunderstaandingthebeenefitsandrissksyouwillbee
ablettobetteriden
ntifywhichprroductisbestsuitedtoyouurclient.Oncceyouhaveaafirm
underrstandingofttheproducttyypes,wewillthenexamin etheoptionssthatareavaailablewith
theseproducts.Itscomparable
etobuyingacar;firstyouufindthemod
delthatsrigh
htforyoutheen
youdecideontheoptions.Webeginbylistiingthemost commontypesofmortgaggeproducts,
follow
wedbyadetaailedexaminationofeach.

1. ThePartiallyAm
mortized,Blen
ndedConstan
ntPaymentM
MortgageFixxedRate
2. ThePartiallyAm
mortized,Blen
ndedConstan
ntPaymentM
MortgageVaariableRate
3. ThePartiallyAm
mortized,Blen
ndedVariable
ePaymentM ortgageVariableRate
4. TheInterestOn
nlyMortgage
5. TheHomeEquityLineofCre
edit(HELOC)
6. TheInterestAccruingMortgage
7. TheReverseMo
ortgage
8. TheStraightLin
nePrincipalRe
eductionMorrtgage
9. TheGraduatedPaymentMo
ortgage

The Partially
y Amortiz
zed, Blen ded Consstant Payyment Mo
ortgage
Fixe
ed Rate
Thisissthemostco
ommonrepayymentplaninCanadatodaay.Thismortgagehasseveeral
characteristics.

Partia
allyAmortized
Theamortizationrreferstothettotalamountoftimethat itwilltaketo
orepaythem
mortgage.Thee
25years,althoughtherea reseveraldiffferentlength
hscurrently
mostcommonamortizationis2
availaable.Theterm
mpartiallyam
mortizedindiccatesthattheereisatermiinvolved.Iftherewasntaa
term,itwouldbeaafullyamortizedmortgage
e,whichisunncommoninO
Ontariotodayy.

Term
Thisissaperiodofttimeinwhich
htheloanisrepaid,typica llyanywherebetweensixmonthsand
fiveyears(althougghlongerterm
msareavailab
ble).Themorrtgagecontraactisbasedonthisterm
and,aattheendoftheterm,the
econtractcom
mesupforreenewal.Theb
borrowercan
nthenrenew
withh
hisorhercurrentlenderb
basedonthettermsoftherrenewal,refin
nancewithth
hecurrent
lende
eroranewlender,orswitcchtoanewle
ender.

Blend
dedPayment
Theblendedpaym
mentisacomb
binationofprrincipalandinnterest,allow
wingtheborro
owertopay
theacccumulatedin
nterestduefo
orthepayme
entperiodas wellasanam
mounttopaydownthe
principalamounto
oftheloanthatisoutstand
ding.

62

Chapter3:AdvvancedMortggageConceptts

ConsttantPaymentt
Thism
meansthatth
hepaymentdoesnotchangethroughouuttheterm.Forexample,,givena
mortggageof$200,,000atarateof6%compo
oundedsemiannually,atermof5yearrsandan
amorttizationof25
5years,them
monthlypaymentis$1,2799.62.

Thisp
paymentwouldremaincon
nstantforthe
efull5years, attheendoffwhichtimethe
outstaandingbalanccewouldhavvetoberepaid,eitherbyrrenewal,refin
nance,switchorfull
paymentfromtheborrowerso
ownmoney.

Theportionofinte
erestandprin
ncipalwithintthisconstant paymentwillchangeeverrymonthas
theam
mountofinte
erestpayabledecreases.Inthisexampple,theamountofprincipaalpaidinthe
firstp
paymentwouldbe$291.90
0whilethein
nterestpaidw
wouldbe$9877.72.Bytheendofthe
term,inthesixtietthpaymentth
heamountoffprincipalpaiidhasincreassedto$390.3
36whilethe
untofinterestthasdecreasedto$889.26
6.
amou

FixedRate
Thisreferstotheffactthattheinterestrateiisfixedordoeesnotchangeefortheentireterm.

Beneffits
Security
mainbenefito
ofthistypeoffmortgagere
epaymentpla ncentresaro
oundsecurityy.
Them
Theborrowerknow
wswhatthep
paymentisth
hroughouttheetermoftheemortgagean
ndcanbudget
accordingly.Thisssecurityshouldnotbeove
erlookedinteermsofimporrtance,especiallyforfirst
timeh
homebuyerswhomaybeusedtorentingandpayinngafixedamo
ountforsheltterevery
month.Manyfirstttimehomeb
buyersareno
otfullyawareeoftheothercostsassociaatedwith
home
eownership,ttheclarificationofwhichispartofthe dutyofthem
mortgageagent.

Risks
PootentialLackoofSavings.
There
earenobasiccrisksattache
edtothistype
eofmortgageerepaymentplanfortheb
borrower
otherthanthefacttthatheorsh
hemaynotsaaveasmuch interestaspo
ossiblewhencomparedto
o
thevaariablerateoption.

Thefo
ollowingfigurreillustratestthereduction
noftheoutsttandingbalannceonaBlend
dedConstantt
PaymentMortgage
e.

The Partially
y Amortiz
zed, Blen ded Consstant Payyment Mo
ortgage
Variiable Ratte
ThecharacteristicssofthistypeofmortgagearethesameeasthePartiaallyAmortized
d,Blended
ConsttantPaymenttMortgageFixedRate,exceptconcerrningtheinterestrate.
While
etherearediffferenttypesofvariableraatemortgagees,themainfeatureisthattavariable
ratem
mortgagehasaninterestratethatflucttuates.

Thistypeofrepaym
mentplanisd
designedtop
protectthele nderfrommiismatchingfu
undsthatit
hasondeposit.Asstheirratesp
paidondepossitproducts,ssuchasbankaccountsand
dinvestmentss
fluctu
uate,sodoestherateofth
hevariableratemortgage..Thisallowsalendertokeeepthe
spreadbetweenw
whatitispayin
ngonitsdepo
ositstowhat theyarereceeivingontheiirmortgages
moreconsistent,thusprotectin
ngprofitmarggins.

Chapter3:AdvvancedMortggageConceptts
hisincreasedsecuritytoth
helender,the
eborrowerteendstoreceivvealowerrattethanona
Forth
fixedratemortgagge.

Figure10Outstandin
ngBalanceofaBlendedConsta
antPaymentMoortgage

ollowingfigurreillustratesh
howprincipalandinteresttarerepaido
onaBlendedConstant
Thefo
PaymentMortgage
e.

ndPrincipalPaid
dinaBlendedC
ConstantPaymenntMortgage
Figure11Interestan

6
63

64

Chapter3:AdvancedMortgageConcepts

Atthebeginningofthemortgage,thepaymentistypicallysetatthelendersposted3yearrate.
Manylendersofferacappedvariableratemortgagethatcapstheamountofinterestthatcan
bechargedatthatpresetrate,whichistypicallyincludedinaScheduleattachedtotheStandard
ChargeTerms.

Theratefluctuationisnormallytiedtothelenderscurrentprimerateandcanberesetmonthly.
Typicalvariableratemortgagescarryinterestratesthatarelowerthantheirfixedrate
mortgages.Forexample,alendermayofferitsvariableratemortgageatitsprimerateminus
50basispoints(abasispointis1/100thof1percent;thereforethereare100basispointsin1
percent).Ifitscurrentrateis6.5%,thenitscurrentvariableratewouldbe6.5%.5%=6%.

Inthistypeofvariableratemortgage,thepaymentremainsthesame,orconstant,whilethe
percentageofthepaymentallocatedtointerestandprincipalfluctuatesaccordingtothe
currentinterestrate.Iftherategoesup,moreofthepaymentiscomprisedofinterest,andvice
versa.Iftheratewastorisepastacertainpoint,theborrowerwouldnotberepayingallofthe
interestfortheperiod,letaloneanyprincipal.Thiswouldresultinanegativeamortization;in
otherwordsthemortgagewouldnotbepaidoffduringtheamortizationperiod.Infact,it
wouldextendbeyondthecontractedamortizationperiod.Forthisreasonlenderswillhavea
clauseinthestandardchargetermsthatindicatesthatiftheamountoftheloanexceedsaset
percentagethelenderhastherighttoincreasethepaymentamount.

Therewasanincreaseinthenumberofvariableratemortgagestakenoutfrom2001to2005
duemainlytothefactthatvariableratemortgagesprovidedalowerinterestratethanfixed
ratemortgages.In2006,itwasestimatedthat22percentofneworrenewedmortgageswere
comprisedofvariableratemortgagescomparedto36percentin2005,duemainlytothe
decreaseinthedifferencebetweenfixedandvariablerates.However,itwasbackupto48%in
thethirdquarterof2008asthatspreadincreased.Onceagainthattrendreverseditselfasthe
economyfaltered.AccordingtoCMHCsCanadianHousingObserverreport,only21%ofinsured
mortgagesfundedin2010werevariableratemortgages.

Benefits
Savings
Forborrowerswhoarenotrisksensitive(fluctuationsinratesdonotcausethemstress)this
typeofrepaymentplancansavethemmoney.Inmostcases,therateforvariablerate
mortgageshasbeenlowerthanthoseoffixedratemortgages.

AbilitytoSwitchtoaFixedRate
Mostvariableratemortgagesoffertheflexibilityofallowingtheborrowertoswitchtoafixed
rateproductthroughthesamelenderwithoutpenalty.Thisprovidestheborrowerwiththe
comfortofbeingabletoswitchifthevariableratebeginstorise.

Risks
Volatility
Thistypeofmortgage,whilebeingabletosavetheborrowermoney,canalsohavethereverse
affectifthelenderincreasesitsrates.Theborrowermustbefinanciallysophisticatedenoughto
keepaclosewatchonratesandmakethedecisiontoswitchtoafixedrateproductifandwhen
thesituationwarrantsit.

Chapter3:AdvvancedMortggageConceptts

6
65

NeegativeAmorttization
Iftheinterestraterises,thepossibilityexistssthatthefixeedpaymentw
willnotbesuffficientto
coverrtheinterestdueforthep
paymentperio
od.Thiswillccausetheborrrowertopottentiallyenteer
anegativeamortizzationscenariio,whichcanforcehimorrherintoincrreasinghisorhermortgage
mortgagetoaapositive
paymentorpayinggalumpsumofmoneytothelendertooreturnthem
amorttization.

PaymentIncreaase
entionedunderNegativeA
Amortization,,iftheborrow
werfallsintothatcategoryyandmust
Asme
increaasehisorherrpayment,thequestionth
henbecomes cantheborro
oweraffordtthehigher
payment?

Thistellstheeborrowerw
whenthis

clauseisapp
plicable
Thefo
ollowingisan
nexampleofaavariableratteclause:

GNATEDAMO
OUNT(applicaabletoVariab
bleRateMorttgagesonly)
DESIG
(a)D
Designatedam
mountshallm
meanthelessserof:
(i)thedesignate
edamountsp
pecifiedinthe
eschedule,o r
(ii))ifyouhaveaaconventionaalmortgage,80%ofthefaairmarketvallueofyour
pro
opertyasestaablishedbyanuptodateappraisalrepportofyourp
propertywhicch
eittherweobtainatyourexp
pense,fromarealestatea ppraiseracceeptabletous,,or
wh
hichyouprovvidetous,sign
nedbyarealestateappraaiserfirstapprovedinwriting
byus,or
(iii)ifyouhaveaCMHCinsuredmortgage
e,thelesseroof:
A.80%(95

5%ifinsuredundertheFirrstTimeHom
meBuyerProggram)ofthelesser

oftheappraisedvalueo
orpurchasep
priceofyour property,plu
ustheCMHC
insurancepremium,or

B.110%o

oftheoriginalbalanceofth
heMortgage,,includingtheeCMHCinsurance

premium.

Thissection
ntellstheborrrowerwhatisexpected

tohappeniifthisclauseaapplies

(b)Ifttheloanamo
ountexceedsthedesignate
edamount,yyoushallbereequiredtotakke
oneo
ofthefollowin
ngactions:
A.increasethe
eamountofe
eachregularp
paymentundeertheMortgaage,inorderto
am
mortizetheMortgageoverrtheremainin
ngamortizatioonperiod;
um
B.reducethetotalamountoftheloanamountthenoowingbymakkingalumpsu
paymentsufficienttoreduce
esuchtotalamounttoappointbelowth
hedesignated
d
am
mount;and
C.converttheMortgagetoafixedratem
mortgagehavvingequalmo
onthly
payments.
Ifyouareunabletotakeanyofftheactionsssetoutin(i),((ii)or(iii)abo
ove,then,ato
ouroption,
theM
Mortgagewillimmediatelybecomedueandpayable..

66

Chapter3:AdvvancedMortggageConceptts

Su
uccessTipDetermiiningaborrrowersn
needs
Manyborrowersdonotkno
owwhattolo
ookforintheiirmortgage.Dotheyneed
dafixedor
vaariableratem
mortgage?Theanswerisntalwaysstra ightforward.Itisnecessaryto
de
eterminetheborrowersn
needsandasssesshisorherrrisktoleranccetodetermiinetheright
typeofmortgageforhimorrher.Morein
nformationcaanbefoundiinthechapteer,TheInitial
Co
onsultation.TThiswillhelpensurethatyyougetyour clienttherightproduct,andthereby
su
uccessfullyclo
osethetransaaction!

The Partially
y Amortiz
zed, Blen ded Vari able Payyment Mo
ortgage
Variiable Ratte
ThistypeofvariableratemortggageisidenticcaltotheVarriableRate,FiixedPaymenttmortgage
excep
ptthatthepaymentwillch
hangeeachtim
methatthel endersprimerate,whichisusedto
determinethevariiablerate,changes.Thisissdesignedtoominimizetheerisktothelenderofthe
borro
owerexperien
ncinganegatiiveamortization.

Beneffits
Savvings
Thistypeofmortgagetendstooffertheborrrowerthegreeatestsavinggspossiblesin
ncetherateo
of
estchargedte
endstobethe
elowestamo
ongmortgageeproductsoffferedinthem
markettoday..
intere
Inadd
ditioniftheraatedrops,the
epaymentwiilldrop,improovingtheborrrowerscash
hflow.

MaaintainAmorttization
Regarrdlessofthecchangeinthe
einterestrate
ethepaymenntwillfluctuattetomatchthatchange,
therebykeepingth
heamortizatio
onthesame.Thisisimpoortantiftheborrowerisinsistentthat
mortgagebep
paidoffinasp
pecificnumbe
erofyearswiithoutbeingaaffectedbyth
herate.
them

Risks
Voolatility
Thistypeofmortgage,whilebe
eingabletosaavetheborroowermoney,canalsohaveethereverse
effecttifratesrise.Theborrowe
ermustbefin
nanciallysophhisticatedeno
oughtokeep
paclosewatcch
onrattesandmake
ethedecision
ntoswitchtoafixedratepproductifand
dwhenthesituation
warraantsit.

PaymentFluctuuation
htimethelen
ndersinteresstratefluctuaates,theborrowermust
Sincethepaymenttisreseteach
ensurrethatheorsshehassufficcientfundstoreflectanyinncreasesinth
hepayment.Thisresultsin
cashfflowuncertaintyforthebo
orrower.

The Interest Only Mo


ortgage
Thein
nterestonlym
mortgageissttraightforwarrd.Theborroowertakesou
utalumpsum
mofmoney
ando
onlyrepaystheinterestdueeachpaymentperiod.TThismeansth
hat,througho
outthelifeof
them
mortgage,theborrowerwillalwaysowe
ethesameam
mountofprin
ncipal.Forexample,givena
mortggageof$200,,000withaniinterestrateo
of6%compooundedsemiaannually,nottinadvance,
overaa1yearterm
m,theborrowerwouldbem
makingmontthlyrepaymen
ntsof$987.73.Aninteresst
onlym
mortgagedoe
esnothaveanamortizatio
onsincethereeisnorepaym
mentofprincipal.

Chapter3:AdvvancedMortggageConceptts

6
67

Beneffits
InccreasedCashFlow
Fromaborrowerssperspective,,thefactthattnoprincipalisbeinginclu
udedinthem
mortgage
paymenttypicallyresultsinalo
owerpaymentthanwould otherwisebeethecaseinanamortized
d
mortggage.Thismaaybebeneficcialtoaborro
owerwhoknoowsthatheo
orshewillbereceivingan
increaaseinincome
einthenearffuture.Oncethatincreaseeisrealized,ttheborrowerrcanswitchto
ablen
ndedpaymen
ntmortgage.

Fo
oryourinfformation
InterestRates
MortgageinterrestratesonPartiallyAmo
ortized,BlenddedConstantPaymentMo
ortgages,
eittherfixedorvariablerate,,typicallyfollowthishieraarchy:

HiighestRate
1YearOpen
nMortgage

6MonthOp
penMortgage
e

10YearClossedMortgage
e,ZeroDownnPaymentMo
ortgages

7YearClose
edMortgage,,CashBackM
Mortgages(deependingon%
%)

6YearClose
edMortgage

5YearClose
edMortgage

4YearClose
edMortgage

3YearClose
edMortgage

2YearClose
edMortgage

1YearClose
edMortgage

VariableRatteMortgage

Lo
owestRate

InccreasedPurchhasingPowerr
If,how
wever,thebo
orrowerwishestokeepthepaymentattthesameam
mountasheo
orshewould
havebeenpayinginablendedpaymentmortgage,heorshewillbeabletoborrow
wmoremoneey
thano
otherwisepossible.Seeth
hefollowingffigureforaniillustratedexample.

Invvestments
Ifthisstypeofrepaymentplanissusedtopurcchaseaninveestmentprop
perty,forexam
mple,the
investtorcandeduccttheinterestpaidasaco
ostofinvestinng.Underthisscenario,th
heinvestoris
ablettopurchaseapropertyataahighervalue
ethanusingaablendedpayymentrepaymentplan
whileusingtheinccomefromthepropertyto
omakethem
mortgagepaym
ments.

Risks
NooPrincipalReduction
Thefaactthatthere
eisnoprincip
palreductioncanputboth thelenderandtheborrow
weratrisk.
Theriisktothelend
deristhat,iftheborrowerrdefaultsanddtheproperttydoesnotap
ppreciate,
theirprincipalmayybeatrisk,de
ependingontheloantov alue.

Forth
heborrower,ifheorsheu
usesthisrepayymentplantooincreasehissorherpurch
hasingpowerr
andp
propertyprice
esdecrease,h
heorshecanendupowin gmorethanthepropertyisworth.The
intere
estonlymortggageisoneofthefactorstthatcontribuutedtothemortgagecrisissintheUnited
Statessin2007.

68

Chapter3:AdvvancedMortggageConceptts

Figure12AmountsA
AvailabletoBorrrowBlendedP
Paymentvs.InteerestOnly

The Home E quity Lin e of Cred


dit (HELO
OC)
AHELLOCisaLineo
ofCreditsecu
uredbyrealp
property.ALiineofCredit((LOC)isanam
mountof
credittmadeavailabletoaborro
owerbutnotadvancedonnclosing.Forexample,ifaaborrowerhaad
a$200,000LOChe
eorshewould
dbeabletou
usethesefun dswheneverrheorshewiished.Asof
mber,2014theOfficeoftheSuperintendentofFinaancialInstituttions(OSFI)reequires
Novem
federallyregulated
dfinancialinsstitutionstolimittheloan tovalueofin
nterestonlyH
HELOCsto
65%.1

Howe
ever,paymentsareonlymadeontheoutstandingbaalanceoftheLOC.AtypiccalHELOChass
monthlypaymentssofinteresto
onlybasedon
navariableraate.Theborrrowercanmaakepaymentss
assmallastheinte
erestonlyoraaslargeashe
eorshewishees.

Beneffits
Fleexibility
Thisp
planallowstheborrowertoborrowfun
ndsasnecessaaryandmakeerepaymentssthatfithiso
or
herbu
udget.

Risks
Voolatility
AHELLOCcontainsthesamerate
evolatilityassavariableraatemortgage..

http:://www.osfibssif.gc.ca/eng/fiiif/rgro/gdno
ort/glld/pagess/b20.aspx

Chapter3:AdvvancedMortggageConceptts

6
69

The Interest Accruing


g Mortgag
ge
Intere
estaccruingm
mortgagesare
eloansthath
havenorepayymentofprin
ncipalorinterrestduring
theirlife.Attheendofthemortgage,theen
ntireprincipaalamountisrrepayable,inccludingallof
theacccruedinterest.StandardformsofInte
erestAccruinggMortgagestendtobefo
orshort
period
dsoftimeduetothelendersrisk.Astthefollowingfigureillustraates,thistypeofmortgage
accum
mulatesintere
estataveryffastpace,whichiswhylenndersdontliiketheserepaymentplanss
tobeoutstandingformuchlongerthanaye
ear.

Beneffits
CashFlow
mentplantherreisabsolute
elynoimpact onaborroweerscashflow
w.Inother
Underthisrepaym
wordss,theycansim
mplyborrowthefundsandforgetabouutthemortgaage,untilthetermexpiress,
ofcou
urse.

Risks
InccreasingDebtt
Underthisrepaym
mentplantheamountborrrowedincreassesovertimee.Thefollowiingchart
illustrratesthatincrrease.Basedonthisexam
mple,theborrrowerwillow
wejustunder$270,000at
theen
ndof5years,,anincreaseofnearly$70
0,000indebt..

ReeducedEquityy
Sincethedebtincrreasesiteatsintotheequiitythatthep ropertyhas.Theborroweermusthope
thatthepropertyaappreciatesin
nvalueovertthesameper iodtooffsetthisloss.

Figure13Outstandin
ngBalanceofan
nInterestAccruingMortgage

70

Chapter3:AdvvancedMortggageConceptts

The Reverse
e Mortgag
ge
ARevverseMortgaggeisatypeoffinterestaccruingmortgaagethatistyp
picallyprovideedtoseniors.
Them
majorproviderofReverseMortgagesinOntariotodaayistheCanaadianHomeIncomePlan
(CHIP).Thisorganizationprovid
deshomeown
nerswhoare55yearsofaageorolderu
upto50%of
theprropertyvalue
einalumpsumofcash,lessanycurrenntdebtsecureedbythepro
operty.This
amou
untaccumulattesinterestuntilthedeath
hofthehomeeowner(thessurvivinghom
meowner,in
thecaaseofspouse
es)oruntilthe
epropertyissold,atwhichhtimethemo
ortgageisdueand
payab
ble.

AccorrdingtoCHIP,,thistaxfreetypeofmorttgageissuitabbleforseniorrslookingtoeenhancetheirr
lifestyyle,renovatetheirhomeo
orpayofftheirdebtswithoouthavingto
ousetheirsavvings.Asof
Novem
mber,2013,tthecurrentraateforaCHIP
Preversemorrtgagerangessfrom3.99to
o5.79%.

Atonepoint,Reve
erseMortgage
eswerereferrredtoasRAM
MSorReverseAnnuityMo
ortgages.
These
emortgagepllanswouldop
peratethesameastheCH
HIPReverseM
Mortgagebut,,insteadof
provid
dingtheborrowerwithalumpsumofccash,thepro ceedswouldbeusedtopurchasean
annuiitythatwould
dpaytheborroweramonthlyincome. Proceedsfro
omaCHIPReverse
Mortggagecanstillbeusedtoacccomplishthis,buttheterrmRAMisno
ownolongeraasrelevantass
itonccewas.

Beneffits
CashFlow
heReverseM
Mortgagehasnoimpacton
nthe
SimilaartotheInterrestAccruingMortgage,th
borro
owerscashflo
ow.

Reepayment
SincetheReverseMortgageisn
notdue(unde
ertheCHIP)pprogram,untildeathoftheremaining
home
eownerorsaleoftheprop
perty,theborrowerneverhastorepaythedebtinhisorher
lifetim
me.

Risks
ReeducedEquityy
Thism
mortgagemayyreduceinpaartorinwholetheamounntofequityreemainingtob
bepassedinto
o
theesstate.Inaddition,thepotentialofredu
ucedequitym
maybeanissu
ueifthehom
meowner
decidestosellthepropertydurringhisorherrlifetime.

The Straightt Line Pri ncipal Re


eduction Mortgag e
AStraaightLinePrin
ncipalReducttionMortgage
eisatypeof repaymentp
planthatallow
wsthe
borro
owertopayofffasetamountofprincipaaleachpaymeentalongwitththeaccruedinterest
(interrestthathasaaccumulated))forthatperiod.Thisisnootacommon
nformofmorrtgagein
OntarrioorCanada,butismoreprevalentintheUnitedSttates.

Thistypeofloanm
maybebenefiicialtothemaanufacturing industrywheendealingindepreciating
assetss.Forexamp
ple,ifanautom
mobilerentalcompanypuurchasesafleeetofautomo
obilesitcanb
be
saidthattheirexpenseswouldbelesstomaaintainthose vehiclesatth
heoutsetwheentheyare
new.Overtime,ittwillbecomemoreexpenssivetomaint ainthefleetd
duetohigherrmaintenancce
costs..Underthissscenario,thecompanymaaywishtohavveitsloanpayymentsdecreeaseovertim
me
tomaatchtheincre
easeinitscostts.

Chapter3:AdvvancedMortggageConceptts

7
71

Beneffits
CashFlow
entsoccurattheoutsetoffthemortgagge.Thiscanb
bebeneficialttoabusiness
Thehighestpayme
ifitbe
elievesitscasshflowwillde
ecreaseovertimeandith asthecashfllowtocomfo
ortablymake
thein
nitialpaymentts.

Risks
HigghInitialPaym
mentSize
Thesiizeofthepayymentislarge
estattheoutset.Thisresuultsinlimited
dcircumstancceswherethiss
beneficialto
typeo
ofrepaymenttplancanbe
theborrowe r.

The Graduatted Paym


ment Morttgage
AGraduatedPaym
mentMortgaggeisatypeoffloanthathasslowerpaym
mentsattheo
outsetthatwiill
e.Forthefirstseveralpayments,theam
mountpaidissnotsufficien
nttopaythe
increaaseovertime
fullam
mountofinte
erestaccumullatedduringttheperiod,m
meaningthatttheoutstandiingbalanceo
of
them
mortgageisacctuallyincreassing.Thistrendwillcontinnueuntilthepaymentincrreasestosuch
h
apoin
ntthatitpayssthefullamo
ountoftheintterestfortheeperiodplusssomeprincipal.This,like
theSttraightLinePrincipalRedu
uctionMortgaage,isnotac ommonform
mofmortgageeinOntarioo
or
Canad
da.

Them
majorrisktoaalenderunde
erthisrepaym
mentplanisthhattheborro
owerscashflo
owwillnotbe
ablettoaffordtheiincreaseinpaaymentsoverrtime,and/o rthatthepro
opertyvaluew
willnot
appre
eciate.Thisco
ombinationccanleadtoap
propertywithhahigherloanbalancethaanitsvalue
where
etheborrowercannotaffordthepaym
ments.

AsimilarsituationtothisoccurredintheUn
nitedStatesinn2007,which
hsawtensofthousandsoff
home
becomingunaffordable
eownerswalkkawayfromtheirpropertie
esduetotheeirpaymentsb
alongwiththecom
mbinationoflloantovaluessinexcessoff100percentt.Althoughthesituationiin
wasnotduettoGraduated
dPaymentMoortgages,theeffectwasth
hesame.
theUnitedStatesw

Thistypeofrepaym
mentplanwo
ouldbebenefficialforsomeeonewhoexp
pectstheirincometo
increaaseovertime
e,suchasinanewlyforme
edbusiness.H
However,theeriskstothelendermake
thistyypeofplanvirtuallyunheaardof,excepttintextsand theory.

Beneffits
CashFlow
hflowfora
Thepaymentinthisrepaymenttplanisatitslowestinitiallly,resultingiinbettercash
borro
owerwhobeliievestheircashflowwillin
ncreaseovertime.

Risks
PriincipalRisk
Thistypeofrepaym
mentplanhasriskassociatedwiththe principal,sinceitactsasaatypeof
intere
estaccruinglo
oanattheoutsetduetoth
hepayments beinginsufficcienttopaytthefull
amou
untofprincipaalandinteresstdueineach
hperiod.

72

Chapter3:AdvvancedMortggageConceptts

3.3 Mortgag
ge Option
ns

Intod
daysmarket,therearemaanyfeaturestthatlendersoofferborroweerstosuittheeirfinancing
needss.Lenders,ovverthepastsseveraldecad
des,havebecoomemoreseensitivetotheechanging
marke
etandhavep
producedmorrtgagefeaturesthatbetteerreflecttheb
borrowersgo
oalsand
attitudestowardsmortgagefinancing.

These
efeaturescan
nbebrokend
downintocategories:
1. Pre
epaymentOp
ptions
a)) FullyOpen
n
b) PartiallyOpen
c)) Closed
2. Re
epaymentOpttions
a)) PeriodicPaaymentIncrease
b) Accelerate
edMortgagePayment
mPayments
c)) LumpSum
d) ExtendedA
Amortization
3. CashBackOptio
ons
4. Bu
undledOption
ns
5. Po
ortabilityOptions
6. AssumabilityOp
ptions

1. Prepayme
P
ent Optio ns
Lende
ersareofferin
ngborrowersmoreoption
nsthaneverbbeforetoprep
paytheirmorrtgages,that
is,topaythemorttgageoffsoon
nerthanwasagreedtoin theoriginalm
mortgagecon
ntract.The
lende
erbeginswith
hthestandard
drepaymentplansthatweerediscussed
dearlier.Theborrower
thenh
hasoptionsto
oenhancetherepaymentplanbydeteerminingthettypeofprepaayment
featurestheywouldlikeasparttoftheplan. Inthissectioonwellbediscussingthesseveral
borrowershavvewhenitco
omestoprepaayingandrep
payingtheirm
mortgage,
differentoptionsb
beginningwiththe
efullyopenprepaymentoption.

a) Fully
F
Ope n
Afullyyopenmortggageallowsth
heborrowerttorepaythem
mortgage,inwholeorinp
part,atany
timew
withoutpenaaltyornotice.Thisoptionisparticularlyybeneficialto
othoseborro
owerswho
knowthattheymaaybecomingintoacashw
windfall,such asfromanin
nheritanceorrproperty
sale.

Beneffits
Fleexibility
Them
mortgagecanberepaidatanytime,pro
ovidingtheboorrowerwiththeflexibilityytopaythe
mortggageofffrom
mhisorherow
wnproceedso
orrefinancetthemortgageewithanotheerlender.

Noopenalties
Afullyyopenmortggagehasnoprepaymentpenalties,meaaningthattheeborrowercaanprepaythee
mortggagewithoutbeingcharge
edthe3montthinterestpeenaltyortheinterestratedifferential
(discu
ussedlaterinthischapter).Thiscansavvetheborrow
werfromhun
ndredstotenssofthousand
ds
ofdolllarsinpenaltties.

Chapter3:AdvvancedMortggageConceptts

7
73

Risks
HiggherRate
Mostfullyopenmortgagesareatahigherin
nterestrate.TThisisprimarrilyduetotheefactthatthe
lende
erhasnoguarranteeinhow
wlongtheborrrowerwillkeeepthefundss.Thismeanssthatthe
lende
erhasnocertaaintyabouttheoverallratteofreturnoonthemortgaage.Sinceab
borrower
would
dusuallyonlyytakethisopttionifheorsheplannedtoorepaythem
mortgageearly,thelenderr
typicaallychargesa premiumintterestrateforrthatright.

b) Partially
P
Open
O
Aparttiallyopenmortgageallow
wstheborrow
wertorepaytthemortgageeinwholewitthapenaltyo
of
eitherr3monthsw
worthofinterestortheinterestratediffferential(theedifferenceb
betweenthe
mortggagesratean
ndlenderscu
urrentmortgaagerate).

Beneffits
Fleexibility
Them
mortgagecanberepaidatanytime,pro
ovidingtheboorrowerwiththeflexibilityytopaythe
mortggageofffrom
mhisorherow
wnproceedso
orrefinancetthemortgageewithanotheerlender.

Risks
HiggherRate
Althoughthisoptio
ondoesntcaarrythesameratepremium
mastheFullyyOpenfeaturre,itcan
comewithahigherratethanfo
oundinaClossedmortgagee.

Penalties
hepenaltyto
ofullyprepay
Althoughitoffersttheflexibilitytoprepaythemortgageaatanytime,th
mortgagemayyoutweighthebenefitsof refinancingw
withadifferentlender,becausethecosst
them
ofthe
epenaltymayybemorethaantheamoun
ntsavedbyreefinancingatalowerratew
withanotherr
lende
er.Thesepote
entialpenaltiesarediscussednext.

CalculatingtheePrepaym
mentPenallty
Theactualprepaym
mentpenaltyywhenprepayyingtheentirreamountof
ftheprincipallduringthe
termisbasedoneither3monthsworthofiinterestorth einterestrattedifferential,whicheveriis
higheer.Forthedetailedequatio
onsusedtoccalculatethessepenaltiesp
pleasereferto
othechapterr,
Calcu
ulatingaMorrtgagePayme
ent.

c) Closed
C
Mo
ortgage Prepayme
P
ent Optio
on
Thistypeofprepayymentfeaturreactuallyonlyappliestotthesaleoftheproperty.U
Underall
othercircumstance
es,theborrow
werhasnorighttoprepayytheentirep
principalowed
d,although
therearetypicallyotherrepaym
mentoptionssuchasincreeasinghisorh
herperiodicp
paymentor
makin
nglumpsumpayments.H
However,themaincharactteristicofthissfeatureisth
hatitdoesnot
allowforfullprepaaymentatanyytimeduringgthetermof themortgageeexceptbysaaleofthe
prope
erty.Thismustnormallyb
beconsidered
danarmslenngthsale,asw
well,meaninggthata
borro
owercouldntsellthepro
opertytoafaamilymembe rsimplytoprrepaythemo
ortgage.

Althoughthistypeofmortgagefeatureisno
otthenorm,sseverallendersdoofferit..Itis
imporrtanttoensurethatthelendersprepayymentoptionnsareundersstoodbeforedecidingonaa
mortggageforthecclient.

74

Chapter3:AdvvancedMortggageConceptts

definesacloseedmortgageasonethatccanonlybe
Forexxample,HomeTrusthasaclausethatd
repaid
donabonafidesale.Itreads,Youm
mayprepayttheinitialloan
noranyotheerfixedloano
or
renew
walofsuchloanonlyupon
ntheclosingo
ofabonafideearmslength
hsaleofyourrpropertyin
theop
penmarketaandpaymentoftheprepayymentchargeesetoutbelo
owinsection5.3.Ifthe
initialloanortheffixedloanorttherenewalisforatermoofmorethanthree(3)yeaars,youmay
alsoaatanytimeaffterthethirdyearofthete
erm,prepayyyourmortgaggeinfullbuto
onlywith
paymentofthepre
epaymentchargesetoutb
belowinsecttion5.4.

Contrrastthiswithaclausefoun
ndinCIBCsSttandardCharrgeTermsdesscribingrepayymentofits
closed
dmortgage.Itreads,Ifyouhaveafixe
edratecloseddmortgageo
ora6monthconvertible
closed
dmortgage,yyoumayprep
paysomeoraalloftheoutsstandingprinccipalamountofyour
mortggagebeforem
maturity.

mentbefore
Bothlendersrefertotheirmorttgagesasclossed,butwhileeCIBCoffersfullprepaym
maturityHomeTru
ustdoesnot.Onceagain,itisveryimpportantthatthelendersteerminologyiss
fullyu
understood.

Beneffits
Rate
prepaymentffeatureprovid
desthelendeerwithsignificantsecurityregarding
Sincethistypeofp
theirmortgageportfolio,theyaareoftenincliinedtoproviddetheirloweestratesonth
heirClosed
mortggages.Iftheborrowerisfairlycertaintthattheywonntneedtoreefinancetheirrmortgageorr
prepaayitinfullduringtheterm
mthenthistyp
peoffeaturecanbefinancciallybeneficialduetothee
lowerrrate.

Risks
LacckofFlexibilitty
Asthe
eborrowerislockedino
onthismortgage,heorsh ehasnoflexibilitytoprep
paytheentiree
mortggageamountorrefinancewithanotherrlender.Thisscanlimithissorheroptionsifrates
decre
easeorifheo
orshewishestoincreaseh
hisorhermorrtgageamoun
nt.

Su
uccessTipDefining
gaClosed
dMortgag
ge
Th
hetermClossedMortgage
eisoftenuse
edinterchanggeablywithth
hetermFixedRate
Mortgage.Altthoughthisissanincorrecttusageoftheeterms,itisim
mportantthaatyou,asa
nt,understand
dwhateachllendermeanssbyitstermin
nology.
mortgageagen
Fo
orexample,iffalendercallsitsloanacclosedmortgaageitisimpeerativethatyyoureadits
gu
uidelinestodeterminewhetheritmean
nsaclosedm ortgage,asw
wasdescribed
dabove,or
whetheritmeaansapartiallyyopenmortgage.Thereissnouniversallyacceptedp
phraseology
thatmustbefo
ollowedbylenders,sotop
provideyourcclientwithth
hebestadvicee,itisupto
yo
outounderstandthelende
ersproducts!

2. Repaymen
R
nt Option
ns
While
eprepaymenttoptionsfocu
usontheabilityoftheborrrowertomakealumpsum
mpayment
andfu
ullyprepayth
hemortgage,repaymento
optionsfocus ontheabilityytochangeh
howthey
repayythemortgaggeduringitsterm.

Chapter3:AdvvancedMortggageConceptts

7
75

a) Periodic
P
Payment
P
Increase
e
Thiso
optionallowstheborrowertoincreasehisorherpayyment,inmaanycasesuptto100%ofth
he
origin
nalpaymentaamount,durin
ngthetermo
ofthemortga ge.Thiscanbeanextrem
melyimportan
nt
measurewhenitccomestopayingamortgaggeoffmoreq uicklyandsavingmoneyintheprocesss.
Anoth
hernicefeatu
ureofthisopttionisthatmostlendersw
willallowthe borrowertolowerhisor
herpaaymenttoan
namountnolessthantheoriginalpaym
mentamountifheorsheffindsthatthe
increaasedpaymentcannolonggerbeafforde
ed.

Theexacttimingofthepaymen
ntincreasean
ndtheexactaamountoftheeincreasewilldetermine
theprrecisesavingssbut,astheffollowingchartillustrates, thosesavinggscanbesubsstantial,even
n
withaaslowasa25
5%increasein
nthepaymen
nt.Thefollow
wingchartuseestheexamp
pleofa
$200,000mortgagewithaninte
erestrateof6
6%compoun dedsemiann
nually,notinadvance,witth
monthlypaymentss.Theoriginaalamortizatio
onperiodis2 5years.Theincreaseinth
hemonthly
paymentisassume
edtotakeplaacefromtheffirstpaymenttforward.

Increaasingthepaymentamountatothertim
mesduringtheelifecycleof
fthemortgaggewillhave
similaar,butlessdramaticeffectts,dependinggonwhentheepaymentinccreaseoccurss.

Figure14EffectsofIIncreasingMorttgagePaymentssovertime

Beneffits
Savvings
Asisillustratedbytheabovech
hart,theeffecctsofanincreeasedpaymeentwillsavesubstantial
sumsovertime.

Risks
CashFlow

76

Chapter3:AdvvancedMortggageConceptts

ncreased,thereisadecreaaseintheborrrowerscashflow.This
Sincethepaymenttamountisin
mustbeexamined
dbeforeincre
easingthepayymentamounnttoensuretthattheborro
owerwillnot
bene
egativelyimpaacted.

b) Accelerat
A
ed Mortg age Paym
ment
Anacceleratedmo
ortgagepaym
mentoptionissimplyanopptionthatpro
ovidesforaniincreased
dicmortgagepayment.Th
hiscanbecom
mparedtoth ePeriodicPaaymentIncreaase;howeverr
period
thisoptionallowstheborrowerrtoincreasehisorhermoortgagepaymentbeforeth
hefirst
paymentbegins,w
whereastheP
PeriodicPaym
mentIncreaseisrequiredto
oberequesteedoncethe
mortggagehasbeen
nadvanced.

Typicaally,mortgageoriginationsoftware(softwareusedbbythemortgageagentthaatperforms
comm
moncalculatio
onsandallow
wsfortheelecctronicsubmiissionofana pplication)w
willallowthe
origin
natortoreque
estanaccelerratedmortgagepaymentffortheborrow
wer,andinso
odoingdoes
nothaavetodoam
manualcalculaationtodeterrminetheam
mountoftheaacceleratedp
payment.Thiss,
howe
ever,hasledttosomemisco
onceptionsab
bouttheacceeleratedpaym
ment.

First,acceleratingapaymenthaasvirtuallyno
othingtodow
withthepaym
mentfrequen
ncy.Youmay
haveheardthestaatementthatbychanginggthepaymentfrequencyaaborrowercaansavetenso
of
thoussandsofdollaarsovertheliffeoftheirmo
ortgage.Thiisstatementispatentlyfalse.

Changgingthepaym
mentfrequencyisnotwhaatacceleratessamortgage;increasingth
hemortgage
paymentis.Thefo
ollowingexam
mpleillustrate
esthispoint.

Barbaararequiresfiinancinginth
heamountof$200,000.S heisabletoo
obtainamorttgageinthis
amou
untamortized
dover25yearrsandataratteof6%com
mpoundedsem
miannually,n
notin
advan
nce.

Webe
eginouranalysisbycalculatingherregularmonthlypaymentund
derthisscenaario.Youwill
learnhowtocalculateapayme
entusingafin
nancialcalculaatorlaterintthecourse,butinthe
ntimeIcantellyouthathe
ermonthlypaymentworkssouttobe:
mean

$1,279.62
$

Based
donthisscenarioitwilltakkeBarbara30
00payments toretirethismortgage.(A
Actually
299.9
9964paymentts,butthiswiillbeexplaine
edindetailinnthesectiono
oncalculatinggamortgage
payment).Bymulttiplyingthen
numberofpayymentsbyth epaymentam
mount,theto
otalamount
thatB
Barbarawillb
berepayingovverthelifeoffthismortgaggeinmonthlyypaymentscaanbe
calcullated.

TotalA
AmountRepaaidbyBarbaraainmonthly payments=$$1,279.62x300
=$383,886

ItisnownecessaryytocalculatewhatBarbarawouldbeppayingifshew
wasmakingw
weekly
paymentsinsteadofmonthlypayments.Inthisscenario theweeklyp
paymentworkksouttobe:

$294.74

Chapter3:AdvancedMortgageConcepts

77

BasedonthisscenarioitwilltakeBarbara1,300paymentstorepaythismortgage.By
multiplyingthenumberofpaymentsbythepaymentamount,thetotalamountthatBarbarawill
berepayingoverthelifeofthismortgageinweeklypaymentscanbecalculated.

TotalAmountRepaidbyBarbarainweeklypayments=$294.74x1,300
=$383,162

Nowwecancalculatethesavingsbytakingwhatshewouldpayinmonthlypayments,$383,886,
andsubtractfromitwhatshewouldpayinweeklypayments,$383,162

Barbarassavings=$383,886$383,162
=$724

Thatisasavingsof$724,over25years!Thatishardlythetensofthousandsofdollarsworthof
savingsthatweareledtobelieveexistssimplybychangingthepaymentfrequency.

Inactuality,theonlywaytopayamortgageofffasteristoincreasetheamountoftheperiodic
payment.Withthatsaid,letslookathowtoacceleratethismortgage.Asmentioned,the
typicalsoftwarewillcalculatetheacceleratedmortgagepaymentfortheuser.Theequation
thatisusedissimpleandstraightforward.Theregularmonthlypaymentisdividedbythe
frequencyoftheacceleratedpayment.

Forexample,ifanacceleratedweeklypaymentisdesired,thesoftwarewouldcalculatethe
paymentusingthefollowingformula.

MonthlyPayment/4weeks=acceleratedpayment

Itisimportanttonotethattherearenot4weeksinamonth,exceptinFebruary.Iftherewere
only4weeksinamonththerewouldonlybe48weeksinayear(4weeksx12months).Thisis
whythepaymentendsupbeingaccelerated.Tocalculatetheacceleratedweeklypaymentwe
mustdividethemonthlypaymentby4.

$1,279.62/4=$319.91

Youcanalreadyseethatthisweeklypaymentislargerthantheweeklypaymentthatwas
calculatedearlier.

Bymakingweeklypaymentsof$319.91,itwilltakeatotalof1,092.34paymentstorepaythis
mortgage.(Youwilllearnhowtocalculatethisnumberlaterinthecourse).

Thetotalamountpaidunderthisscenarioiscalculatedbymultiplyingtheweeklypaymentby
thenumberofpaymentsitwilltaketorepaythemortgage.

$319.91x1,092.34=$349,450.49

Nowletscomparethistothenonacceleratedweeklypayment.Todosowecansubtractthe
amountrepaidbyacceleratedpaymentsfromtheamountrepaidbynonacceleratedpayments.

$383,162$349,450.49=$33,711.51

78

Chapter3:AdvancedMortgageConcepts

Thatisasignificantsavings.Inactuality,theeffectofincreasingtheweeklypaymentunderthis
scenarioisequivalenttomakingoneextramonthlypaymentperyear.Ineachcaseof
acceleratingamortgagepayment,whetheritisweeklyorbiweekly,theneteffectisthatthe
borrowerismakingwhatequatestoanadditionalmonthlypaymentannually.

Asamatteroffact,youcanaccelerateamonthlypaymentaswell.Letslookathowthiswould
beaccomplished.Asmentioned,theeffectofaccelerationissimplyanadditionalmonthly
paymentperyear.Therefore,ifthirteenmonthlypaymentswerespreadovertwelvemonths,
theresultwouldbeanacceleratedmonthlypayment.Webeginbymultiplying13monthstimes
theregularmonthlypayment.Wethentakethatamountanddivideitby12months.

13x$1,279.62=$16,635.06(amountpaidperyear)

$16,635.06/12=$1,386.26

Therefore,theacceleratedmonthlypaymentwouldbe$1,386.26.Itcannowbecalculatedthat,
bymakingacceleratedmonthlypaymentsitwilltake253.03monthstorepaythismortgage.
Underthisscenariothetotalpaidis:

$1,386.26x253.03=$350,765.37

Comparedtothenonacceleratedmonthlypaymentthisequatestoasavingsof:

$383,886$350,765.37=$33,120.63

Thatisalsoasignificantsavings!

Youmayhearsomesaythatthemajorityofthesavingsoccurduetothefactthatundera
weeklyscenario,moreperiodicpaymentsarebeingappliedtotheprincipalthanundera
monthlyrepaymentplan,butthatissimplynotthecase.Thereisnomagicofcompounding
interestsavingtheborrowertensofthousandsofdollars;itissimplythattheyaremakinglarger
payments.

Lookingatthisexample,theeffectsofcompoundingonthistransactionareminimal.

AcceleratedWeeklySavingsAcceleratedMonthlySavings=TotalSavings

$33,711.51$33,120.63=$590.88

This$590.88representsthetotalsavingsovertheentirelifeofthemortgagethatthechangein
paymentfrequencyhasfrommonthlytoweekly.

Tosummarize,acceleratingamortgagepaymentisachievedbyincreasingtheamountofthe
mortgagepayment,notbychangingthepaymentfrequency.

Benefits
Savings
Asdiscussedtheeffectsofanacceleratedpaymentareclear:tensofthousandsofdollarsin
savingsovertime.

Chapter3:AdvvancedMortggageConceptts

7
79

Su
uccessTipPaymen
ntfrequenccy
Th
hemajorityoffconsumersb
believethatssimplychangiingthepaymeentfrequencywillsave
themthousand
dsofdollarso
overthelifeo
oftheirmortggage.Byknow
wingthatthissisnotthe
caaseandwhy,yyoucanexplaainthistoyou
urclient.Thississimplymo
oreproofthaatyouarethee
mortgageprofe
essionalandtthatyoucantrulyadvisetthemonhowtosavesignificant
am
mountsofmo
oneyoverthe
elifeoftheirm
mortgage!

Risks
CashFlow
easingthemoortgagepaym
ment.Sincethepayment
Theeffectofacceleratingamortgageisincre
amou
untisincrease
ed,thereisadecreaseintheborrowerscashflow.Thismustbeeexamined
beforeincreasingtthepaymentamounttoen
nsurethattheeborrowerw
willnotbeneggatively
impaccted.

c) Lump
L
Su m Payme
ents
Thiso
optionallowstheborrowertomakealu
umpsumpayymentwhichisapplieddirectlytothe
principalamounto
ofthemortgaage.This,inaadditiontoth epaymentin
ncreasediscussed
previo
ously,cansignificantlyincrreasethesavvingsovertim
mebydecreassingtheamou
untofinterest
payab
ble.Asisthecasewithperiodicpaymentincreases,theeffectoffmakingalum
mpsum
paymentwillbem
mostsignifican
nttheearlieritismade.Thhefollowingchartusesthesame
mpsumpaym
ment(10%ofttheoriginallo
oanamount)
exampleasabove,,butappliesaa$20,000lum
atdiffferenttimesd
duringtheloaanlifecycletoillustratethheeffectsofssuchapaymeent.TheTotaal
Amou
untRepaidinccludesthelum
mpsumpaym
mentof$20,0000.

Figure15EffectofM
Makinga10%($2
20,000)OneTim
meLumpSumPaayment

80

Chapter3:AdvvancedMortggageConceptts

Analyysis
Bycomparingthee
effectofmakkingaonetim
melumpsum paymentwitththeeffecto
ofan
increaasedmortgaggepayment,tthebestscenaarioforaborrrower,ifhiso
orhercashflowpermits,
would
dbetoincreaasehisorhermonthlypaymentsthrougghoutthelifeeofthemortggage.Ifheorr
sheissunableorun
nwillingtodothis,thenexxtbestscenarriowouldbettomakealum
mpsum
paymentdirectlytotheprincipalofhisorhe
ermortgageaassoonaspo
ossible.Iftheborrower
couldcombinethe
esescenarios,,thetotalsavvingswouldbbesubstantialllyincreased.

d) Extended
E
Amortiza
ation
Aspro
opertyvaluesshaveincreassedsubstantiallyovertimeeincomparissonwithincomes,the
marke
ethasrespon
ndedbydevellopingcreativveoptionsto assistborrow
wersinkeepin
ngtheir
mortggagepaymentsaffordable.Onesuchoptionistheeextendedamo
ortization.

optionallowsthemortgage
etobeamorttizedforapeeriodlongerthan25years.For
Thiso
example,intodaysmarketabo
orrowermigh
htqualifyforaanextendedamortization
nof30years.
Increaasingtheamo
ortizationhasstheeffectoffloweringtheemortgagep
paymentorallowingthe
borro
owertoborrowanincrease
edamountofffunds.

ollowingexam
mpleillustrate
estheeffectssofextendingganamortizaationperiod.
Thefo

Example
Letsu
usethesame
eexamplethaatweusedearlierinthischhapter.Ourcclientisborro
owing
$200,000.Thismo
ortgagehasa25yearamo
ortization,araateof6%com
mpoundedseemiannually,
notin
nadvanceand
dmonthlypayyments.

Underthisscenario
o,thepayme
entwouldbe$1,279.62.A
Asdiscussedeearlier,thispaaymentwould
d
resulttintheborrowerrepayinggatotalof$383,886over225years.

189.65.This
Byexttendingtheaamortizationtto30years,themonthlyppaymentisreducedto$1,1
mighttbebeneficiaaltotheborro
owerifheorshecantquaalifyforamortgagepaymeentof
$1,27
79.62;howeve
eritdoescom
meataprice.

Underthis30yearramortization
nscenario,th
heborrowerw
wouldbemakking360paym
mentsof
$1,18
89.65.Thatm
meansthatthe
eborrowerw
wouldberepaaying:

TotalRepaiid=360X$1,,189.65

TotalRe
epaid=$428, 274

Bysavving$89.97p
permonththe
eborroweren
ndsuprepayiinganadditio
onal$44,388..Whilethis
optionmayallowttheborrowerrtoborrowth
heamountofffundsrequirredfortheirp
purposes,for
exampletopurchaaseahome,ittisnecessaryytoadvisetheemoftheadd
ditionalintereestthatis
repayyableusingthisoption.

Tomitigatetheefffectofthisop
ptiontheborrrowercanreamortizetheemortgageto
oashorter
amou
untoncetheycanaffordth
heincreasedp
payment.

Theextendedamo
ortizationcanalsoincrease
etheamounttthattheborrrowercanbo
orrow.

Chapter3:AdvvancedMortggageConceptts

8
81

eborrowercaanqualifyforthemortgageepaymentoff$1,279.62th
heycanapplyy
Forexxample,ifthe
thispaymentover30yearswith
htheresultb
beingthatinstteadofborro
owing$200,00
00theycan
nowb
borrow$215,126,anincre
easeof$15,12
26overits255yearcounteerpart.

Thish
hastheeffectofallowingttheborrower topurchaseemorehouseeforthesam
mepayment.It
canbearguedthatttheintroducctionofthisrrepaymentopption,alongw
withtheinterestonly
option,hasallowedpropertyvaaluestoremaainhighorinccreasewithlitttleimpactonborrowers
abilityytoqualifyfo
ortheseincreasedhousinggvalues.

Itmayybeofintere
esttolearnth
hatourmarke
etisnottheoonlyonewithincreasedam
mortization
options.Thishasb
beenavailableintheUnite
edStatesfor severalyearss.Manyhomebuyersin
Japan
nresortedtou
using100yeaaramortizatio
onoptionstoobeabletoafffordhousinggatthepeak
ofthe
erealestateb
bubble,allow
wingthemarkettocontinu eitsrise.

3. C ash Back
k Option
Inthisstypeofoption,theborro
owerreceivessanamountoofcash,onclo
osing(thetim
methatthe
mortggagefunds),tthatrepresen
ntsapercentaageofthetottalloanamou
unt.Theamo
ountofthe
CashBackoptionccanrangefrom1%to7%,dependingonnthelenderaandtheproduct.

Beneffits
CashonClosingg
mehomebuyeers,investalloftheirmoneyasadown
n
Sincemanyhomebuyers,especciallyfirsttim
ebeneficialtoreceivefundsonclosinggthatcouldb eusedtopurrchase
payment,itmaybe
appliaances,finance
erenovationss,replenishbankaccountss,etc.

Risks
HiggherRate
MostCashBackOp
ptionscomew
withahigherrateofintereestonthemo
ortgage.Thissisdesigned
ofadvancingaadditionalmo
oniesthatdonothavetob
berepaidbytheborrowerr.
toofffsetthecosto

ReepaymentofttheCashBackk
Iftheborrowerdecidestorefin
nancetheirmortgagedurinngtheterm,ttheywillberequiredto
repayyaportionoftheamounttthatwasrece
eivedunderthhisoption.Fo
orexample,ifaborrower
receivveda5%Cash
hBackona$200,000morttgagewitha 5yeartermaanddecidedttorefinance
withaadifferentlen
nderonthe3
3rdanniversaryoftheterm
m,thefollowin
ngcalculation
nwouldbe
usedttodetermine
etheamountrepayabletothelender.

Amou
untRepayable
e=Numbero
offullorpartialmonthsre maininginth
heterm
Numberofmonthsinth eterm

=5
5%x$200,000
0x(60month
hterm36m
monthsalread
dypaid)/60

=$10
0,000x24/6 0
=$10,000x0.4
=$4,000

Th
herefore,theamounttheborrowerwo
ouldberequirredtorepayw
wouldbe$4,000.

82

Chapter3:AdvvancedMortggageConceptts

4. C ombined or Bundlled Optio


on
Forou
urpurposes,aCombinedorBundledO
Optionisoneethatincludeesastandard
dmortgage
alongwithanothertypeofdebtt,suchasalineofcredit.Scotiabankccurrentlyoffersthisoption
n
inthe
eformoftheSTEPmortgagge.If,forexaample,aborrrowerwereto
otakeouta$
$200,000
mortggageheorshecouldhavethatsplitinto
obothastan dardmortgaggeandalineofcredit.If
them
mortgageamo
ountwasfor$
$199,999and
dthelineofcrreditbeganaat$1,thenevverypayment,,
asthe
eprincipalonthemortgaggewasreduce
ed,wouldinc reasetheam
mountavailableunderthe
lineofcredit.Inesssence,theamountthatthepropertyi sencumbereedby(theamountofdebt
thatissregisteredo
ontitle)remainsat$200,0
000,buttheppercentagemadeupoftheemortgage
andlineofcreditcchangesovertime.

Thefo
ollowingcharrtprovidesan
nexampleofaa$200,000a mountborrowed,witha$
$199,999
mortggagecomponent,amortize
edover25ye
earswitharatteof6%compoundedsem
miannually,
notin
nadvanceand
dmonthlypayyments,alongwitha$1linneofcreditccomponent.O
Overtime,ass
them
mortgageamo
ountoweddecreases,theaavailablelineeofcreditincrreases.

Figure16BlendedOp
ptionMortgageewithaMortga
ageandLineofCCredit

Beneffits
Fleexibility
Thistypeofoption
nallowstheb
borrowertohaveaccesstootheequityo
ofhisorherp
propertyat
anytimebywayoffthelineofccredit,withou
uthavingtoreeapplytoborrrowaddition
nfunds.

Risks
ReegisteredDebt
Thefu
ullamountoffthe$200,000Bundleisallwaysregiste redagainstth
hetitleoftheeproperty.
Wherreasinastand
dardmortgagge,theamoun
ntregisteredagainstthep
propertydecrreasesasthe

Chapter3:AdvvancedMortggageConceptts

8
83

decreases,theamountoftheBundlere
emainsconsttantatthetottalamountoriginally
debtd
appro
oved.Thisisd
duetothefacctthatthebo
orrowerhasaaccesstotheffunds,wheth
herornothe
orshe
ehasactuallyyborrowedth
hem.

5. Po
ortability Option
ThePortabilityOpttion,alsorefe
erredtoaspo
orting,allowssthecurrenthomeownerttoeffectivelyy
hisorhercurrentmortgaggetohisorhe
ernewhome..Underatyp
picalscenario,the
takeh
borro
owerwouldbe
esellingtheccurrenthome
eandpurchassinganewon
ne.Ifthemorrtgageis
defau
ultinsuredandheorshew
wasportingitwithintwoyeears,heorsh
hewouldbeeeligiblefora
premiumcreditfro
omthemortggagedefaultinsurer.Afterrtwoyearsth
hatcreditnolongerappliees
andth
hefullinsurancepremium
m(forexample
e,throughCM
MHC)wouldaapplytoeitheertheentire
mortggage(ifitisin
ncreased)ortthetopuppo
ortion(theam
mountincreassed).Sincedifferent
premiumsapplyun
nderbothsce
enarios,itisn
necessarytoddeterminewh
hichoptionissbestsuitedtto
thebo
orrower.The
eborrowerco
ouldthentake
ethismortgaagetohisorh
hernewhomee.Thereare
threeoptions:
ntloanintheexactamoun
ntthatisoutsstandingprovvidedthattheeLoanto
Takethecurren
eeded
Valueoftheoriiginalmortgageisnotexce
ntloaninare
educedamountthatdoesnnotexceedth
heoriginalLo
oanto
Takethecurren
Value
ntloantothenewproperttyandincreassetheamoun
ntbyhavingtthe
Takethecurren
nderblendthecurrentratechargedonanewmortggagewiththeeborrowersccurrentrate.
len

Beneffits
RateProtectionn
esarecurrenttlyhigherthantheborrow
werscontracttedinterestraateonthemo
ortgage,heo
or
Ifrate
shecaanbenefitbykeepingthelowerratean
ndportingitttothenewho
ome

Risks
Lim
mitedApplication
Thisfeaturecanbe
efantasticwh
hencurrentm
marketintere stratesareh
higherthanth
heborrowerss
contraactedrate,bu
utinaneraw
withconsisten
ntlylowrates ,theapplicattionofthisop
ptionis
limite
ed.

6. As
ssumabil ity Optio n
AnAsssumableOpttionallowsap
purchasertoassumeortaakeovertheccurrenthomeeownersdebtt
onthe
epropertybe
eingpurchase
ed.Forthecu
urrentborrow
wertobereleeasedfromth
heircovenantt
withtthelender,th
hepurchasermustbeapprrovedbythe lenderandco
ompleteanA
Assumption
Agree
ement.

Beneffits
RateProtectionn
Ifmarrketinterestrratesarecurrrentlyhigherthantherateeoftheexisting,assumabllemortgage,it
mayb
bebeneficialfforthepurch
hasertoassum
methecurrenntmortgage.

84

Chapter3:AdvancedMortgageConcepts

Risks
LimitedApplication
Thisfeaturecanalsobeverybeneficialwhencurrentmarketinterestratesarehigherthanthe
borrowerscontractedrate,butinanerawithconsistentlylowrates,theapplicationofthis
optionislimited.

Chapter3:AdvancedMortgageConcepts

85

Key Terms and Definitions

AcceleratedMortgagePayment
Amortgagepaymentlargerthanrequiredtoretirethemortgageoverthecontracted
amortization,havingtheeffectofrepayingtheamountborrowedsoonerandsavingthe
borrowerinterest

Amortization
Thetotalamountoftimecontractedtorepayamortgage

AssumabilityOptions
Thisoptionallowsapurchasertheabilitytotakeoverthecurrenthomeownersmortgage

BalloonPayment
Theamountrepayableattheendoftheterm

BasisPoint
1/100thofonepercent

BlendedPayment
Apaymentthatincludesacombinationofinterestandprincipal

BundledOption
AlsoreferredtoasaCombinationOption,thisoptioncombinesamortgageandalineofcredit.

CappedVariableRateMortgage
Avariableratemortgagethatcannotexceedapresetinterestrate

CashBackOption
Anoptionwherebyonclosingofthemortgage,apercentageofthemortgageloanispaidtothe
borrowerbythelender

ClosedMortgage
Amortgagewithnooptiontorepaytheoutstandingprincipalbalanceunlessthepropertyissold
toanarmslengthpurchaser

CompoundingFrequency
Thenumberoftimesperyearinwhichaninterestrateischarged.Typicalcompounding
frequenciesincludesemiannuallyandmonthly.

ConstantPayment
Apaymentthatremainsthesamethroughoutthetermofthemortgage

Default
Thefailuretomeettheobligationsofacontract.Inamortgagecontractdefaulttypicallyrefers
tothefailuretomaketheregularperiodicmortgagepayments

Equity
Thedifference,indollarsbetweenthevalueofthepropertyandtheamountoffinancing

86

Chapter3:AdvancedMortgageConcepts

currentlyontheproperty.ValueFinancing=Equity

ExtendedAmortization
Anamortizationthatexceedsthestandardamortizationof25years

FaceValueoftheMortgage
Theamountrepayablebytheborrower

FixedRate
Aninterestratethatremainsthesamethroughoutthetermofthemortgage

FullyOpenMortgage
Anoptionallowingearlyrepaymentofthemortgageprincipalwithoutpenaltyornotice

GraduatedPaymentMortgage
Amortgagerepaymentplanwherebythemortgagepaymentsareinitiallysmallbutgrowover
time.Theinitialpaymentsmaynotbeenoughtopaytheprincipalandaccruedinterestforthe
period.

HighRatioMortgage
Amortgageinexcessof80%loantovalue

HomeEquityLineofCredit(HELOC)
Alineofcreditsecuredbyaproperty

InterestAccruingMortgage
Amortgagewithatermwherebynorepaymentsofinterestorprincipalaremade.Theprincipal
andcompoundinterestarerepayableattheendoftheterm.

InterestOnlyMortgage
Amortgagewithatermandaconstantmortgagepaymentconsistingofonlyinterestpayable
forthepaymentperiod.Attheendoftheterm,theprincipalamountisrepayable.

InterestRateDifferential
Thedifferencebetweenaborrowerscurrentcontractedmortgagerateandthelenderscurrent
availablerateforasimilarterm

LineofCredit
Adebtwithacreditlimitthatallowstheborrowertowithdrawfundsuptothatcreditlimit.
Repaymentsarebasedonapercentageoftheoutstandingbalanceandinterestischargedonly
ontheamountofthecreditlimitthatisactuallyused.

LoantoValue
Theamountofaloantothevalueofthepropertyexpressedasapercentage.
LoantoValue(%)=Loan/PropertyValue

LumpSumPayment
Apaymentofmoneyapplieddirectlytotheprincipalofamortgage

Chapter3:AdvancedMortgageConcepts

87

MortgageDefaultInsurance
Aninsurancepolicywhichprotectstheinsured(thelender)againstlossessufferedbythe
defaultoftheborrower

MortgageRank
Thepositionofamortgageregisteredontitleofapropertyinrelationtothetimingofother
registeredmortgages.Thefirstmortgageregisteredontitleisconsidereda1stmortgage.The
nextmortgageregisteredafterthe1stisconsidereda2ndmortgage,andsoon.

NegativeAmortization
Ascenarioinwhichtheperiodicpaymentisnotsufficienttopaytheaccumulatedinterestand
theprincipalforthepaymentperiod.Thiscausestheamortizationtoextendbeyondthe
amountcontracted.

OpenMortgage
Amortgagethatallowstheborrowertorepaytheentireprincipalbalanceorportionthereof
withoutpenalty(fullyopenmortgage)orwithaninterestratedifferentialor3monthsinterest
penalty(partiallyopenmortgage)

OutstandingBalance
Theamountofthemortgageremainingtoberepaidatagiventime

PartiallyAmortized
Amortgagecontractthathasaterm

PartiallyAmortized,BlendedConstantPaymentMortgageFixedRate
Amortgagewithatermandarepaymentplanconsistingofafixedinterestrateandthesame
periodicpaymentmadeupofacombinationofinterestandprincipalthroughouttheterm.

PartiallyAmortized,BlendedConstantPaymentMortgageVariableRate
Amortgagewithatermandarepaymentplanconsistingofavariableinterestratethatchanges
wheneverthelendersprimeratechangesandthesameperiodicpaymentmadeupofa
fluctuatingcombinationofinterestandprincipalthroughouttheterm

PartiallyAmortized,BlendedVariablePaymentMortgageVariableRate
Amortgagewithatermandarepaymentplanconsistingofavariableinterestrateanda
fluctuatingperiodicpaymentthatbothchangewheneverthelendersprimeratechanges.The
paymentconsistsofafluctuatingcombinationofinterestandprincipalthroughouttheterm

PortabilityOption
Thisoptionallowstheborrowertotakethemortgagewithhimorhertohisorhernewhome

PowerofSale
Aprocessthatallowsthelendertocommenceaproceedingagainsttheborrowerwithoutusing
thecourtsandselltheproperty.Thiscanbeaquickandfairlyinexpensiveremedyavailableto
lendersupondefaultbytheborrower

PrepaymentOptions
Optionsavailabletotheborrowertoprepayapartofhisorhermortgage.Theseoptionsmayor

88

Chapter3:AdvancedMortgageConcepts

maynotincludeapenaltyforthisright.

PrepaymentPenalty
Apenaltychargedbyalendertoaborrowerforearlyprepaymentofthemortgage

Principal
Theamountofmoneyadvancedonamortgageloan,excludinginterestoranyothercosts

PropertyInsurance
Insurancethatprotectstheinsuredagainstlossestothepropertyduetofireandothercovered
perils

Purchaser
Thebuyerofaproperty

QuietPossession
Therightoftheborrowertoenjoythepropertywithoutinterferencebythelenderunlessthere
isadefaultbytheborrower

ReverseMortgage
Aninterestaccruingmortgagetypicallyreservedforseniors.Themortgageisusuallyonly
repayableuponthedeathofthesurvivinghomeownerorsaleoftheproperty.

StraightLinePrincipalReductionMortgage
Amortgagerepaymentplanwherebyequalpaymentsofprincipalaremadethroughoutthe
terminadditiontotheinterestpayableforthatperiod

Term
Aperiodafterwhichthemortgagemustbefullyrepaidorrenegotiated

VariableRate
Aninterestratethatfluctuatesbasedonalendersprimerate

Vendor
Thesellerofaproperty

Chapter3:AdvvancedMortggageConceptts

3.4

8
89

Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons

1. Wh
hatarethefivvefinancialcomponentsthatarerequi redtocalculaateamortgaggepayment?

eenaccelerattingamortga geandusingtheincreasedpayment
2. Disscussthedifferencebetwe
op
ptiontopayth
hemortgageoffmorequicckly.

3. Disscussthedifferencebetwe
eenanopenm
mortgageanddaclosedmo
ortgage.

hymightaco
onsumerbeco
onfusedasto
othedifferen cesbetweenanopenand
dclosed
4. Wh
mo
ortgage?

5. Un
nderwhatcirccumstancesw
wouldaprepaaymentpena ltybecharged?

escribeascen
nariounderw
whicha3mon
nthinterestpeenaltywouldbecharged.
6. De

7. De
escribeascen
nariounderw
whichaninterestdifferenti alpenaltywo
ouldbechargged.

8. Wh
hatisabundlledmortgage
e?Nameanddescribetheelendersthattcurrentlyoffferbundled
mo
ortgagesinOntario.Thisw
willrequireyo
outocompleeteoutsideinvvestigation.

9. Wh
hatisthemostcommontyypeofmortgagerepaymeentplaninOn
ntariotoday?

10. Aborrowerhaasaskedyoufforoptionsre
egardingrepaayinghismorttgagemoreq
quickly.
Explaintheoptiionsavailable
etohimandu
underwhatccircumstancessyouwouldaadvisehimto
use
etheseoptio
ons.

90

hapter4:PropertyOwnersshipinOntario
Ch

Chaptter 4: Property
P
y Owneership in Onttario

Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Distinguishbe
D
tweenperson
nalandrealp
property
Explainthemeeaningofpropertyownersship
Explainestatesinland
Discussthevarioustypesoffencumbranccesandtheeeffectseachhhasonproperrtyownershipp
Explainthetyppesofcoownnershipofreaalproperty
Discusstheim
D
mpactofjudgm
mentsonreallproperty

4.1

Properrty

Rea
al Propertty
Prope
ertycanbeclaassifiedintwodistinctwayys:personalaandreal.Reaalpropertycaanbedefined
d
asthe
elandandeve
erythingaffixxedtoit.Itisinafixedloccationandisp
permanent,remaining,to
onee
extentoranotther,longafte
erthecurrentownershavverelinquisheedtheirrightsstoit.

Pers
sonal Pro
operty
Incon
ntrast,person
nalpropertyisdefinedase
everythingth atisnotrealproperty.Th
hatincludes
chatte
elsandothergoods.Perso
onalpropertyyistypicallynnotfixedinitsslocationand
dnormallyhaas
ashorterusefullife
eexpectancyythanrealpro
operty.

4.2

Owners
ship

Owne
ershipofrealpropertyisco
ommonlytho
oughtofasow
wningthelan
ndandeverythingaffixedtto
it.Ho
oweverinale
egalsensethisisnotthecaase.Thecurrrentowneroffapieceofreealproperty
actuallyownstherighttouseth
heland.The onlyowneroofthelandistheCrown.IInitiallythe
Crown
nprovidedgrrantstoindiviidualsallowin
ngthemtoussetheland.EEverypieceoffrealpropertty
thatissownedbyanyoneotherthantheCrow
wnorAborig inalpeoplesiinCanadahasanoriginal
grant.

There
esultofthisissthatindividu
ualsowndiffe
erentrightst otherealpro
operty.Theseerightsare
determinedbythe
etypeofownership,referrredtoasthe DoctrineofEEstates.Them
mostcommon
formssofestatesin
nOntariotodaayarefeesim
mpleestatesaandleasehold
destates.Anothertypeoff
estate
e,alifeestate
e,isbecominggmorepopularinOntariooandwhileottherestateseexist,these
three commonformswillbeexxploredinthisschapter.

4.3

Estates
s in Land
d

Fee Simple Estate


E
Thefe
eesimpleestateisthemo
ostcommonfo
ormofowne rshipinOntarioandprovidestheholdeer
withtthewidestbreadthofrightsavailable.Feerefersto thefactthatttheestatem
maybe

Ch
hapter4:PropertyOwnersshipinOntario

9
91

mplerefersto
othefactthatttherearenooprohibitionssagainstwho
omayinherit
inheriitedwhilesim
it.

Theownerofthise
estateisinco
ontroloftherrealpropertyyforaslongasheorshehasit,subject
topayyingtheprop
pertytaxesan
ndothermunicipalobligatiionsandsubjjecttoanyintterestsinthee
prope
ertythatmayberegistered
dagainstthepropertystittle.Thisindivvidualmaytrransferhisor
herin
nterestinthepropertydurringhisorherrlifetimeorddictatewhow
willinherittheefeesimple
intere
estuponhiso
orherdeath.Inaddition,h
heorshemayymortgagetheinterest,p
pledgeitas
securityforaloansuchasthrou
ughasecured
dlineorcrediit,andsoon.

Ifthefeesimpleow
wnerdieswitthoutawillan
ndtherearenoheirs,thefeesimplein
nterestis
terminatedandthepropertywillescheatorrevertbackttotheCrown.

Lea sehold E state


Thele
easeholdestaate,commonlyreferredtoasalease,issaninterestinlandcreateedbya
landlo
ordandtenan
nt,mostcommonlybyale
ease.Thisinteerestinlandiscreatedforrafixed
period
doftime,succhasamonth
h,year,ormo
ore.Thereis nolimitonth
hetimethataaleasehold
estate
emaybeineffect.

Aleasseholdestateprovidesthe
eownerofthiisestatetherrighttoexclu
usiveuseandpossessiono
of
theprroperty,subje
ecttocontracctuallimitsco
ontainedinthhetermsofth
helease.

Life Estate / Life Lea


ase
Alifeestateisdefinedastherigghttouseoroccupyrealppropertyfortthedurationo
ofoneslife.
Atthe
eendofthatpersonslife,thelifeestatteisoveranddthefeesimp
pleownership
pgoestothe
remaiinderman.Aremaindermanistheindivvidualwhoissonthedeedasthenextinlinetoown
n
theprroperty.

Example
Johno
ownsahouse
e.Heisawid
dowerandhasasixyearo lddaughteraandhismotheerisstillalivee.
Johnw
wantstoensu
urethatifanyythinghappenstohimhismothercanliveinhishou
useforthe
resto
ofherlife.Ho
owever,onceshepassesaw
wayhewisheesthehousettogotohisd
daughter.In
thissccenarioJohncancreatealifeestateforrhismother, andnamehisdaughterass
remaiinderman.

Anoth
herformofliffeestateisco
ommonlyrefe
erredtoasalifelease.TThisistypicallyseenin
seniorsdevelopmentswheretheseniorpurrchasestheri ghttoliveinahouseuntildeath.Full
owne
ershipoftheh
housethenre
evertstotheccorporation( typicallyano
onprofit)thatownsand
managestheproje
ect.In2007C
CMHCreporte
edthattherewereatleastt135lifeleasse
developmentsinO
Ontariocontainingmoreth
han8,600uniits.

Itisim
mportantton
notethattheholderofaliffeestatewill finditdifficu
ulttoobtainaamortgage
dueto
othedifficulttythatthelen
nderwillhave
einrecoverinngtheirmoneeyupondefau
ult.Howeverr,
somelendersarew
willingtofinaancelifelease
esiftheprojeecthasaguarranteedbuyb
backprogram
m.
Thisaareaisconside
eredtobean
nichemarketbecauseappproximately90%oflifeleaseowners
purch
hasethelifele
easefromthe
eproceedsoffsellingtheir previoushom
me,whichressultsin
virtuaallynodeman
ndforlifeleassepurchaseffinancing.

92

Ch
hapter4:PropertyOwnersshipinOntario

Su
uccessTipLifeEsta
ate/LifeLeease
Mo
ortgageagentsmustbeaw
wareofthese
etypesofestaatesandensu
urethatiftheemortgageiss
forralifeestateorlifeleasetthattheapplicationclearlyyindicatesth
his.Inadditiontheagent
mu
ustbesureth
hattheappliccationissubm
mittedtoalennderthathasaproductforthistypeof
ow
wnership,and
dthattheapp
plicantmeetstheproduct requirements.Failuretodosocould
ressultinwasted
dtimeandmoneyforboth
htheagenta ndtheappliccant.

4.4

Condom
minium Ownershi
O
ip

Condo
ominiumscom
mbinefeesim
mpleownersh
hipofindividuualunits,refeerredtoasstrratalots,
includ
dingallofthe
erightsattach
hedtothatow
wnership,witthacombined
downershipofcommon
areas,referredtoaascommone
elements.The
esecommon elementsinccludethehallways,
recreaationalfacilities,elevatorss,lobby,andssoon.Eachuunitpaysaco
ondominiumm
maintenance
feeon
namonthlyb
basistotheco
ondominiumcorporation. Thecondom
miniumcorporationisa
corpo
orationcreate
edundertheCondominium
mActthatiscchargedwithmanagingthe
condo
ominium,inclludingitsasse
ets,andmain
ntainingandrrepairingthecommonelem
ments.Itis
managedbyaBoardofDirectorsconsistingofunitowne rswhoareelectedbytheotherunit
owne
ersonaregulaarbasis.

4.5

Encum
mbrances

Anen
ncumbranceissaninterestinpropertyth
hathastheefffectoflimitingtherightsoffeesimplee
owne
ershipofrealproperty.Typicalencumb
brancesarem
mortgages,easements,and
drestrictive
coven
nants.

Morrtgages
Amorrtgageisregissteredontitleandhascon
ntractualobli gationsthatprohibittheffeesimple
owne
erfromhavinggfullcontrolofhisorherp
property.

Eas ements
Easem
mentsarerigh
htsacquiredfforthebeneffitofrealpropperty,grantin
ngrightstousseanother
prope
erty.Theland
dgivingtheriightiscalledttheservientttenementwh
hilethelandrreceivingthe
rightiiscalledthed
dominantten
nement,wherrethetermteenementsimp
plyreferstotthereal
prope
erty.

Aneaasementisaninterestinlaandthatpasse
esfromoneoownertoano
otherorasisccommonly
referrredto,runsw
withtheland
d.Unlikeafe
eesimpleinteerestthatmaaybetransferrredbythe
currentowner,aneasementcannotbeextin
nguishedbyttheownerofttheservientttenement.
ntandservien
nttenementm
mustagreeto
oremoveaneasement.
Bothttheownerofthedominan

Example
Adam
mownsacottaagethatfronttsontoalake
e.ImmediateelybehindAdamsproperttyisMarys
cottagge.Hercottaagedoesnoth
havedirectaccesstothel ake.ToimprroveMarysp
property,
Adam
mandMaryhaaveagreedto
ocreateandaallowtheuseofathreefo
ootwidestripoflandon
thefaarrightofAdaamspropertyyasapathfro
omMaryscoottagetothelake.Thishaastheeffecto
of

Ch
hapter4:PropertyOwnersshipinOntario

9
93

grantingMarysprropertyaccesstothelakevviaAdamsprroperty.Asssuch,thiscreaatesan
easem
mentwhichissregisteredontitle.

mportantton
notethatane
easementmustbenefittheeproperty,no
otsimplytheeproperty
Itisim
owne
er.Inthisexample,Marysspropertyhassgainedlake accessandh
hasthereforeimprovedthe
prope
erty.Ifitsimp
plybenefitedMary,itwou
uldonlybecoonsideredaco
ontract,notaaneasement.

Inadd
ditiontostandardeaseme
entsbetweendominantanndservientteenements,pro
ovincial
legislaationhascreaatedspecialtypesofeasem
mentswhere adominantttenementisn
notrequired.
These
eeasements,referredtoasstatutoryrightsofway,aarenormallyprovidedtop
publicutilities,
allowingtheutilityytorun,forexample,hydrrolinesthrou ghapropertyy.

Res
strictive Covenant
C
s
Aresttrictivecoven
nantisarestrictionofuseplacedontitlleoftheservienttenemen
ntforthe
beneffitofthedom
minanttenement.Aswithaneasementt,arestrictiveecovenantru
unswiththe
landaandcanonlybeextinguish
hedthroughtheagreemenntofbothcurrrentownersofthe
domin
nantandservvienttenements.

Example
Adam
mownstwopaarcelsofland
d.Onefrontsalakewhile theotherisd
directlybehin
ndthatparcell.
Adam
misgoingtob
buildanewtw
wostoreyhom
meonthepa rcelbehindthelakefrontparcelandseell
thelakefrontparce
el.Whenselllingthelakefrrontparcel,A
Adamwishestoensurethaatthenew
owne
erdoesnotco
onstructabuildinghighertthanonestorrey,sincethisswouldimpedeAdams
prope
ertysviewofthelake.Inssodoing,Adaamandthepuurchaserofth
helakefrontllothave
agree
edtoplacearrestrictivecovvenantontitllethatprohibbitstheconstructionofab
buildinghigheer
thano
onestorey.InthisscenariioAdamwouldalsorequeestaneasemeentgrantingh
hisparcelof
landaaccesstothelake.

Buil ding Sch


hemes
Abuilldingschemeisagroupoffrestrictiveco
ovenantsregiisteredagainsstseveralpro
opertiesina
developmentplanthatisbindin
ngonallpurcchasersofap ropertywithiinthatdevelo
opment.Thiss
hasth
heeffectofensuringthataallpropertiessinthedeveloopmentconfo
ormtoaseto
of
prede
eterminedpoliciesforthattdevelopmen
nt.Anexamppleofthisform
mofrestrictivvecovenant
mighttbetolimitth
hecolourvariationsofpro
opertyexterioorsinanewssubdivision,llimitthe
numb
berofstoriesofpropertiessinanewsub
bdivision,anddsoon.

4.6

Co-Ow
wnership of
o Real Prroperty

Prope
ertycanbeow
wnedbyanin
ndividualorb
byseveralind ividuals,referredtoascoownership.
Coow
wnershipoccu
ursinoneofttwoways:byyatenancyincommonortthroughajointtenancy.
Them
majordifferen
ncebetweentthetwocente
ersaroundthherightofsurrvivorship,wh
hichrefersto
o
howo
ownershipisttransferredo
onthedeatho
ofoneofthe coowners.

Ten ancy in Common


C
Atenaancyincomm
monisatypeofcoownersshipofrealprropertytypicaallyusedbyp
partieswho
wishttoownindivid
dualsharesin
naproperty.Forexamplee,twobusinessspartnersw
wouldliketo
purch
haseanofficebuilding.On
neisprovidinggsixtypercenntofthepurcchasepricew
whiletheotheer
partnerisinvestinggfortypercen
nt.Toreflecttthisarrange ment,theow
wnershipofth
hepropertyiss

94

hapter4:PropertyOwnersshipinOntario
Ch

entingasixty percentown
nershipwithttheother
beingdividedintotwoportionss,onereprese
representingaforttypercentow
wnership.

Eitherrpartycanse
ell,mortgage,orwillhisorrherinterest intheproperrty,althoughmostlenderss
would
drequireallo
ownerstosign
nonanymorrtgageplaced onthepropeerty.Thisisd
duetothefacct
that,iftheborrow
werdefaults,thelenderwo
ouldhaveadiifficulttimesellingaportio
onofanofficce
building.

Ifone
epartydecide
edtosellhiso
orherinteresstintheprop erty,theotheerpartywoulldbecomethe
newttenantincom
mmon.

Join
nt Tenanc
cy
Ajoin
nttenancyisaatypeofcoo
ownershipofrealpropertyytypicallyuseedbyspousesspurchasingaa
matrimonialhome
e.Unlikeatenancyincom
mmon,where eachownero
ownsadivideedshareof
theprroperty,jointttenantsown
nanundivided
dinterestinttheproperty..Inotherwo
ords,bothown
oneh
hundredperce
entofthepro
opertytogeth
her.Ifoneco ownerdies,thepropertyythen
becom
mesthesurvivingownerspropertywithouthavingttogothrough
htheprobateeprocess.
Some
eparentswilladdachildorchildrenontitleasjoint tenantssoth
hat,onthedeeathofthe
survivvingparent,thepropertyb
becomesthechildswitho utgoingthro
oughtheproccessand
payingthecostsoffprobate.Ho
owever,there
emaybeincoometaximpliicationsinvolvedinthis
esssince,whe
enpropertyotherthanap
principalresiddenceistranssferredtoano
onspouse,a
proce
dispositionisdeem
medtooccuratfairmarketvalue.The resultisthatanyaccruedgainistaxable
inthe
eyearofdispo
ositionwhichmayresultin
ntaxpayableethatexceedsstheamounttthatwould
havebeenpayable
einprobatefees.

4.7

Judgments and
d Liens

Jud gments
Ajudggment,asitrelatestoade
ebt,isajudge
esdecisionthhatadebtiso
owedbyadeebtortoa
credittor.InOntariioacreditorccan,afterobttainingajudggment,fileaW
WritofSeizurreandSaleoff
landaagainstadebttorinanycou
untyordistricctinwhichthhedebtorown
nsland.Thewritwill
encum
mberanycurrentlyowned
dlandinanyccountyordisttrict,orlandw
whichispurcchasedinthe
future
ebythedebtor,bywayoffplacingalien
nagainstthe property.It shouldbeno
otedthat,eveen
thougghacreditorh
hasobtainedajudgment,heorshedoeesnothavetofileaWrito
ofSeizureand
d
Sale,aandcanwaituntilheorsh
heknowsthattthedebtoroownsland.

notlendonapropertyunttilthisdebtisspaid,unless,,withcertain
nlenders,the
Mostlenderswilln
debtiisbeingpaidfromtheproceeds.

Fourm
monthsafterfilingofthew
writwiththeenforcementtoffice,acreditorcandireectthe
enforcementoffice
e,throughthesheriff,tosseizeandsell theland.Theeactualsaleoftheland
canno
ottakeplaceuntilafterthe
ewrithasbee
enonfilefor sixmonths.

Thew
writexpiressixxyearsfromthedateitisissuedandm
maythenbereenewedforaanothersix
yearp
period.

Ch
hapter4:PropertyOwnersshipinOntario

9
95

Lien
ns
Alienissecurityaggainstaprope
erty,eitherre
ealorperson al,foradebt.Legislationallowsforthe
placin
ngofalienon
napropertyfforconstructioncostsnot paid,whichisscommonlyrreferredtoass
amecchanicslien.UnderthePeersonalPropeertySecurityA
Act(alsorefeerredtoastheePPSA),alien
n
canberegisteredaagainstperso
onalpropertysuchasforacarloan.Aliendoesnotforcethesalee
ofpro
opertybutsim
mplyusesthatpropertyasssecurityforaadebt.

96

Chapter4:PropertyOwnershipinOntario

4.8

Key Terms and Definitions

BuildingScheme
Agroupofrestrictivecovenantsregisteredagainstseveralpropertiesinadevelopmentplanthat
isbindingonallpurchasersofapropertywithinthatdevelopment

Chattel
Personalproperty,movablepropertyandotherpropertynotdeemedtobefixtures

Condominium
Thewholecollectionofindividualhomeunitsalongwiththelanduponwhichtheysit.Individual
homeownershipiscomposedonlyoftheairspacewithintheboundariesofthehome,as
definedbyadocumentknownasaDeclaration,filedonrecordwiththelocalgoverning
authority.

DominantTenement
Apropertyreceivingabenefit

Easement
Arightforthebenefitofthedominanttenementoverthatoftheservienttenementthatis
normallyregisteredontitleandthatrunswiththeland

Encumbrance
Aninterestinpropertythathastheeffectoflimitingtherightsoffeesimpleownershipofreal
property.Typicalencumbrancesaremortgages,easementsandrestrictivecovenants.

FeeSimpleEstate
ThemostcommonformofownershipinOntarioandprovidestheholderwiththewidest
breadthofrightsavailable.Feereferstothefactthattheestatemaybeinheritedwhilesimple
referstothefactthattherearenoprohibitionsagainstwhomayinheritit.
Theownerofthisestateisincontroloftherealpropertyforaslongasheorshehasit,subject
topayingthepropertytaxesandothermunicipalobligations.Thisindividualmaytransferhisor
herinterestinthepropertyduringhisorherlifetimeordictatewhowillinheritthefeesimple
interestuponhisorherdeath,mortgagetheinterest,andsoon.

JointTenancy
Atypeofcoownershipofrealpropertywherebyallownersownanundividedinterestinthe
property

Judgment

Afinalcourtrulingresolvingthekeyquestionsinalawsuitanddeterminingtherightsand
obligationsoftheopposingparties,suchastheawardingofmoniestoaninjuredparty

LeaseholdEstate
Aninterestinlandcreatedbyalandlordandtenant,mostcommonlybyalease.Thisinterestin
landiscreatedforafixedperiodoftime,suchasamonth,year,ormore.Thereisnolimiton
thetimethataleaseholdestatemaybeineffect.Aleaseholdestateprovidestheownerofthis
estatetherighttoexclusiveuseandpossessionoftheproperty,subjecttocontractuallimits
containedinthetermsofthelease

Chapter4:PropertyOwnershipinOntario

97

Lien
Securityagainstaproperty,eitherrealorpersonal,foradebt

Personalproperty
Everythingoneownsthatisnotrealproperty.Thatincludeschattelsandothergoods.Personal
propertyistypicallynotfixedinitslocationandnormallyhasashorterusefullifeexpectancy
thanrealproperty.

RealProperty
Landandeverythingaffixedtoit.Itisinafixedlocationandispermanent,remaining,toone
extentoranother,longafterthecurrentownershaverelinquishedtheirrightstoit.

RestrictiveCovenant
Arestrictionofuseplacedontitleoftheservienttenementforthebenefitofthedominant
tenement

Runswiththeland
Meansthataninterestinproperty,suchasaneasementorrestrictivecovenant,transfersfrom
ownertoowner

ServientTenement
Apropertygivingupabenefit

TenancyinCommon
Atypeofcoownershipofrealpropertytypicallyusedbypartieswhowishtoownindividual
sharesinaproperty

98

hapter4:PropertyOwnersshipinOntario
Ch

4.9

Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons

1. De
escribethediffferencesbettweenrealan
ndpersonalp roperty.

hatdoesaho
omeowneractuallyowninrelationtohhisorherprop
perty?
2. Wh

3. De
escribethetermFeeSimp
pleanddiscu
usstherightsofthefeesim
mpleholder.

4. De
escribethetermLeaseholldEstateand
ddiscussthe rightsofaho
olderofthistypeofestatee.

5. Wh
hatmakesco
ondominiumo
ownershipun
nique?

6. Wh
hatimpacton
npropertyow
wnershipdoe
encumbranceeshave?

hatisanease
ementandwh
hatareitsimpactsonproppertyrights?
7. Wh

8. Wh
hatisarestrictivecovenan
ntandwhataareitsimpacttsonpropertyyrights?

9. De
escribethediffferencebetw
weenabuildin
ngschemeanndarestrictivvecovenant.

10. Discussthemaaindifference
ebetweenjointtenancyanndtenancyin
ncommon.

11. Exxplaintheimpactofajudggmentonpro
opertyownersship.

Chapter5:R
RegulationanddLegislation

9
99

Chaapter 5: Regullation aand Leggislatioon


Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Describetherooleandorgannizationalstruuctureofthe regulator,thheFinancialSeervices
CommissionoffOntario(FSC
CO)
Iddentifyactivittiesthataressubjecttoreggulation
IddentifythefourlicensescaapturedbytheActandReggulations,resstrictions,exeemptions,
howtheyareissued,registe
ered,suspend
ded,revoked andenforced
InnterprettheA
ActandRegullations(includ
dingStandarddsofPracticee)thatgovern
nmortgage
brokerages
InnterprettheA
ActandRegullationsthatggovernmortgaageagents
InnterprettheA
ActandRegullationsthatggovernmortgaagebrokers
InnterprettheA
ActandRegullationsthatggovernprincippalbrokers
Correctlyinterrpretanduseterminologyrelatedtothhemortgagebbrokerageinddustrys
egulatoryenvvironment
re

Intro
oduction

Note:Thischapterrcontainsinfo
ormationabo
outandinterppretationsoflegislation.N
Neitherthe
autho
ornorthepub
blisherisalaw
wyerandinn
nowaydoesaanyinformationcontained
dinthistext
constitutelegaladvice.Legalandotherdecisionsrelateddtofinancialoranyothertypeof
transaactionshould
dbecomplete
edonlyaftersseekingadviccefromacom
mpetentprofeessionaland
shouldnotbebase
edoninformaationcontainedherein.N eitherthepu
ublishernorth
heauthoris
engaggedinrenderinglegalorotherprofessionaladvice.

Them
mortgagebrokkerageindusttryisnowhigghlyregulatedd,althoughitwasnotalwaays.The
Mortg
gageagentsA
Act,datingbaacktothelate
e1960s,wasnotsubstanttiallyupdated
dfor30years.

Origin
nally,theRealEstateandB
BusinessBrokkersAct,also referredtoasREBBA,(theelegislation
thatrregulatesrealestatebroke
ers),regulated
dmortgageaagents,untiltheMortgageeagentsAct
tooke
effectwhichsseparatedmo
ortgagebroke
eringfromreaalestatebrokkering.Withthecreation
ofthe
eMortgageagentsAct,reaalestatebrokkersweredeeemedmortgaageagents.H
Howeverthe
newlegislationthaatwasenacte
edinJuly2008removedthhatprovision..

Thefo
ocusofthele
egislationenactedin2008istoensuretthattheOntaarioconsumerisprotected
d
andp
providedwith necessarydisclosuretom
makeaninform
meddecision
nregardingth
hepotential
transaaction.TheFFinancialServicesCommisssionofOntariio(FSCO)enfforcestheleggislationand
regulaatesthemorttgagebrokeraageindustryaaswellassevveralothers.

Pa
auseforcllarification
nDisclosure
Th
heactofreve
ealingsometh
hing,ormakin
ngsomethingevident.Sevveraltypesoffdisclosure
arrerequiredun
ndertheMBLLAAandRegu
ulations.

100

Chapter5:R
RegulationanddLegislation

mportantforamortgageaagenttounde
erstandtheleegislationandditsimpact,eespecially
Itisim
giventhatlicensed
dbrokerscanbeinthepossitionofman aginglicensedmortgageaagentsfor
whom
mbrokershavvesomerespo
onsibility.Furthermorealicensedbrokkercanalsoh
holdthe
positionofprincipalbroker,the
eChiefComplianceOfficerrofabrokeraageinotherrwords,the
perso
onwithinthebrokeragewh
hoisresponsibletoFSCOfforcompliancce.Amortgaageagent
musthavesufficientunderstandingofthele
egislationtoeensurethatheeorsheismaaking
inform
meddecisionssonhisorhe
eractionsasw
wellasthose ofthebrokerrageandtoquicklyand
successfullylocate
elegislativein
nformationon
nadaytodayybasisasreq
quired.Failurretoknowan
nd
apply therelevantlegislationcaanputthebro
okerageandtthebrokerslicenseinjeopardy.

TheFinancialServiicesCommisssionofOntario(FSCO)isreesponsibleforenforcingth
hecurrent
legislaationandregulatingthem
mortgagebrokkerageindusttry,amongotthers.

Pa
auseforcla
arification
nRegulatte
To
o govern or diirect accordin
ng to rule, to make
m
regulatiions for or conncerning an industry.

musthaveacclearunderstaandingofFSCCOsmandateeaswellasth
hemeansby
Mortggageagentsm
which
hFSCOaccom
mplishesitsro
oleasregulato
orofallactiviitiesrelatedttodealingand
dtradingin
mortggagesaswellaslendingintheprovince
eofOntario.

etail,theman
nnerinwhich mortgageaggentsandthemortgage
Thiscchapterwillexxamine,inde
broke
erageindustryyareregulate
edinOntario..

5.1

The Re
egulator: FSCO

TheFinancialServiicesCommisssionofOntario(FSCO)isthheregulatorfforthemortggage
broke
erageindustryyinOntario.FSCOwascre
eatedonJuly1,1998asan
narmslengthagencyof
theM
MinistryofFinance.Integraatingtheope
erationsoftheeformerOntarioInsurancce
Comm
mission,PensionCommissiionofOntario
oandDeposittInstitutionsDivisionofth
heMinistryof
Finance,FSCOcom
mprisesthreekeyparts:

The Commis
ssion
Thepurposeofthe
eCommission
nincludespro
ovidingregulaatoryservicessandmaking
recom
mmendationstotheMinistterofFinance
eonmatters affectingtheeregulatedseectors.

Fina
ancial Se
ervices Trribunal (T
Tribunal)
Thisissanindepend
dent,adjudicaativebodythathearsappeealsofregulaatorydecision
nsbythe
Superrintendent.TTheTribunalh
hasexclusivejurisdictiontooexercisetheepowerscon
nferredunderr
theFiinancialServicesCommissiionofOntario
oAct,1997anndotherActssthatconferpowersonorr
assign
ndutiestotheTribunal.

The Superin tendent and


a
Stafff
TheSuperintenden
ntofFinanciaalServicesisrresponsiblefoorissuingand
drevokingliceenses,aswell
asforrenforcingco
ompliance,allofwhichare
edesignedto protectthep
public.AllFSC
COstaff

Chapter5:R
RegulationanddLegislation

10
01

reporrtdirectlyorindirectlytotheSuperintendent.Thesstaff,whoareecivilservantssappointed
underrthePublicSeervicesAct,performFSCOsdaytodayywork.

hanthemortgagebrokeraageindustry.Followingisasummaryo
of
FSCOisconcernedwithmoreth
1
there
egulatedelem
mentsofFSCO
OsdaytodayyconcernsassofDecembeer31,2015 :
1,1196licensedm
mortgagebro
okerages(1,0
075inFeb,20015and1,1699in2012)
2,6696mortgageeagents(2,6000inFeb2015and2,466i n2012)
10,977mortgaggeagents(9,7703inFebruaary,2015and8,134in2012)
143licensedmoortgageadmiinistrators(1330inFebruarry,2015and995in2012)
327insuranceccompanies(3332inFebruary,2015and350in2012)
7,0059pensionpplans(7,234inFebruary,22015and7,6007in2012)
110creditunionsandcaisseespopulaires (118inFebruuary,2015annd157in2012)
51loanandtrustcompaniess(52inFebruuary,2015annd58in2012))
1,8800cooperattivecorporations(1,788inFebruary,22015and1,6994in2012)
51,324insurancceagents(488,928inFebruuary,2015annd46,222in22012)
5,5511corporateeinsuranceagencies(5,2884inFebruaryy,2015and44,632in2012)),and
1,5510insuranceeadjusters(11,588inFebruuary,2015annd1,657in20012)

MoreinformationmaybefoundbyvisitingFFSCOswebsitteatwww.fsco.gov.on.ca

In200
04,duetothe
eincreaseintthepopularityofmortgag eagentsandthegrowthinthe
mortggageindustryy,TheMinistryofFinanceb
begantheproocessofrevieewingtheMo
ortgageagentts
Act,thelegislation
ninplaceatth
hetime.Thestatedgoals ofthereview
wweretoenssurethatthe
edsafeguardsforthepublicwhilegivinggmortgageagentsfairand
deffective
legislaationprovide
rulesthatencourageindustryggrowthandinnovation.

Thisp
processbegan
nwithaconsu
ultationpape
erentitledIm
mprovingtheMortgageag
gentsActthaat
putfo
orwardideasfornewlegislationandpromotedindu stryinvolvem
mentintheprrocess.The
resulttwas,throughBillC65,th
hattheMortg
gageagentsA
Actwasrepeaaledandreplaacedbythe
Mortg
gageBrokera
ages,lendersa
andAdministtratorsAct,20006(MBLAA).TheMinisteerofFinance
includ
dedprovisionsthatoneormoreperson
nsbeappointtedtoreviewtheoperatio
onofthe
MBLA
AAanditsReg
gulationseveryfiveyears.

Sum
mmary of the Act and
a
Regu
ulations
Them
mortgagebrokkerageindusttryisregulate
edbyoneprinncipalActand
ditscorrespo
onding
Regullations(includ
dingonethataddressesSttandardsofP ractice).Stan
ndardsofPraacticeare
found
dinmanyindustriesanddictatethebussinessrulesbbywhichthatparticularind
dustry
operaates.

InOnttario,legislationispassedwhenaBill(w
whichhasannumber)isinttroducedtotthelegislaturee,
goestthroughseveralphasescalledreadings,andifafteertheThirdreeadingthereareenough
votes,itreceivesw
whatscalledRoyalAssentbytheLieuutenantGoveernor.Atthisstageit
becom
mesanActorrStatute.

http:://fsco.gov.on.ca/en/about/P
Pages/default.aspx

102

Chapter5:RegulationandLegislation

ThefollowingisasummaryoftheActandRegulationsthatarecurrentlyinplaceforthe
mortgagebrokerageindustry.Eachpieceoflegislationhasanameand,inthecaseofthe
Regulations,anumber,bywhichitisreferred.TheapplicablesectionsoftheActand
Regulationswillbedescribedindetailinasubsequentchapterastheyrelatetothebrokerage,
themortgageagent,themortgagebroker,theprincipalbrokerandthemortgageadministrator.

TheMBLAA
TheMortgageBrokerages,lendersandAdministratorsAct,2006(MBLAA)istheprincipal
legislationgoverningthisindustry.ItiscommonlyreferredtosimplyastheMBLAAorthe
Act.

TheRegulations
MortgageBrokerages
408/07MortgageBrokerages:Licensing
188/08MortgageBrokerages:StandardsofPractice

PrincipalBrokers
410/07PrincipalBrokers:Eligibility,PowersandDuties

MortgageagentsandAgents
409/07MortgageagentsandAgents:Licensing
187/08MortgageagentsandAgents:StandardsofPractice

CostofBorrowingandDisclosure
191/08CostOfBorrowingandDisclosuretoborrowers

MortgageAdministrators(note:thisisnotcoveredontheexamasitdoesnotapplyto

mortgageagents)
406/07RegulatedActivities:AdditionalPrescribedActivities
411/07MortgageAdministrators:Licensing
189/08MortgageAdministrators:StandardsofPractice

LicensingExemptions
407/07ExemptionsfromtheRequirementtobeLicensed

ReportingRequirements
193/08ReportingRequirementsforLicensees

General
190/08General

Penalties
192/08AdministrativePenalties

5.2

Activities that are Regulated

TheMBLAAregulatesthefollowingactivities:
dealinginmortgagesinOntario

Chapter5:R
RegulationanddLegislation

10
03

traadinginmortggagesinOntaario
carrryingonbusinessasalen
nderinOntariio,and
carrryingonthebusinessofaadministeringgmortgagesinnOntario
Regulatedactivitie
esaresetoutinMBLAA,se
ections2to66.Thesesectiions,whichreefer
ngandtradinginmortgaages,aswellaslending,whichwere
specifficallytothettermsdealin
includ
dedintheold
dMortgageag
gentsActbuttneverdefineed,arenowcclearlyexplain
ned.Those
dealin
ngortradinginmortgagess,aswellasth
hoselending onrealestatee(unlessexempted)mustt
haveabrokersoragentslicense.

Forth
hepurposeso
ofthelegislation,thedefin
nitionofthettermdealingginmortgageesisdefined
asanyyonewhosolicitsanotherpersonorbu
usinesstobuyy,sellorexchangemortgages,orwho
doessoonhis/herrownbehalfo
oronbehalfo
ofanother(thhatis,whoso
olicitsaperso
onorentity,
suchaasabusinessorcorporatio
on,toborrow
worlendmonneyonthesecurityofrealestate).In
additiion,ifaperso
onorbusinesssassessesab
borrower,whhichwouldinccludeunderw
writinga
mortggageapplication,providesinformationtoalenderoornegotiatesorarrangesaamortgageon
n
behalfofanotherp
personorbussinessisdeem
medtobedeealinginmorttgages.

Regarrdinglendingactivities,the
eMBLAAstattesthatanyonnewholendssmoneyinOn
ntarioonreal
prope
ertyisdeemedtobealend
der.Inthiscaasethepersoonorbusinesssmustbeliceensedasa
mortggagebrokeragge,unlessitissexempt.Tyypicallyabusiinesswouldb
beexemptifiitwaslicensed
underrotherlegislaation,suchasstheBankActtortheTrusttandLoanCo
ompaniesAct,,orifthe
perso
onsorbusine
essslendingaactivitieswere
edonesolelyythrougham
mortgagebrokkerageor
otherregulatedlen
nder.

mmissionofO
OntarioAct,19
997aswellas
SeverralchangesweremadetotheFinanciall ServicesCom
theLiicenceAppeallTribunalActt,1999torefllectthechanggestolegislattion,resultingginthe
MBLA
AA.Onethatisofparticulaarinterestisparagraph5oofsubsection
n35.2oftheSecuritiesAct,
which
hstates:Sub
bjecttothere
egulations,re
egistrationisnnotrequiredtotradeinth
hefollowing
securities:Mortgaggesorothere
encumbrance
esuponrealoorpersonalproperty,otheerthan
erencumbran
ncescontainedinorsecureedbyabond,,debentureo
orsimilar
mortggagesorothe
obligaationorinatrustdeedorotherinstrum
menttosecurrebondsordebenturesorrsimilar
obligaations,ifsuch
hmortgageso
orotherencumbrancesareeofferedforsalebyapersonor
comp
panylicensed,,orexempted
dfromtherequirementtoohavealicence,undertheeMortgage
Brokeerages,lenderrsandAdministratorsAct,2006.

TheM
MBLAAintroducedanewliicensingrequ
uirementfortthoseadminissteringmortggages.This
activittyisdefinedaasbeinganyindividualorbusinessthattreceivesmo
ortgagepaym
mentsonbehaalf
ofano
other.Ifengaagedinthisactivitytheind
dividualorbuusinessmusthaveaMortggage
Admin
nistratorslicense.

5.3

Licensu
ure

Pau
useforcla
arification
Licensuree
Lice
ensurecanbe
edefinedasp
permissiongraantedbyanaagencyofgovvernmenttoaanindividual
ore
entitytoengaageinagivenprofessionoroccupation..

104

Chapter5:R
RegulationanddLegislation

Fou r License
es
Inord
dertoregulate,theMBLAA
Aprovidesforfourtypesooflicensestobeissuedbythe
SuperrintendentofFinancialSerrvices:abrokeragelicensee,amortgagebrokerslicense,a
mortggageagentsllicenseandamortgagead
dministratorsslicense.Eacchisdescribed
dintheAct,
sectio
ons712and
ddiscussedin
nmoredetaillaterinthiscchapter.

ensesareissuuedtoindivid
duals.Corporrations,
Mortggagebrokersandmortgaggeagentslice
partnerships,soleproprietorshipsandpresccribedentitiessthatcarryo
onthebusinesssofdealingin
mortggages,tradingginmortgage
esorlendingmoneyontheesecurityofrealpropertyyarerequired
d
tohavveabrokeraggelicenseoraaMortgageA
Administratorrslicense.

Pa
auseforcllarification
nCorpora
ations,parrtnershipssandsole
prroprietorsh
hips
Acorporationisalegalbusinessentitycrreatedunderfederalorprrovincialstatu
utes.
Apartnershipisatypeofbu
usinessentityyinwhichparrtners(ownerrs)sharewith
heachother
theprofitsorlo
ossesoftheb
businessunde
ertakinginwhhichallhaveiinvested.
Asoleproprietorshipconsisstsofasoleowner,alsocaalledaproprieetor,ofanun
nincorporated
d
usiness.
bu

TheM
MBLAAstatesthat,toenfo
orcecompensationforanyyofitslicenseedactivities,tthepersonorr
businessmustbelicensed.Sim
mplystated,ifapersonarraangesamortgageforanottherpartyand
expecctstobecompensatedbyalender,thattlendermay refusetodosoiftheperssonisnot
appro
opriatelylicen
nsedatthetim
meofthetransactionand thepersonw
wouldnotbeabletosue
thele
enderforpaym
ment.

Res
strictions
TheM
MBLAArestricctstheuseofthetitlesmortgagebrokerage,morrtgagebrokerr,mortgagee
agentt,mortgage
eadministrattorandtheirrFrenchequivvalentstopersonsandenttitieslicensed
d
assucchundertheMBLAA.Thissprohibitionincludesusinngabbreviatio
onssuchasm
mtg.broker,o
or
theirequivalentsin
nanotherlan
nguage.

Exe mptions to Licens


sure
Regullation407/07
7detailstheccircumstancessunderwhichhcertainpeopleorentitiesareexemptt
fromobtainingalicenseundertheMBLAA.Exemptionsffromobtainin
ngalicenseundertheAct
arein
ndicatedinvariouscircumsstancesandfo
orvariousenntitieswhichaarespelledou
utindetailin
theReegulation(sim
mplereferralss,lawyers,an
ndsoon).Folllowingisasu
ummary.

Asimplereferral(d
describedinssections12
2oftheRegullation)isatermusedtodeescribetheacct
ofrefferringapotentialborrowe
ertoapotenttiallender,orrviceversa,iffthereferrerrinformsthe
otherparty,inwritting,thatafe
eewillberece
eivedforthe referral,thenatureoftheerelationship
p
betwe
eenthepartie
es,andaslon
ngastheonlyyotherinform
mationprovid
dedisthenam
me,address,
teleph
honenumberr,faxnumberr,emailaddre
essorwebsiteeaddressofttheindividualbeing
referrred.Inaddition,ifnofeeiispayable,ap
personorenttitydoesnothavetobeliccensed.

Chapter5:R
RegulationanddLegislation

10
05

uldbeareale
estatesalesppersonwhoreefersaclientttoabank
Anexxampleofthisssituationcou
mortggagerep.Intthiscase,ifth
herealestatesalesperson abidesbytheeserules,heorshedoes
nothaavetobelice
ensedundertheMBLAA.
Alawyer(asperse
ections35)isexemptfromprescribeedactivitiesiffheorsheisactingsolely
onbe
ehalfofhisorherclientandisnotholdiinghimorhe rselfouttob
betrading,dealingor
admin
nisteringmorrtgagestothe
egeneralpublic.

Anexxampleofthissscenariocou
uldbeadivorrcelawyerwhhohasaclientwhorequireesamortgage
topayyhisspouseaasettlement.Inthiscaseitwouldbeleegalforthislaawyertoarraangethis
financcingforthatcclientwithouttbeinglicenssedundertheeMBLAA.However,thislaawyercould
notad
dvertise,fore
exampleinanewspaper,tthathebrokeersmortgagess.
Otherrexemptionsfromlicensin
ngincludetru
usteesinbankkruptcy,thoseeactingundeeracourt
orderr,statutoryco
orporations,aapersonalcorrporationofaabrokeroraggent,motorvvehicle
dealershipfinancin
ngcompaniess,directorsan
ndemployeessofCrownaggenciesoroth
herexempted
d
perso
onsorentitiess.Aspersecttion11ofReg
gulation407//07,consumerreportingaggenciesare
exemptiftheyareonlyprovidin
nginformatio
ononprospecctiveborroweerstoprospectivelenders
andarenototherw
wisedealinginmortgages..
Registteredrealesttatebrokeragges,brokerso
oragentsare exemptwhen
ntheyarearrrangingor
attem
mptingtoarraangeavendorrtakebackm
mortgageforaaclient,aslon
ngastheyareenotholdingg
themsselvesouttothepublicassdealinginmortgages.

Pa
auseforcla
arification
nVendorrtakebackk
Avvendortakeb
back,alsokno
ownasaVTB,iswheretheeselleroftheepropertypro
ovidesallor
someofthefinancingtothe
epurchaserin
nordertoselllthepropertyy.
Apersonorentityregisteredun
ndertheSecu
uritiesActiseexempt,aspeersections12
214,under
certaiincircumstan
nces,aslongaastheyareno
otholdingtheemselvesouttothepubliccastradingin
n
mortggages.Inadd
dition,thoseinvolvedinthesecuritizati onofmortgaagesarealsoeexempt.

Ifape
ersonorentittyonlylendstthroughamo
ortgagebrokeerageorotheerexemptperrsonorentityy,
theyaarenotrequirredtohaveamortgagebrrokeragelicennse(section115onMortgaageLending).

edtohaveaM
MortgageAdministratorslicenseiftheeyare
Apersonorentityisnotrequire
admin
nisteringmorrtgagesonbehalfoftheCrrown,afinanccialinstitution,acollectionagency
registteredundertheCollectionAgenciesActt,oriftheyarreonlyadmin
nisteringmorttgagesthat
constitutemortgaggebackedseccuritiesaspersections16 19,ExempttionsforAdm
ministering
Mortggages.

Gettting and Keeping a Licens


se
Sectio
ons13to22o
oftheActstattesthatanyp
partywishinggtoapplyforalicensemusstcomplete
theap
ppropriateap
pplicationand
dforms,alonggwiththeap plicablefeettotheSuperin
ntendent,
usingtheprocessllaidoutinthe
eapplicableR
Regulation.TThelicensingp
processforamortgage
broke
erageiscontaainedinRegullation408/07
7;thelicensinngprocessforrmortgageaggentsand
agenttsiscontained
dinRegulatio
on409/07andthelicensinngprocessforrMortgageA
Administratorss

106

Chapter5:R
RegulationanddLegislation

ntainedinReg
gulation411//07.Theactualformsuseddtoprocessaanapplication
nforlicensingg
iscon
maycchangefromttimetotime,withcurrentformsbeing availableonFSCOswebsiteorby
contactingtheregulatordirectly.

TheSuperintenden
nthastherighttorefusettoissueorrennewalicensee,suspendaliicenseor
propo
osetoimpose
econditionso
onalicensee,ifitisbelieveedthattheap
pplicantdoessnotmeetthe
requirrementsforlicensing.Inssuchcasesthe
eapplicanthaastherightto
orequestahearingbythee
Tribun
nal,aslongasthatrequesstismadewitthin15daysoofreceivingnoticefromth
he
Superrintendentregardinghisorherlicenseapplication.

Hav
ving a Lic
cense Iss ued by FSCO
F
TheSuperintenden
ntofFSCOise
empoweredtto:
ense
issueorrefusettoissuealice
ndconditionssonalicense,and
imposeoramen
ren
neworrefuse
etorenewallicense

FSC
CO's Pub lic Regis try
Regullation190/08
8createdtherequirementofapublicreegistryforliceensees(brokeeragesand
Admin
nistrators)wh
hichmaintain
nsthefollowinginformatioon:
eachnameinw
whichitislicen
nsedanditslicencenumbber
the
etypeoflicen
ncethatitho
oldsandwhettherthelicen ceisingoodstandingorisssuspended
itsmailingaddrressinOntario
oasitappearrsinthereco rdsmaintaineedbytheSup
perintendent
itstelephonenu
umberasitappearsinthe
erecordsmai ntainedbyth
heSuperinten
ndent
anyconditionstthatapplytothelicence
forrabrokerage
e,thenameoffitsprincipal broker

Fortw
woyearsafte
erabrokeraggeorMortgageAdministrratorceasesttobelicensed,theregisteer
mustcontaintheffollowinginfo
ormationabou
uttheformerrbrokerageo
orMortgageA
Administratorr:
whichitwaslicensedandittsformerlice ncenumber
eachnameinw
etypeoflicen
ncethatitheld
the
the
edateonwhichitceasedtobelicensed
d
wh
hetherthelice
encewassurrenderedorrrevoked

Similaarly, the public register of


o mortgage agents and aagents that iis to be maintained undeer
subse
ection 28 (1) of the Act must
m
contain
n the followinng informatio
on about eacch broker an
nd
agentt:
the
enameinwh
hichheorshe
eislicensedandthelicenc enumber
the
etypeoflicen
ncethatheorsheholds,ittsexpirydateeandwhetheerthelicenceisingood
staandingorissu
uspended
the
enameofthe
ebrokerageo
onwhosebeh
halfheorsheeisauthorized
dtodealortrradein
mo
ortgages
anyconditionstthatapplytothelicence,o
otherthancoonditionsrelaatingtoeducaational
quirements
req

Again, if a brokerr or agent ceases


c
to be licensed, thhe register m
must contain the followin
ng
inform
mationabouttheformerb
brokeroragent:
the
enameinwh
hichheorshe
ewaslicensed
dandhisorh erformerliceencenumberr

Chapter5:R
RegulationanddLegislation

10
07

the
etypeoflicen
ncethatheorsheheld
the
enameofthe
ebrokerageo
onwhosebeh
halfheorsheewasauthorizzedtodealorrtradein
mo
ortgagesimm
mediatelybefo
oreceasingto
obelicensed
the
edateonwhichheorsheceasedtobe
elicensed
wh
hetherthelice
enceexpired,,renewaloftthelicencew asrefused,th
helicencewaassurrendered
orthelicencew
wasrevoked

Thein
nformationre
equiredmustbekeptonth
heregisterunntiltwoyearssaftertheexp
pirydateof
thein
ndividualslice
enceor,ifthe
elicencewassurrendered orrevokedb
beforetheexpirydate,
untilttwoyearsafterthedateonwhichthelicencewoulddhaveexpired
difithadnottbeen
surren
nderedorrevvoked.

Proh
hibited Activities
A
TheM
MBLAA(sectio
ons4350)cclearlylaysou
utwhatarecoonsideredtobeprohibited
dactivities
underrthelegislatio
on.Theseinccludeaprohib
bitionon:
counsellingoraadvisinganyonetogivefalseordeceptiiveinformatio
oninatransaaction
ob
bstructingtheSuperintendentfromperforminghisoorherdutieso
orwithholdin
nganything
rellevanttoaninquiry
pro
ovidingfalseormisleadingginformation
ntotheSuperrintendent
ap
personorbussinesstakingaadverseemplloymentactioonagainstanemployeebeecausethe
em
mployeeproviidedinformattionordocum
mentstotheSSuperintendeent.

Pa
auseforcla
arification
nProhibitedactivitties
Th
heMortgageB
Brokerages,lendersandAdministratorssAct,2006an
ndRegulation
ns,prohibit:
Tradingordealinginmoortgageswithhoutalicencee:AsofJuly11,2008,allmortgage
mustbelicensedwithFSCO
Otocarryon
brokeragess,administrators,brokersaandagentsm
businessinOntario,unle
essanexemp
ptionapplies.
Usinganun
nauthorizedn
name: Youcaanonlyusethhenameinwhichyouarelicensed.

Com
mpliance and Enfo
orcementt
TheM
MBLAAspecifiicallystatesw
whatisrequiredofalicensseeandhowffailuretocom
mplywillbe
enforced.

Sectio
ons2842,forexample,ccreatesthere
equirementthhatlicenseesprovideinforrmationas
requirredunderRegulations.Th
helegislationprovidestheSuperintend
dentoraperssondesignateed
bythe
eSuperintend
denttherightttoenter(withoutusingfforce)andinsspectalicenseeespremisess
(butn
notareasthattaredeemed
dtobedwellin
ngs,unlessthheoccupantcconsents),exaaminemoneyy,
valuables,docume
entsandrecordsofthelice
ensee,requireeemployeesorthoseapp
pearingtobe
emplo
oyeestoansw
werquestionss,producedo
ocumentsorrrecords,inclu
udingdatasto
oragesystemss
andre
emoveanyite
emthatmayberelevantttotheinquiryyorexamination(receiptsforallitems
removvedmustbeprovided).

IftheSuperintende
entoritsdesigneeisrefussedentryorittisbelievedtthattheywillberefused
entry,,anordermaaybeobtainedfromajusticeofthepeaace,whichmaybeenforceedthrough
theusseofforcebyypoliceoffice
ers,ifthatforceisreasona blynecessaryytoexecutettheorder.

108

Chapter5:R
RegulationanddLegislation

ompliancewitthlicensing
UndertheMBLAA,,theSuperinttendenthassseveraltoolsttoenforceco
requirrementsandconditions.TTheSuperinte
endent,ifheorshebelievesthatsomeethingthe
licensseeisdoingco
ontravenesth
heMBLAA,m
mayissueaCoomplianceOrd
dertocorrectttheissue.
Thelicenseehasth
herighttoap
ppealthisdecisiontotheTTribunalwithin15daysofreceivingthe
Superrintendentsp
proposalconttainedintheComplianceO
Order,inwhichcasetheC
Compliance
Orderrwillbeonho
olduntiltheh
hearingoccurrs.If,howeveer,intheopin
nionofthe
Superrintendent,itisinthepublicsinterestttoimmediateelyimplementtheCompliaanceOrder,
theSu
uperintenden
nthastherigh
httodoso.TThelicenseessrightstoreq
questahearin
ngwithin15
dayso
ofbeingnotiffiedoftheCo
omplianceOrd
derstillrema inineffect.

Furthermore,theSSuperintende
enthastherigghttoissueoorderstofreezzeassetsorttrustfundsif
necesssarytoprote
ectthepublic,,andmaymaakeapplicatioontothecourrttoappointareceiverorr
truste
ee.Section36
6.8oftheMB
BLAAallowsfo
ortheindivid ualtopreven
nttheSuperin
ntendentfrom
m
doinggsoifheorsh
heprovidesth
heSuperinten
ndentwitha bondintheaamountandm
manner
requirredbytheSuperintendentt.

Pa
auseforcla
arification
nTrustfu
unds
Tru
ustfundsarethosemonie
esreceivedbyyabrokerageeorAdministrratoronbehaalfofor
paayabletoanottherparty.

TheM
MBLAA(sectio
ons4350)ggivesFSCOtw
wotypesofennforcementto
ools:adminisstrative
penaltiesandcharrgesunderthe
elegislation.

Pa
auseforcla
arification
nAdminisstrativepeenalties
Th
hisisapenaltyyassessedbyytheSuperinttendentforleessseriousco
ontraventionssoforfailures
tocomplywiththeMBLAA.

Regullation192/08
8spellsoutru
ulesandproce
eduresrelateedtoadministtrativepenaltties.This
Regullation(section
ns14)proh
hibitstheSup
perintendentffromimposin
ngpenaltieso
onthose
coverredinsection46oftheMB
BLAA(whichp
prohibitsreprrisalsagainstthosewhoprovide
inform
mationtothe
eSuperintend
dent).
Admin
nistrativepen
naltiesareeitthergeneralorsummarryandareco
overedindettailin
Regullation192/08
8sections16.Thesametimeframesapplytoboth
h. TheSuperintendent
mayimposeadmin
nistrativepen
naltiesforcon
ntraventionsooforfailurestocomplywiiththeMBLAA
minedinaccordancewithttheRegulatioons.IftheSup
perintendenttproposesto
inamountsdeterm
imposseanadminisstrativepenallty,theaffecttedpartymayyrequestaheearingbeforeetheFinanciaal
ServiccesTribunal.Asummaryp
processispro
ovidedforadm
ministrativep
penaltiesimp
posedon
licensseeswhofailttoprovideinfformationtotheSuperinteendentinacccordancewith
hthe
Regullations.Anad
dministrativepenaltymayynotexceed$$10,000inthecaseofaco
ontravention
orfailluretocompllybyamortgageagentoragentor$255,000inthecaaseofacontrraventionor
failure
etocomplyb
byabrokeragge,MortgageAdministratoororanyotheerpersonoreentity,orsuch
h
lowerramountsasmaybepresccribed.

TheM
MBLAAempow
werstheSupe
erintendentttoimposeadm
ministrativep
penaltiestop
promote
comp
pliancewithth
heMBLAAup
ptoamaximu
umof$25,0000forabrokerrageorAdministrator,up

RegulationanddLegislation
Chapter5:R

10
09

0,000forabrrokeroragen
ntandupto$
$25,000forannyoneelse.IfftheSuperinttendent
to$10
propo
osestoimposseanadministrativepenaltythelicenseeehastherighttoappealtthisproposal
tothe
eTribunalwitthin15dayso
ofreceivingitt.Ifthepena ltyisnotpaid
d,itisconsideeredadebtto
o
theCrrownandcan
nbeenforced
dassuch.

Those
eassessedap
penaltymustpaythepenaaltywithinthiirtydaysofbeeingassessed
dthepenalty
oroncceahearingh
hasbeenconducted,orlongerifproviddedforintheepenaltyorordermade
fromthehearing.

Beyon
ndadministraativepenaltie
es,theMBLAA
AallowstheSSuperintendenttochargeindividualsorr
businesseswithan
noffenceund
derthelegislaation.Anyoneewhocontravenesanyofthesections
aslisttedinsection48oftheMB
BLAAisconsid
deredtobegguiltyofanofffence.

eoffencesinccludecontraveninganyoneofthefollow
wing:
These
subsection2.2oor2.3,DealinnginMortgagges
subsection3.2oor3.3,TradinnginMortgagges
subsection4.2,MortgageLeending
subsection5.2,AdministerinngMortgages
secction27,ProhhibitionreDissclosureinAddvertising
secction30.6,InquiriesandExaminations
subsection43.11or43.2,ProhibitionreFaalseorDecepttiveInformattion
subsection44.11or44.2,ProhibitionreObbstruction
subsection45.11or45.2,ProhibitionreFaalseorMislea dingInformaation,and
secction46,ProhhibitionreReeprisals

Individualscharged
dwithanoffe
enceareliabletoafineuppto$100,0000,imprisonmeentforupto
oneyear,orbothw
whilecorporaationsareliab
bletoafineoofupto$200,,000.Itisimp
portantto
notetthatdirectorssandofficersofacorporationthathas committedaanoffenceareealsoliable.
Sectio
on48.2ofthe
eMBLAAalso
odictatesthattanycontravventionsofap
pplicableStan
ndardsof
PractiiceareanoffenceundertheMBLAAan
ndliabletothhefinesaspreeviouslydiscu
ussed.

Hav
ving a Lic
cense Sus
spended or Revokked by F SCO
TheSuperintenden
ntisempowe
eredto:
ndconditionssonalicense
imposeoramen
neworrefuse
etorenewallicense
ren
susspendorrevo
okealicense
alloworrefusetoallowthesurrenderofalicense,andd
imposeconditio
onsonthesurrenderofallicense

AspertheAct,secctions1322
2,theSuperintendenthasttheright,withoutgivingn
notice,to
autom
maticallysusp
pendalicense
eunderseverralcircumstannces.Amortggagebrokeraageslicense
willbe
eautomaticallysuspended
difitfailstoh
haveatleast onelicensedmortgageaggent.A
mortggagebrokerssandmortgaggeagentslice
ensewillbeaautomaticallyysuspendediffthe
broke
erageslicense
eislostorsuspended,oriifthatbrokerragenolongeerauthorizestthebrokerorr
agentttodealinmo
ortgagesonitsbehalf,whichineffecti swhentheb
brokerageterm
minatesthe
broke
ersoragentssemployment.Inotherw
words,onlywhhenemployedbyabrokerrageisa
mortggageagentorrbrokerlicensed.

110

RegulationanddLegislation
Chapter5:R

ofthesesuspe
ensionswillbeautomaticaallyrevokediffthereasonfforthesuspen
nsionis
Anyo
rectifiied.Forexam
mple,ifthebrrokerslicenseissuspendeedduetothebrokeragessuspension,
thebrrokerslicensewillbereinstatedassoo
onasthebrokkerageslicen
nseisnolongersuspended
d.
Ifthebrokerorage
entisterminaated,assoonasheorshe isemployedbyanotherb
brokeragehis
orherrlicensewillbereinstated
d.

TheSuperintenden
ntmustfirstggivenoticeoffhisorherprroposalandgivetheappliccantor
licensseeanopporttunitytorequ
uestahearinggonthepropposalbeforetheFinancialSServices
Tribun
nal.Ifitisintthepublicinteresttoactim
mmediately,ttheSuperinteendentmayssuspenda
licenssebeforeahe
earingcanbeheldbeforettheTribunal.

Ifanaapplicantorliicenseefailsttopayafeeo
oradministrattivepenaltyu
undertheMB
BLAAorifan
appliccantdoesnottgivetheSup
perintendentinformationoordocumentssrequiredun
nderthe
MBLA
AA,forexamp
ple,theSuperrintendentmaayrevokeorrefusetoissu
ueorrenewaalicense
witho
outmakingap
proposalfirsttorgivingthe
elicenseeoraapplicantano
opportunityttorequesta
hearin
ng.

TheSuperintenden
ntmayalsosu
uspendorrevvokealicenseeduetounpaaidfeesorad
dministrative
penalties,thefailu
uretoprovide
etheSuperinttendentwith informationordocumenttsrequiredto
o
besubmitted,orfo
orotherreaso
onswhichmaaybeprescribbedinthefutture.

Sectio
on4.1ofRegu
ulation408/0
07,entitledSu
urrenderofLiicense,detaillsthecriteriawhichthe
Superrintendentmustusetodetterminewhettherabrokerrageisalloweedtosurrenderitslicense..

There
emainderoftthischapterw
willprovideadetailedexp lanationofeaachofthefou
urlicenses,
alongwiththerequirementsforobtainingandkeepingeaachone.

5.4

The Mo
ortgage Brokerage
B
e License
e

TheM
MBLAAhascre
eatedalicenssenotpreviouslyseeninO
Ontario.PriortotheMBLA
AAalicensed
d
mortggageagentwouldbeemplloyedbyacompany,oftennreferredtoasabrokeragge,andinso
doinggthecompanyywouldbealllowedtodeaalortradein mortgages.

UndertheMBLAAthecorporation,partnershiporsoleprroprietorshipmustobtainitsown
broke
eragelicense. Thislicenseallowstheliccenseetodeaalortradeinmortgages,aaswellascarrry
onbu
usinessasale
ender.Thisliccenseissubje
ecttomeetinggcertaineligibilityrequireementsand
othertermsandco
onditionsasp
prescribedbyyRegulation4408/07and1888/08,Mortg
gage
Brokeerages:StandardsofPractiice.

Lice
ensing Re
equireme
ents (Sec tions 1 3, Regu
ulation 40
08/07)
Abrokeragelicenssemaybeissu
uedtoacorporation,partnnershiporso
oleproprietorrshipifit
meetssallofthefollowingrequirements:
Inthecaseofacorporation,itwasincorp
poratedinanyyjurisdictionofCanada,
Inthecaseofapartnership,itwasforme
edunderthellawinanyjurrisdictionofC
Canada,
Inthecaseofasolepropriettorship,thep
proprietorisaaresidentofC
Canada.
Inallcases,ithaasamailingaaddressthatisnotapostoofficeboxand
dthatissuitaabletopermitt
serrvicebyregisteredmail.

Chapter5:R
RegulationanddLegislation

11
11

Inallcases,ithaasErrorsandOmissionsin
nsurancewithhatleast$1m
millionofcoverageper
year,andaminimumof$500,000ofcove
erageperocccurrence.Itm
mustalsoincludea
pro
ovisionforlossresultingfrromfraudulentacts.

Pa
auseforcla
arification
nErrorsa
and omissiionsinsura
ance(E&O
O)
ErrrorsandOmissionsinsurance,oftenrefferredtoasEE&O,isinsurrancethatpro
ovides
coverageforerrrorsoromisssionsmadebyyabrokeragee,broker,ageentoradminisstrator.This
inssurancemusttcontainaprovisionforfraaud.

Inthecaseofacorporationorpartnershiip,theapplicaationincludestheparticullarsofthe
priincipalbrokerr,whomustm
meeteligibilittyrequiremenntsasfoundinsection7.7
7ofthe
MB
BLAA.Inthecaseofasole
eproprietorshipthesolepproprietorisaalsotheprinccipalbroker.

Pa
auseforcla
arification
nPrincipa
albroker
Th
hepositionofPrincipalBro
okerisalicenssedmortgageebrokerwhoisresponsibllefor
en
nsuringthatth
hebrokerage,andallofitssbrokersanddagents,com
mplywiththerequirementss
oftheMBLAA,includingenssuringthatan
nycontraventtionsoftheActaredealtw
with,andthatt
the
ebrokerageh
hastheprope
erpoliciesand
dproceduressinplacetoeensurethatallbrokersand
d
agentsareadeq
quatelysuperrvisedandthaattheycompplywitheveryyrequirementtunderthe
MB
BLAA.

Suittability fo
or Licensiing (Secttions 1 3, Regullation 40 8/07)
Acorp
poration,partnershiporso
oleproprietorshipmustbeefoundsuitableforlicenssingasa
mortggagebrokeragge.Thisisde
eterminedbyafourpartteestwhichaim
mstoestablish
hlackof
suitab
bility:
Whhetherhavinggregardtoitssfinancialposition,thecoorporation,paartnershiporsole
pro
oprietorshipccannotreasonablybeexpe
ectedtobefiinanciallyresponsibleinth
heconductoff
itsbusiness.
Whhetherthepaastconduct,inthecaseofacorporatio n,ofanydireectororofficeerofthe
corporationaffo
ordsreasonablegroundsfforbeliefthattthebusinesssofthecorpo
orationwill
no
otbecarriedo
oninaccordancewiththelawandwithhintegrityand
dhonesty.In
nthecaseofaa
partnershipthissappliestoth
heconductoffapartner;innthecaseoftthesoleprop
prietorship,
thiisappliestottheproprietorhim/herselff.
Whhetherthecoorporation,paartnershiporsolepropriettorshipiscarrryingonactivvitiesthat
contraveneorw
willcontraven
netheActortheRegulatioonsifalicens eisgranted.
Whhetherinthecaseofacorrporationadiirectororoffiicerofthecorporationhassmadeafalsee
staatementorhaasprovidedfaalseinformattiontotheSu perintendenttwithrespecttothe
applicationforaalicense.Intthecaseofapartnershiptthiswouldap
pplytoapartn
ner.Inthe
casseofasoleproprietorship
p,thiswouldaapplytothepproprietorhim
m/herself.

Alicensedbrokeraagemayobtaiinalicensein
neitheritsleggalnameorb
bothitslegaln
nameanda
name
eregisteredundertheBusiinessNamesA
ActasperSe ction4ofReggulation408//07.Whetheer
thenaameislegalo
ornot,theSuperintendenttcanrefuset oissuealicen
nseinthatnaameifthe
Superrintendentreasonablybeliievesthatthe
enamemighttconfusethepublicwithaanother
licenssedbrokerage
eorthatthen
namemightb
beobjectionaableonanypublicgroundss.Ifa

112

Chapter5:R
RegulationanddLegislation

eragecarrieso
onanyotherbusiness,asperRegulatioon188/08Secctions5660
0,itmust
broke
ensurrethatitdoessntallowthe
eotherbusine
esstojeoparrdizeitsinteggrity,indepen
ndenceor
comp
petencewhen
ncarryingontthebusinessofdealingor tradinginmo
ortgagesorcarryingon
businessasamorttgagelender.

Stan
ndards off Practice
e (Regula
ation 188
8/08)
Stand
dardsofPracticecontainth
hebusinessru
ulesthatabrrokeragemusstfollow,inadditionto
otherrulesasseto
outbytheMB
BLAAanditsR
Regulations.Contraventio
onoftheStan
ndardsof
PractiiceassetoutinRegulation
n188/08isan
noffenceunddertheMBLA
AAssection4
48.2andis
subjecttothefinesoutlinedinsection49offtheMBLAA. Thefollowin
ngwillprovideeadetailed
explanationofthedifferentsecctionsfoundintheStanda rdsofPracticceformortgage
broke
erages.

Pub
blic Relat ions
Sectio
ons59ofReegulation188
8/08definepublicrelationnsmaterialsaasanyadvertisementbyth
he
broke
erage in connection with
h its business as a brok erage that is published, circulated o
or
broad
dcast by any means, or any
a material that a brokeerage makes available to
o the public in
conne
ectionwithitssbusinessasabrokerage.

Abrokeragemustuseitsauthorizednamew
whenconducttinganybusin
ness,anditm
must
prominentlyinclud
deitsauthorizzednameand
dlicensenum
mberinallofitspublicrelaations
materrials.Ifthebrokerageisafranchise,itmuststatethhatitisindependentlyown
nedand
operaated.

Ifanindividualsnaameisincludedinthematterial,hisorhhertitle(i.e., brokerorageent)mustbe
includ
ded.Forexam
mple,ifBobSSmithisamorrtgageagent andhisnameeisusedinan
n
adverrtisement,hemustinclude
ethewords,mortgagebrrokerorbro
okerbesidehisname,
resulttinginBobSmith,MortgaageBroker,o
orBobSmithh,Broker.A
Abbreviationsmayalsobe
used.

Abrokeragemustalsoprovidethelicensein
nformation,iffrequested,ttoapersonw
whorequests
it.Thisdoesnotm
meanthatabrokerageisre
equiredtoproovidealistoffallofitsbrokersor
agentts,justthosespecificallyre
equestedbyaaperson.

Com
mplaints Process
P
Thebrokeragemusthaveacom
mplaintsprocesssothatif anindividuallmakesacom
mplainttothee
broke
erageinwritin
ng,thebrokeragemustresspondinwritting,alsoindicatingthatifthe
comp
plainantbelievvesthattheb
brokeragehasscontraveneddtheMBLAA
Aheorshemaayreferthe
comp
plainttotheSuperintenden
nt.Allcomplaintsmustbeedocumentedandhandleedbyoneor
moreauthorizedin
ndividuals.

Cus
stomer Re
elations
Sectio
ons1017offRegulation1
188/08requirethebrokerragetoverifytheidentityofthe
borro
owers,lenderssandInvesto
orsinvolvedin
namortgage transaction.Ifitisunableetodosoit
mustadvisetheottherpartiesin
nthetransacttion.Abrokeeragecannotcompleteanyytransaction

Chapter5:R
RegulationanddLegislation

11
13

nformationprovidedtothhebrokerage issuspicious,,the
thatittfeelsisunlawful.Ifthein
broke
eragemustinformanyand
dalllendersin
nvolvedintheetransaction
nassoonasp
possible.

Ifabrrokeragearraangesamortggagethroughaninvestoroorlenderofanytype,itcannotmakea
guaraanteetothatinvestororle
enderinrespe
ecttothemoortgage.Foreexample,abrrokerage
canno
otguaranteeaspecificrate
eofreturnto
oaninvestor,norcanitgu
uaranteethatallpaymentss
willbe
emadebytheborrower.

Retu
urn of Do
ocuments
s (Section
n 17, Reg
gulation 188/08)
Abrokerageisrequiredtoreturrnanydeed,instrumentoorotherdocumenttoitsow
wner
regard
dlessofwhettherthebroke
eragehasbee
enaskedtor eturnthesed
documents,andmustdosso
promptlyandwith
houtchargew
whenrequeste
edinwriting.

Abrokeragemayo
onlyuseinforrmationgathe
eredfortheppurposesforw
whichitwaso
obtained.An
ny
otheruserequiresthewrittencconsentofthepersonoreentitywhoistthesubjecto
ofthe
inform
mation.

Info rmation about


a
the
e Brokera
age
Sectio
ons18and19
9ofRegulatio
on188/08req
quirethebrokkeragetodiscclosespecificinformation
topro
ospectiveborrrowers.Certtaininformatiionmustbeddisclosedtoaallprospectiveeborrowers
whileotherinform
mationneedo
onlybedisclossedwhenreqquested.

Inallcases,abrokeragemustd
disclose,inwrriting,ifitisa ctingsolelyo
onbehalfofeeitherthe
lende
erortheborro
ower,orifitiisactingonbehalfofbothhwithoutshow
wingpreferencetoeither
(exceptincaseswherethebrokkerageisthelender).The brokeragem
mustalsodiscllose,in
writin
ng,thenumbe
eroflendersonwhosebehalfthebrokkerageactedaasarepresen
ntativeduringg
theprreviousfiscalyearandifittwasalenderr.

When
nrequestedb
bytheborrow
wer,thebroke
eragemustdiisclose,inwriiting,whenth
hebrokerage
wasthelenderformorethanfiftypercento
ofthetotalnuumberofmorrtgages(including
renew
wals),andifandwhenthebrokerageussedonlyone lender,andtthatlendersname,for
morethanfiftypercentofthettotalnumberofmortgagess(includingreenewals)duringthe
previo
ousfiscalyear.

Fee s and Pa
ayments
TheM
MBLAAandReegulationsspeaktoseveraaltopicsrelat edtofeesan
ndotherpaym
ments:
representationofffeesandcostts,disclosureoffeesinwriitingtoaborrrower,disclosureofthe
ofborrowing(seeChapter11:Consume
erProtection::Disclosure)aandacceptinggpayments.
costo
Eachiisdescribedb
below.

Sectio
ons2023offRegulation1
188/08speciffythatabrokkerageisnotaallowedtomakeanyform
m
ofrep
presentationtthatanyfees orcostspayaabletothebrrokerageinco
onnectionwithcarryingon
thebu
usinessofdeaalingortradin
nginmortgaggesoracting asamortgaggelenderaresetor
appro
ovedbyanyggovernmentauthority,unle
esstheyarei nrespecttod
disbursementstoregister
ordep
positinstrum
mentsunderth
heLandTitlessActortheR
RegistryAct.

114

Chapter5:R
RegulationanddLegislation

writing,toabo
orroweriftheebrokerage,brokerorageentmayor
Abrokeragemustdisclose,inw
willre
eceiveafeeo
orotherremu
unerationinconnectionwiiththemortggageoramorrtgage
renew
wal,fromwho
omitmayorwillbereceivvedandthebbasisforcalcuulatingtheam
mount.The
borro
owermustackknowledgeinwritingthatheorshehassreceivedthiisdisclosure.Thesame
disclo
osureappliesifthebrokeraagemayorw
willpayanyfe eorotherremunerationttoanother
perso
onorentityinconnectionw
withthemorttgageormorrtgagerenewaal.

Pa
auseforcla
arification
nRemuneeration
Re
emunerationiisthetotalco
ompensationthatisreceivvedinexchangefortheserrvicethathass
be
eenprovided.Mortgageaggentsandage
entstypicallyyreceiveremu
unerationinttheformof
mo
oney,mostofftenascomm
mission,butcaanalsoreceivvenoncashrremuneration
nsuchas
rew
wardpoints,trips,etc.

ulation188/08
8,abrokeraggecannotacceeptanadvancepayment
AsperSections37 39ofRegu
fromtheborrowerrontransactionswhereth
heprincipala mountoftheemortgageis$400,000(ass
ofJan
brokeragecannotaccept
nuary1,2016;itwasprevio
ously$300,00
00)orless.Innaddition,ab
fundssfromalende
erorinvestorrunlessinreggardstoaspeecificmortgagge.Inotherw
words,a
broke
eragecannotacceptfundsfromalende
erorinvestor tobeheldon
ndepositorintrustunlesss
those
efundsareforaspecificm
mortgage.

Iffund
dsarereceive
edandareco
onsidereddee
emedtrustfuunds(fundsth
hatarepayab
bletoanotherr
party))thebrokeragemustprovvideawritten
nstatementtoothepersonorentityprovidingthe
fundss.

Dutiies in Pa rticular Transacti


T
ons
Sectio
ons2432offRegulation1
188/08requirethebrokerragetoensurethatanym
mortgageor
investtmentinamo
ortgagethatiitpresentsfo
ortheconsideerationofaborrower,lend
deror
investtor,asthecassemaybe,issuitableforttheborrowerr,lenderorinvestorhavinggregardtoth
he
needssandcircumsstancesofthe
eborrower,le
enderorinveestor.

Inadd
dition,thebro
okeragemusttinformtheb
borrower,lennderorinvesttor,inwritingg,astothe
mate
erialrisksofe
eachmortgaggeorinvestme
entinamorttgagethattheebrokeragep
presentsfor
theco
onsiderationoftheborrow
wer,lenderorrinvestor,a ndobtainwrittenacknow
wledgmentthaat
thisdisclosurehasbeenmade.Neitherofth
heserequirem
mentsappliesstolenderso
orinvestors
thataaremembersofadesignattedclassofle
endersandinvvestors,asdeefinedintheInterpretation
sectio
onofthisRegulation.

Disc
closure
TheM
MBLAAisexplicitaboutreq
quirementsre
elatedtodiscclosure.Furth
hertothoseaalready
mentionedareoth
herdisclosure
eobligationsssuchasdiscloosureoftheb
brokeragesreelationships,
poten
ntialconflictsofinterest,m
mortgagesprreviouslyindeefaultandofthecostofborrowing,thee
latterdisclosurebe
eingveryexplicit.Disclosu
urerequirem entsarediscu
ussedindetaailinalater
chaptter.

Chapter5:R
RegulationanddLegislation

11
15

Poli cies and Procedu


ures
Sectio
ons40and41
1ofRegulatio
on188/08dettailthepolicieesandproced
duresthatab
brokerage
musthaveinplace
e.Thesepolicciesandproce
eduresmust addresstheffollowing:
edescriptionoftheroleoffthebrokerageinrelationntoborrowerrsandlendersandits
the
dissclosuretobo
orrowersandlendersasre
equiredbythiisRegulation
the
everificationoftheidentittyofborrowe
ers,lendersaandinvestorsinthecircum
mstances
req
quiredbythissRegulation
the
edeterminationofthesuitabilityofam
mortgageori nvestmentin
namortgagefora
bo
orrower,lende
erorinvestorr,asthecasemaybe
the
eidentificatio
onofthematterialrisksofamortgageoorinvestmenttinamortgaggefora
bo
orrower,lende
erorinvestorr,asthecasemaybe,and theirdisclosu
uretotheborrower,lendeer
orinvestor,astthecasemaybe,asrequiredbythisRe gulation
eidentificatio
onofpotentiaalconflictsoffinterestbetw
weenthebro
okerageoranyybrokeror
the
agentauthorize
edtodealorttradeinmorttgagesonitsbbehalfandaborrower,len
nderor
invvestorwhoisrepresentedbythebroke
erage,andtheeirdisclosureetotheborrower,lendero
or
invvestor,asthecasemaybe
e,asrequiredbythisRegullation
the
eprovisionoffincentiveso
otherthanmo
oneyfordealiingortradingginmortgageestoits
bro
okersandage
entsbyotherrpersonsandentities,ifthhebrokeragepermitsanyofitsbrokerss
oragentstorecceivesuchinccentives
eprovisionoffincentiveso
otherthanmo
oneyfordealiingortradingginmortgageestobrokers
the
andagentswho
oareauthorizzedbyanothe
erbrokerage todealortraadeinmortgaagesonthe
oth
herbrokerage
esbehalf,iftthebrokerage
eprovidesinccentivestoan
nybrokersorragentsofthe
oth
herbrokerage
e

Rec
cord Keep
ping
Abrokeragemustretainallreco
ordsasfollow
ws:
reccordsthatrelatetoamorttgageormorttgagerenewaalagreement,asthecasemaybe,foraat
le
eastsixyearsaftertheexp
piryofthetermofthemorrtgageorreneewalorotherrexpiryofthee
mortgagetran
m
saction
allrecordsthatrelatetoapu
urchase,saleortradeina mortgageforatleastsixyyearsafterth
he
traadecompletio
ondateoroth
herexpiryofthetransacti onO.Reg.1888/08,s.48((2)
forratleastsixyyearsallotherrecordsthattarerequireddbysubsectio
on46(1)ortthatthe
bro
okerageisoth
herwiserequiredtocreate
eormaintain undertheAcct.O.Reg.18
88/08,
s.4
48(3)

Pauseforrclarificatiion Tradeecompletiiondate
Regulation1
188/08define
esthetradeccompletiondaateastheearrlierof:
a)thedateo
onwhichaninvestor,orabrokerageonnbehalfofan
ninvestor,en
ntersintoan
agreementttotradeinthe
emortgage,o
or
b)thedateo
onwhichthetradeinthem
mortgageisccompleted.

ekeptatitsp
principalplace
eofbusiness inOntario,iffany,or,ifthebrokerage
reccordsmustbe
hasnotifiedth
heSuperinten
ndentthatitkkeepsrecordssatotherspeecifiedpremissesinOntario
o,
attthosepremiisesO.Reg.1
188/08,s.48 (4)
Re
ecordsmaybe
ekeptelectro
onicallyinanyylocationasllongastheyccanberetrievvedpromptlyy,
ifrequested.

116

Chapter5:R
RegulationanddLegislation

pawrittenrecordofalldeeemedtrustfu
undsthatitreceivesandaall
Abrokerageisrequiredtokeep
transaactionsrelatin
ngtothefundsasperReg
gulation188/0
/08sections44955.Theseerecordsmusst
berecconciledmon
nthlyandsignedbytheprincipalbrokerrcertifyingth
hattheyareaccurate.If
thereareanyshorrtfallsthebrokeragemustimmediately notifyFSCO.Withinninettydaysofthee
endo
ofthebrokeraagesfiscalyearitmustpre
epareandsubbmitanannu
ualreconciliattiontoFSCO.

Abrokeragemustalso:
maaintainamailingaddressinOntariothaatissuitablettopermitservvicebyregistteredmail
maaintainanem
mailaddress
ensurethatonlythecurrenttversionsofaapprovedform
msareusedb
byitsbrokerssandagents

Rev
verse Morrtgages
Sectio
on29ofRegu
ulation188/08
8requiresbo
orrowersinvoolvedinareveersemortgagetoobtain
indep
pendentlegaladvice.Thissectionalsod
detailsthedeefinitionofareversemorttgageunder
theReegulation.

Com
mpliance Review
Abrokerageisresp
ponsiblefore
ensuringthatallcompleteddmortgageffilesinagiven
ntransaction
arere
eviewedtoen
nsurecompliaancewiththe
eActandReg ulations.

5.5

The Mo
ortgage Agent
A
License

Regullation409/07
7dealswithw
whoissuitable
etobealicennsedmortgaggeagent(asw
wellasbrokerr)
andth
herequireme
entsforlicenssing.Licensessareissuedw
whenapproveed,andareth
henrenewed
everyytwoyearson
nafixeddate
e.Forexamplle,March31,2012andeachtwoyearp
period
thereafter.

Licenssesforagentssarerenewed
daslongastheagentsati sfiesalloftheoriginalliceensing
requirrementsandiftheymeetanycontinuin
ngeducation requirementtsthatmaybeeinstitutedb
by
FSCOfromtimeto
otime.

Tobecomealicenssedmortgage
eagentanind
dividualmustt:
beatleast18ye
earsold
bearesidentoffCanada
haveamailingaaddressinOn
ntariothatisn
notapostoffficeboxandtthatissuitablletopermit
serrvicesbyregisteredmail
beauthorizedb
byabrokeragetodealortradeinmortggagesonitsb
behalf
danapproved
deducationpprogramform
mortgageagentswithin
havesuccessfulllycompleted
woyearsbeforreheorsheaappliesforthe
elicense
tw

Apersonisdeeme
edtohaveme
ettheeducatiionandexpe riencerequirrementsifthee
Superrintendentissatisfiedthatttheindividuaalhasacombbinationofed
ducationandexperience
equivalenttotherrequirementss.Theindividualmayalso beexempted
dfromtherequired
educaationandexp
periencerequirementsifhe
eorshewaslicensedasamortgageaggentatany
timed
duringthe24
4monthsbefo
oreapplyingfforthelicensee.

RegulationanddLegislation
Chapter5:R

11
17

eemedunsuittableforalicense(aswillaabroker)if:
Anaggentwillbede
the
eindividualspastconducttaffordsreassonablegrounndsforbeliefthatheorsh
hewillnotdeal
ortradeinmorttgagesinacco
ordancewith
hthelawand withintegrityyandhonesty
eindividualisscarryingonactivitiesthattcontravene orwillcontraavenetheMB
BLAAorits
the
Reegulations
the
eindividualh
hasmadeafalsestatementinhisorherrapplicationfforalicense

Individualswhoareremunerate
edfordealingginmortgageesortradingiinmortgagesinOntario,aas
emplo
oyeesorothe
erwise,arere
equiredtohavveeitheram ortgagebrokkersormortggageagents
licensse.

Them
mortgageagen
ntlicenseallo
owsthelicensseetodealorrtrademortggagesonbehaalfofone
licenssedmortgagebrokeragein
nOntario,un
nderthesupeervisionofam
mortgagebro
oker(section
n
9,sub
bsection5).TTheMBLAAdo
oesnotdefinewhatthisteermmeansin
nregardstotthenumbero
of
agenttsallowedtobesupervised
dbyabrokerr.However,FFSCOsmortggageagentQu
ualifying
Stand
dards(MBQS),adocumenttthatdetailsttheknowledggethatamorrtgageagentmusthaveto
o
obtain
nalicense,in
ncludessuchiitemsasapplicationovers ightaswellaasotheritemssrelatedto
them
managemento
ofagents.Inaddition,inittswebinar,FSSCOclearlysttatedthattheedesired
outco
omeofsupervvisionistheh
highstandardsofethicalcoonductandbusinesspractticesand
includ
deshiringthe
erightpeople,establishinggeffectivepo liciesandpro
ocedures,traiiningbrokers
andagentsandmo
onitoringbrokersandagen
nts.Furtherm
more,theMB
BLAAdoesnottdeemreal
estate
ebrokerstob
belicensed.

Withregardstobo
orrowerdisclo
osure,themo
ortgagebrokeerageisrespo
onsibleforalldisclosure
obligaationsasperttheActandR
Regulations.TThemortgageeagentisressponsibleforfollowing
broke
erageprocedu
uresinthisre
egard.

Stan
ndards off Practice
e
Them
mortgageagen
ntisresponsiibleformeetiingtheStanddardsofPractticeoutlinedinRegulation
187/0
08.TheseStaandardsofPraacticeapplye
equallytomoortgageagenttsandarelistedbelow.

Firstaandforemostt,neitheraliccensedbrokerrnoralicenseedagentmayydoanythinggthat
jeopardizesthebro
okerageslice
ense.Section
ns4and5ofR
Regulation1887/08restrictthowabrokeer
orage
entmaybepaaid.Abrokerroragentmu
ustbepaiddirrectlybythebrokeragefo
oranyactivityy
relate
edtodealingortradinginmortgages.A
Anexception appliestono
onmonetaryincentives,
which
hmaybepaid
ddirectlytoth
hebrokeroragent.

Regarrdingadvertissingandpublicrelationsm
materials,abrrokeroragentisnotallow
wedtouseanyy
othernameotherthanhisorhe
erlicenseenaameandmusstincludehisorherbrokerragesname
andlicensenumbe
ers,prominen
ntlydisplayed
d,andiftheb rokerageisafranchise,th
hematerials
mustclearlyindicaatethatthebrokerageisin
ndependentlyyownedandoperated.A
Abrokeror
agenttmustalsosu
upplythisinfo
ormationtoanyonewhoreequestsit.

Materialscannotccontainfalse,,misleadingo
ordeceptiveiinformationaandonlythettitle
MorttgageBroker,,Broker,MortgageAggentorAge nt(oranabbreviation)m
maybeused.

hatabrokero
oragentmusttmaintainam
mailingaddreesssuitablefo
or
Finallyy,theRegulationstatesth
registteredmail,an
ndmustmaintainanemailaddress.

118

Chapter5:RegulationandLegislation

5.6

The Mortgage Broker License

Regulation409/07addresseswhoissuitabletobealicensedmortgageagentandthe
requirementsforlicensing.Aswiththemortgageagentlicense,alicensesisissuedwhen
approved,andisthenrenewedeverytwoyearsonafixeddate.Forexample,March31,2012
andeachtwoyearperiodthereafter.
Licensesarerenewedaslongasthebrokersatisfiesalloftheoriginallicensingrequirementsand
meetsanycontinuingeducationrequirementsthatmaybeinstitutedbyFSCOfromtimeto
time.

Justlikeanagent,abrokerwillbedeemedunsuitableforalicenseif:
theindividualspastconductaffordsreasonablegroundsforbeliefthatheorshewillnotdeal
ortradeinmortgagesinaccordancewiththelawandwithintegrityandhonesty
theindividualiscarryingonactivitiesthatcontraveneorwillcontravenetheMBLAAorits
Regulations
theindividualhasmadeafalsestatementinhisorherapplicationforalicense

Tobecomealicensedmortgageagentanindividualmust:
beatleast18yearsold
bearesidentofCanada
haveamailingaddressinOntariothatisnotapostofficeboxandthatissuitabletopermit
servicesbyregisteredmail
beauthorizedbyabrokeragetodealortradeinmortgagesonitsbehalf
havesuccessfullycompletedanapprovededucationprogramformortgageagents
havebeenlicensedasamortgageagentforatleast24ofthe36monthsimmediatelybefore
heorsheappliesforthelicense
havesuccessfullycompletedanapprovededucationprogramformortgageagentsand
passedtheapprovedqualifyingexamwithinthreeyearsbeforeapplyingforthelicense

Apersonisdeemedtohavemettheeducationandexperiencerequirementsifthe
Superintendentissatisfiedthattheindividualhasacombinationofeducationandexperience
equivalenttotherequirements.

Theindividualmayalsobeexemptedfromtherequirededucationandexperiencerequirements
ifheorshewaslicensedasamortgageagentatanytimeduringthe24monthsbeforeapplying
forthelicense.

Thislicenseallowsthelicenseetodealortrademortgagesonbehalfofonlyonelicensed
mortgagebrokerageinOntario.Amortgageagentmustworkforonlyonespecifiedbrokerage,
andthatbrokeragemustbelicensed.

Justliketheagent,amortgageagentisresponsibleforadheringtothebrokeragesprocedures
relatedtocomplianceandforadheringtotheStandardsofPracticealreadydescribedfor
mortgageagents.

Chapter5:RegulationandLegislation

5.7

119

The Principal Broker

Aprincipalbrokerisnotaseparatelylicensedposition,butisalicensedmortgageagentwhois
designatedbythebrokeragetobeitschiefcomplianceofficer.UndertheMBLAA,the
brokerageislicensedanditmusthaveonelicensedmortgageagentdesignatedastheprincipal
broker.ThispersonisresponsibleforactivitiesasoutlinedinRegulation410/07,whichdefines
theroleoftheprincipalbroker,whoiseligibletoholdthispositionandthedutiesofthe
principalbroker.
Tobeeligibletobetheprincipalbrokerforabrokerage,theindividualmustbeauthorizedby
thebrokeragetodealortradeinmortgagesonitsbehalfandmusthavethefollowingstatusin
relationtothebrokerage:
ifthebrokerageisacorporation,heorshemustbeadirectororofficerofthecorporation
ifthebrokerageisapartnership,otherthanalimitedpartnership,heorshemustbea
partner
ifthebrokerageisalimitedpartnership,heorshemustbeageneralpartneroradirectoror
officerofacorporationthatisalimitedpartner
ifthebrokerageisasoleproprietorship,heorshemustbethesoleproprietor

Thepositionofprincipalbrokerisresponsibleforensuringthatthebrokerage,andallbrokers
andagents,complywiththerequirementsoftheMBLAA,includingensuringthatany
contraventionsoftheActaredealtwith,andthatthebrokeragehastheproperpoliciesand
proceduresinplacetoensurethatallbrokersandagentsareadequatelysupervisedandthat
theycomplywitheveryrequirementundertheMBLAA.

5.8

The Mortgage Administrator License

ThoseinvolvedintheadministrationofmortgagesasdefinedintheMBLAAandRegulation
406/07musthaveaMortgageAdministratorslicense.TheMBLAAitselfisvagueonwhat
constitutesadministeringamortgage;howeverRegulation406/07,section1,subsection1
statesthattheactivitythatconstitutesadministeringmortgagesistakingsteps,onbehalfof
anotherpersonorentity,toenforcepaymentbyaborrowerunderamortgage.

TherequirementsforobtainingaMortgageAdministratorslicensearedefinedinRegulation
411/07,whiletheobligationstomaintainthatlicensearereflectedinRegulation189/08,
MortgageAdministrators:StandardsofPractice.

Corporations,partnershipsandsoleproprietorshipswishingtobelicensedasaMortgage
Administratormustmeetlicensingrequirementsandmustpasstestsofsuitabilityasper
Regulation411/07.MortgageAdministratorshaveexactlythesamelicensingeligibility
requirementsasmortgageagentsandbrokersandmustpassthesametestsofsuitabilitywith
onlyoneadditionalrequirement:thatthecorporation,partnershiporsoleproprietorshiphavea
financialguaranteeinanamountequalto$25,000.Thismaybeunimpairedworkingcapitalor
somethingelseacceptabletoFSCO.

StandardsofPracticeforMortgageAdministratorsarestatedseparatelyintheRegulationsbut
parallelthoseofmortgagebrokerages.Naturally,theStandardsofPracticeofabrokeragerefer

120

Chapter5:RegulationandLegislation

alsotoresponsibilitiesrelatedtomortgageagentsandmortgageagents.Nosuchreferencesare
foundintheRegulationsformortgageadministrators.

5.9

Summary

TheMBLAAanditsRegulationshavesignificantregulatoryoversightofthebrokerageindustry
andrequirebrokerages,brokersandagentstobefullyawareoftheirregulatoryresponsibilities.
Theprincipalbroker,apositionmandatedbylegislation,requiresunprecedentedoversightover
abrokeragesoperations.Thisindividualmustinstitutepoliciesandproceduresthatwillensure
compliancewiththeMBLAAanditsRegulations,aswellastakecorrectivemeasuresas
necessarytomodifynoncompliantpoliciesandprocedures.Toeffectivelyachievethesetasks
requiresanindepthunderstandingoftheregulatoryenvironment,theMBLAAandits
Regulations.

5.10 External Resources

FinancialServicesCommissionofOntario
Theregulatorforthemortgagebrokerageindustry
Website:www.fsco.gov.on.ca

Elaws
DatabaseofOntariosstatutesandregulations
Website:www.elaws.gov.on.ca

Chapter5:RegulationandLegislation

121

5.11 Key Terms and Definitions

AdministrativePenalties
ApenaltyassessedbytheSuperintendentforlessseriouscontraventionsoforfailuresto
complywiththeMBLAA

AuthorizedName
ThenameauthorizedtobeusedbyFSCO.Typicallythisisthenamefoundonalicensees
license

Borrower
Theindividualresponsibleforthereceiptandrepaymentofmortgageproceeds

Complaint
AdisagreementorstatementofdissatisfactionwithabrokerageorAdministrator.Bothmust
havepoliciesandproceduresinplacetodealwithcomplaints.

Compliance
ConformingtotheMBLAAanditsRegulations

Corporation
Alegalbusinessentitycreatedunderfederalorprovincialstatutes

CostofBorrowing
TheMBLAAdefinesthecostofborrowingastheinterestordiscountapplicabletothe
mortgage;anyamountchargedinconnectionwiththemortgagethatispayablebythe
borrowertothebrokerageorlender;anyamountchargedinconnectionwiththemortgagethat
ispayablebytheborrowertoapersonotherthanthebrokerageorlender,wheretheamountis
chargeable,directlyorindirectly,bythepersontothebrokerageorlender,and;anycharge
prescribedasincludedinthecostofborrowing,butdoesnotincludeanychargeprescribedas
excludedfromthecostofborrowing.Itmustbedisclosedaseitherapercentageorindollars
andcentsdependingonthedisclosurerequirementsoftheRegulations.

DeemedTrustFunds(alsoseetrustfunds)
Fundsthataredeemedtobepayabletoanotherparty.Thesefundsmustbekeptinaseparate
trustaccount.

DesignatedClassofLendersandInvestors
Atermusedtodescribespecificlendersandinvestorsthatmaybeexemptfromcertain
requirementsunderRegulation188/08,section2.(1)whichstates,
2.(1)ForthepurposesofthisRegulation,apersonorentityisamemberofadesignated
classoflendersandinvestorsifthepersonorentityisamemberofanyofthefollowing
classes:
1. TheCrowninrightofOntario,CanadaoranyprovinceorterritoryofCanada.
2. Abrokerageactingonitsownbehalf.
3. Afinancialinstitution.
4. Acorporationthatisasubsidiaryofapersonorentitydescribedinparagraph1,2or3.
5. AcorporationthatisanapprovedlenderundertheNationalHousingAct(Canada).
6. Anadministratorortrusteeofaregisteredpensionplanwithinthemeaningof

122

Chapter5:RegulationandLegislation

subsection248(1)oftheIncomeTaxAct(Canada).
ApersonorentitywhoisregisteredasanadviserordealerundertheSecuritiesAct
whenthepersonorentityisactingasaprincipalorasanagentortrusteeforaccounts
thatarefullymanagedbythepersonorentity.
8. Apersonorentitywhoisregisteredundersecuritieslegislationinanotherprovinceor
territoryofCanadawithastatuscomparabletothatdescribedinparagraph7whenthe
personorentityisactingasaprincipalorasanagentortrusteeforaccountsthatare
fullymanagedbythepersonorentity.
9. Apersonorentity,otherthananindividual,whohasnetassetsofatleast$5millionas
reflectedinitsmostrecentlypreparedfinancialstatementsandwhoprovideswritten
confirmationofthistothebrokerage.
10.Anindividualwho,aloneortogetherwithhisorherspouse,hasnetassetsofatleast$5
millionandwhoprovideswrittenconfirmationofthistothebrokerage.
11.Anindividualwho,aloneortogetherwithhisorherspouse,beneficiallyownsfinancial
assets(beingcash,securitieswithinthemeaningoftheSecuritiesAct,thecash
surrendervalueofalifeinsurancecontract,adepositorevidenceofadeposit)that
haveanaggregaterealizablevaluethat,beforetaxesbutnetofanyrelatedliabilities,
exceeds$1millionandwhoprovideswrittenconfirmationofthistothebrokerage.
12.Anindividualwhosenetincomebeforetaxesineachofthetwomostrecentyears
exceeded$200,000orwhosenetincomebeforetaxesineachofthoseyearscombined
withthatofhisorherspouseineachofthoseyearsexceeded$300,000,whohasa
reasonableexpectationofexceedingthesamenetincomeorcombinednetincome,as
thecasemaybe,inthecurrentyearandwhoprovideswrittenconfirmationofthisto
thebrokerage.
13.Apersonorentityinrespectofwhichalloftheownersofinterests,otherthanthe
ownersofvotingsecuritiesrequiredbylawtobeownedbydirectors,arepersonsor
entitiesdescribedinparagraphs1to12.O.Reg.188/08,s.2(1).
7.

Disclosure
Theactofmakingsomethingevident.Thereareseveraldisclosurerequirementsmandatedby
theMBLAAanditsRegulationswithrelationtoamortgagebeingrecommendedtoaborrower,
investororlenderbyabrokerage.

DisclosureForm
Aform,prescribedorotherwise,usedtoprovidedisclosuretoaborrower,lenderorinvestor,as
thecasemaybe,inaccordancewiththeMBLAAanditsRegulations

ErrorsandOmissionsInsurance
Insurancethatprovidescoverageforerrorsoromissionsmadebyabrokerage,broker,agentor
Administrator.Thisinsurancemustcontainaprovisionforfraud.

FinancialGuarantee
ArequirementundertheMBLAAinregardstoMortgageAdministratorsrequiringlicenseesto
haveatleast$25,000inunimpairedworkingcapitalorinanotherformasapprovedbyFSCO.

FinancialServicesTribunal
Anindependent,adjudicativebodythathearsappealsofregulatorydecisionsbythe
Superintendent

Chapter5:RegulationandLegislation

123

FSCO
TheFinancialServicesCommissionofOntario.Thisistheregulatorybodythatoverseesthe
mortgagebrokerageindustryandenforcestheMortgageBrokerages,lendersand
AdministratorsAct,2006(formerlytheMortgageagentsAct),aswellasseveralotherindustries
andActs.

Guarantees
InregardstotheMBLAA,apromisetopay.Guaranteesareprohibitedunderseveral
circumstancesincludingabrokerage,broker,agentorAdministratorguaranteeingpayment
fromaborrowertoaninvestor.

Investor(alsoseelender)
Anindividualorentitylendingmoneyonthesecurityofamortgage

lender(alsoseeInvestor)
Anindividualorentitylendingmoneyonthesecurityofamortgage

Licensure
Permissiongrantedbyanagencyofgovernmenttoanindividualtoengageinagivenprofession
oroccupation

LimitedPartnership
Anassociationoftwoormorepartnersformedtoconductabusinessjointlyandinwhichoneor
moreofthepartnersisliableonlytotheextentoftheamountofmoneytheyhaveinvested

MBLAA
TheabbreviationofTheMortgageBrokerages,lendersandAdministratorsAct,2006,the
legislationregulatingtheactivitiesofmortgagebrokerages,lendersandAdministrators

MortgageAdministrator
Anindividualorentitythatenforcespaymentsbyborrowersonbehalfoflendersorinvestors.
MortgageAdministratorsmustbelicensed.

MortgageAgent
IndividualswhoareremuneratedfordealinginmortgagesortradinginmortgagesinOntario,as
employeesorotherwise.MortgageagentsarerestrictedintheirabilitiesbytheMBLAAandits
RegulationsandmustbesupervisedbyalicensedMortgageagent.Mortgageagentsmustbe
licensed.

MortgageBroker
IndividualswhoareremuneratedfordealinginmortgagesortradinginmortgagesinOntario,as
employeesorotherwise.Amortgagebrokermayholdthepositionofprincipalbrokerandmay
superviselicensedmortgageagents.Mortgagebrokersmustbelicensed.

MortgageBrokerage
Corporations,partnerships,soleproprietorshipsandprescribedentitiesthatcarryonthe
businessofdealinginmortgages,tradinginmortgagesorlendingmoneyonthesecurityofreal
property

124

Chapter5:RegulationandLegislation

Partnership
Atypeofbusinessentityinwhichpartners(owners)sharewitheachothertheprofitsorlosses
ofthebusinessundertakinginwhichallhaveinvested

PoliciesandProcedures
Apolicyisaplanorcourseofaction,whileaprocedureisastepbystepprocessonhowto
performacertaintask.UndertheMBLAA,brokeragesandAdministratorsmusthaveasetof
documentsthatdescribeanorganization'spoliciesforoperationandregulatorycompliance,and
theproceduresnecessarytofulfillthepolicies

PrincipalBroker
Atitleheldbythelicensedmortgageagentresponsibleforensuringthatthebrokerage,andall
brokersandagentscomplywiththerequirementsoftheMBLAA,includingensuringthatany
contraventionsoftheActaredealtwith,andthatthebrokeragehastheproperpoliciesand
proceduresinplacetoensurethatallbrokersandagentsareadequatelysupervisedandthat
theycomplywitheveryrequirementundertheMBLAA.Theremaybeonlyoneprincipalbroker
perbrokeragewhomustbeidentifiedtoFSCO.

Proprietor
Asoleownerofanunincorporatedbusiness,alsocalledasoleproprietor

PublicRegisterofLicensees
AregistryrequiredtobemaintainedbyFSCOthatprovidesaccesstolicenseeinformation

PublicRelations
AsdefinedinRegulation188/08,anyadvertisementbythebrokerageinconnectionwithits
businessasabrokeragethatispublished,circulatedorbroadcastbyanymeans,oranymaterial
thatabrokeragemakesavailabletothepublicinconnectionwithitsbusinessasabrokerage.

Regulatedactivities
AsdefinedbytheMBLAA,anyactivitiesthatrequirealicensewhicharecurrentlylistedas
dealingortradinginmortgagesandmortgagelending

SimpleReferral
Atermusedtodescribetheactofreferringapotentialborrowertoapotentiallender,orvice
versa,ifthereferrerinformstheotherparty,inwriting,thatafeewillbereceivedforthe
referral,thenatureoftherelationshipbetweentheparties,andaslongastheonlyother
informationprovidedisthename,address,telephonenumber,faxnumber,emailaddressor
websiteaddressoftheindividualbeingreferred

SoleProprietorship(alsoseeProprietor)
Asoleownerofanunincorporatedbusiness,alsocalledaproprietor

StandardsofPractice
Regulation188/08,whichappliestomortgagebrokerages,Regulation187/07,whichappliesto
mortgageagentsandagents,andRegulation189/08,whichappliestomortgageadministrators
constitutetheStandardsofPracticeundertheMBLAA.TheseRegulationsdetailthebusiness
rulesthatlicenseesmustfollowtocomplywiththeMBLAAanditsRegulations.

Chapter5:RegulationandLegislation

125

Superintendent
TheSuperintendentofFinancialServicesisapositionresponsibleforissuingandrevoking
licenses,aswellasforenforcingcompliance,allofwhicharedesignedtoprotectthepublic.All
FSCOstaffreportdirectlyorindirectlytotheSuperintendent.

TradeCompletionDate
Regulation188/08definesthetradecompletiondateastheearlierof:
a)thedateonwhichaninvestor,orabrokerageonbehalfofaninvestor,entersintoan
agreementtotradeinthemortgage,or
b)thedateonwhichthetradeinthemortgageiscompleted.

TrustAccount
AbankaccountheldbyabrokerageorAdministratorforthepurposesofkeepingmoneyheldon
behalfofclientsseparatefromthefundsoftheprofessionalorherbusiness

TrustFund(orAccount)Reconciliation
Awrittenrecordofalldeemedtrustfundsreceivedandalltransactionsrelatingtothefunds,
summarizedandcheckedforaccuracy.

TrustFunds(alsoseedeemedtrustfunds)
Fundsthataredeemedtobepayabletoanotherparty.Thesefundsmustbekeptinaseparate
trustaccount.

VendorTakeBack(VTB)
Wherethesellerofthepropertyprovidesallorsomeofthefinancingtothepurchaserinorder
toselltheproperty.ThearrangingofaVTBbyarealestatesalespersonisanexemptedactivity
undertheMBLAAaslongascertainconditionsaremet.

126

Chapter5:R
RegulationanddLegislation

5.12
2 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

True
e or Fals e Questi ons
1.

2.

3.

4.

AsofJanuary20
009,abrokerragemustdisclosetoabo rrowerifoneeofitsagentsswillreceiveaa
fee
efromalenderinconnecttionwiththemortgagerennewal.
orrowersaree
entitledtothefollowingin
nformation,oonlyiftheyassk:brokerageenameand
Bo
lice
ensenumberr.
Itisagoodideaaforabrokeragetohaveaacomplaintsprocessbuttthisisnotreq
quiredbylaw..

TheSuperintendentofFSCO
Ohastheauth
horitytorefussetograntalicensetoab
brokerageif
the
eSuperintend
dentthinksth
henamemigh
htconfuseth epublicwith
hanotherexissting
bro
okerage.

5. Assoleproprieto
orshipmuste
establishitseligibilityforli censureasamortgagebro
okerage
wh
hereasacorporationdoesnot.

6. Un
ndercertainccircumstancess,theSuperin
ntendentofF SCOmaysuspendabrokeerslicense
witthoutwarning.

ochangesmaybemadeto
otheRegulatiionswithoutggoingthroughtheformalprocessof
7. No
recceivingRoyalAssent.

8. TheFinancialSe
ervicesComm
missionisonlyyconcernedw
withonesecttor,themortggage
bro
okerageindustry.

9. StaandardsofPrracticeareguidingprinciplesthatbusin essesareenccouragedtoimplement.

10. Regulatorydeccisionsbythe
eSuperintend
dentofFSCO arefinal,basedonthepowers
conferredupon
ntheposition.

11. AspertheMBLAA,therearrecurrentlyth
hreedifferen tlicensesintthemortgageebrokerage
ind
dustry.

12. Th
heSuperinten
ndentofFSCO
O(orhis/herdesignate)m
mayvisitabro
okeragewithintheFSCO
reggistrytoexam
minedocumentsandrecorrds.

13. Th
heprincipalb
brokerdesignationwascre
eatedbytheM
MBLAAtoaddresscomplianceissues
witthinthebrokkerage.

heroleofthe
ebrokeragem
maybedefine
edastaking steps,onbeh
halfofanotheerpersonor
14. Th
entity,toenforcepaymentb
byaborrowerunderamo rtgage.

15. Amortgageaggentmayworrkonlyforone
ebrokeragew
whereasamo
ortgageagentmaybe
em
mployedbyse
everalbrokeraagesatthesaametime.

Chapter5:R
RegulationanddLegislation

12
27

Sho
ort Answe
er Questio
ons
1.

2.

3.

4.

5.

Wh
hataretheed
ducationalrequirementsttoobtainam ortgageagen
ntslicense?
Wh
hatis/arethe
edifference(ss)betweenam
mortgageageentandmortgagebroker??
De
escribethedu
utiesandresp
ponsibilitieso
oftheprincipaalbroker.
Wh
hatadministrrativepenaltiesmaybeim
mposedonabbrokerage,bro
okeroragentt?

Wh
hatisthediffferencebetwe
eenanoffencceunderthe MBLAAandaanadministraativepenalty??

dualwouldbeedeemedunssuitabletobeegranteda
6. Lisstthecircumsstancesinwhichanindivid
mortgagebrok
m
kerslicense.

7. De
escribetheco
omplaintspoliicythatabro
okeragemusthavetocomplywiththeM
MBLAAanditts
Regulations.

8. Wh
hatinformationmustbein
ncludedinevverypublicrellationsitem??

9. Lissttheitemsth
hatmustbed
disclosedtoaborrowerin adisclosured
document.

10. Whatamount
W
oferrorsand
domissionsin
nsurancemusstabrokerageehavetocom
mplywiththee
MBLAA?
M

11. Whatistheam
W
mountoftime
ethatrecordssofamortgaggetransactio
onarerequireedtobekept
byythebrokeraage?

12. Whattypesof
W
bedepositedintoatrusta ccount?
fundsmustb

13. Whatinformat
W
tionmustbeprovidedtoaapotentialprrivatelenderbeforeheorshecan
co
ommittofundingamortgage?

14. Whattitles(i.e
W
e.,broker,age
ent,etc.)musst/canbeuseedbybrokersandagentsin
nadvertising
materials?
m

128

Chapter5:RegulationandLegislation

Appendix 1: FSCO Organization Chart as of November 23, 2015

Figure17FSCOOrganizationChartasofNovember23,20152

http://fsco.gov.on.ca/en/about/Documents/2015orgchartnov23.pdf

Chapter6:TransactionOverview

129

Chapter 6: Transaction Overview

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Explainwhotheclientsareinabrokeredtransaction
Discusstheroleoftheagentasadvisor
Explaintheexpectationsthataremadebytheborrowerandlender
Summarizethestepsinabrokeredtransaction

Introduction

BrokeringamortgageinOntariocanbebothfinanciallyandpersonallyrewarding,whendone
properly.Themortgageagentwillobtaintheappreciationoftheborrowerandreceive
handsomeremunerationatthecompletionofthetransaction.

However,likeanyprofession,ourshasasetofstandardproceduresthatmustbefollowedto
achievesuccessfulcompletionofatransaction.Thischapterwilldiscussthemortgageagents
roleintheprocessandthebasicstepsinthetransaction.Regardlessofwhetheryouarea
licensedmortgageagentorlicensedmortgageagent,theprocessofbrokeringamortgageisthe
same.

6.1

Who is the Client?

Brokeringamortgagetransactioninvolvesseveralkeyparticipantsinthemortgageindustry.
Beforetheprocessofbrokeringamortgagetransactioncanbeexamined,itisimportantto
answerabasicquestion:Whoistheclient?

Letusbeginansweringthisquestionbyrevisitingthedefinitionofamortgageagentas
discussedpreviously.

Mortgageagent/Agent
Apracticingprofessionalwhoassessesaborrowersfinancialgoalswithrespecttorealestate
financingandafterdetailedanalysisprovidessolutionstomeetthosegoalsbyactingasan
intermediarywiththeappropriatelendingsource.Indeterminingtheappropriatelending
source,twofactsareassumed:one,thattheclientisappropriateforthelenderandtwo,that
thelenderisappropriatefortheclient.

Therefore,bythisdefinitionamortgageagenthastwoclients:theborrowerandthelender.
Letsexplorethisfurtherbydescribinginmoredetailwhythelenderandborrowerareboth
clients.

Borrower
Amortgageagentfindstheappropriatelenderforhisorherborrower;thereforetheborrower
isobviouslyaclient.Mortgageagentspromotethattheywillobtainthebestmortgagefora
borrower,implyingthattheyworkfortheborrower.Whileinsomecasesamortgageagentwill
chargeafeedirectlytotheborrower,inthevastmajorityofcasesagentsarecompensatedby

130

Chapter6:TransactionOverview

enderinthefo
ormofafinde
ersfeeorcommission.Thhiscouldpoteentiallyresulttina
thele
mortggageagentge
ettingaborro
oweramortgaagewithalennderbecauseethelenderp
paysahigher
finderrsfeeandno
otbecauseitiisinthebestinterestsofttheborrower.

If,how
wever,themortgageagen
ntfollowsthedefinitionoffamortgageaagentillustraatedaboveass
wellaasadherestothefourborrrowerexpectationsinthe sectionentittled,TheRoleofthe
MortggageAgentassAdvisor,th
hemortgageaagentwillunddoubtedlyacttinthebestiinterestsof
thebo
orrowerinalllcases.

Lende
er
orhisorherborrower,thee
Onceamortgageaagenthasdeccidedonthem
mostapproprriatelenderfo
nes.Inotherrwords,the
agenttmustensure
ethattheborrrowermeetssallofthelenndersguidelin
agenttmustensure
ethattheborrrowerisapprropriatefort hatlender.TTherefore,sin
ncetheagentt
hasadutytothele
ender,thelen
nderisalsoth
heclient,wheetherornottthelenderisp
payingthe
agenttafindersfee
eorcommisssion,ortheaggentischargi ngafeedirecctlytothebo
orrower.

6.2

The Ro
ole of the Mortgag
ge Agent a
as Adviso
or

Whyd
dolendersde
ealwithmortgageagents??

mightthinkth
hatsincethem
mortgageage
entfindsthebborrower,theelenderdoessnthaveto
Youm
payth
hecostsassocciatedwithobtainingthatborrower,suuchasadvertisingandmarketing,
havingbranchofficces,etc.,andthereforede
ealingwithmoortgageagen
ntsismoreprofitablefora
lende
er.Whilethattiscertainlytthecase,itisonlytruewh enmortgageagentsmeettthefollowing
setoffbasicexpecttations.Ifab
brokerfailstomeettheseeexpectations,,thenthelen
nderwillmostt
likelystopdealingwiththatbro
okersincethe
ebrokeredtraansactionswiillbecomeun
nprofitable.

Len der Expe


ectations
These
eexpectationscanbesummarizedas:
1. Provideborrrowerswhoaresuitablefforthelenderr
2. Provideapp
propriateprotectionagain
nstfraud
3. Facilitateth
hetransaction
ntoitssuccesssfulcomplettion(funding)).

These
ethreeexpectationsformthecornersto
oneoftherellationshipbettweenthelen
nderandthe
broke
eragecommunity.

Thebestwaytoen
nsurethatthe
eseexpectationsareconsiistentlymetistoadoptthemascore
valuesorphilosophiesthatareappliedtoevverytransacti on.

Tome
eettheseexp
pectationsthe
eymustfirstb
beexplained..

1.Pro
ovidingborro
owersthatare
esuitableforrthelender
Thele
endersfirste
expectationissthatthemorrtgageagent willonlysend
danapplicationonbehalff
ofab
borrowerthattfitsthelende
erslendingccriteria.Lenddingcriteriain
ncludesuchth
hingsas
incom
meandemplo
oymentrequirrements,propertyrequireements,creditrequiremen
ntsandsoon..
Thism
meansthatth
hemortgageaagentmustkn
nowandund erstandtheleenderslendingcriteria
andb
beabletoaccuratelyassesstheborrowertodeterm ineiftheymeeetthosecritteria.

Chapter6:TransactionOverview

13
31

ntssendthem
mapplicationss
Unforrtunately,atyypicallendercomplaintistthatsomemoortgageagen
forprroductsthatttheydonothave.Thistyp
peoferrorcannerodethecconfidencethatlenders
haveinthebrokerragecommun
nity.

2. Pro
ovidingappro
opriateprote
ectionagainsttfraud
Lende
ershavebeen
nsufferingfro
omanincreasseinmortgaggefraudoverthepastseveeralyears.
Althoughnottechn
nicallyamorttgageagentsslegalresponnsibility,itisaamortgageaggentsethical
andm
moralresponssibilitytomakkereasonable
eattemptstooprotectthellenderfromffraud.

Inmanybrokerage
essetofBesttPracticesitisdeemedneecessaryforth
hemortgageagentto
review
walldocumentationreceivvedfromtheborrowerfo raccuracyan
ndconsistency.Thismean
ns
identiifyinganysign
nsofpotentiaalfraud,such
haspoorlywrrittenortypeedincomeverrificationas
wellaasverifyingincomeandide
entity.

Moreinformationonfraudprevventioncanb
befoundinthhechapter,M
MortgageFrau
ud.

3. Facilitatingthetransactionttoitssuccesssfulcompletio
on
Alend
derexpectsth
hatamortgaggeagenthassubmittedannapplicationtothatlendeerbecausehee
orshe
ehasdeterminedthatlend
dertobethemostapproppriateforthe borrower.In
naddition,the
lende
erexpectsthaat,ifapproved
d,themortgaagetransactioonwillclose.Thatrequireesthe
mortggageagentto
oensurethattheborroweriscommitteedtocomplettingthetranssactionand
underrstandswhatisrequiredofhimorherttoconcludeitt.

deralsoexpectsthatamo
ortgageagenttwillbeavailaabletoassistinensuringtthetransactio
on
Alend
closessifthereisan
nythingthattthemortgage
eagentisrequuiredtoaccomplishsuchaasmeeting
outstaandingcondittions.

mortgageagen
ntsotherclie
ent,theborro
ower,alsobe ginsbyhavin
ngasetofexp
pectationsin
Them
regard
dstothemorrtgageagent.

Borrrower Ex pectation
ns
These
eexpectationscanbesummarizedas:
1. Actintheb
borrowersbe
estinterests
2. Completelyyanalyzetheborrowersneeds
3. Makeappro
opriaterecom
mmendationsbasedontheeborrowersneeds
4. Facilitateth
hetransaction
ntoitssuccesssfulcomplettion(funding)).

These
efourexpectaationsformth
hecornerston
neofthetrannsaction.Byeensuringthattthese
expecctationsarem
met,themorttgageagentw
willdevelopa strongrelatio
onshipwithttheborrower
andensurethatth
heindustryassawholeisw
wellrepresentted.

Thebestwaytoen
nsurethatthe
eseexpectationsareconsiistentlymetistoadoptthemascore
valuesorphilosophiesthatareappliedtoevverytransacti on.

Tome
eettheseexp
pectationsthe
eymustfirstb
beexplained..

132

Chapter6:TransactionOverview

1.Actintheborrowersbestinterests
Theborrowersfirstexpectationisthatthemortgageagentwillatalltimesactinthebest
interestsoftheborrower.Thisexpectationiskeytotheborrowerandisvitaltothesuccessof
thetransaction.Actinginthebestinterestsoftheborrowercanbestbedefinedasputtingthe
borrowersneedsandconcernsfirstandforemostaboveothersinvolvedinthetransaction,
limitedonlybyethical,moralandlegalrestrictions.

Thishastheeffectofensuringthatthemortgageobtainedfortheborrowerisbothfinancially
bestforthemandsuitstheirotherneedsandgoals,suchasprovidingprepaymentprivileges
thattheclientbelievesareimportanttothem,atermthatthatbestreflectstheirgoals,andso
on.

Thephilosophyofalwaysdoingwhatisbestfortheclientdiffersfromalwaysdoingwhatis
suitablefortheclient.Forexample,mortgageagentshavemadethecasethatifaborrowerhas
poorcredittheymaydeserveamortgage;howevertheymaynotdeservethebestrates.

Example
Brianwasreferredtoamortgageagent,Cynthia,byapastclientwhofeltthatCynthiahad
providedexcellentserviceandadvice.BrianhasexplainedtoCynthiathathehashadcredit
problemsintherecentpast.AftertakingBriansapplicationandperformingtherequired
analysis,CynthiahasdeterminedthatshecanobtainamortgageforBrianfromtwodifferent
sources.

ThefirstsourcewillofferBriana5yearfixedratemortgagewitharateof6.5%compounded
semiannuallyovera25yearamortizationwithmonthlypayments.ThefindersfeetoCynthia
wouldbe50bps.

ThesecondsourcewillofferBriana5yearfixedratemortgagewitharateof6.55%(.05%higher
thanthefirstoption)compoundedsemiannuallyovera25yearamortizationwithmonthly
payments.ThefindersfeetoCynthiawouldbe75bps.Allothertermsandconditionsofthese
twomortgageoptionsarethesame.

Cynthianowhasadecisiontomake.WhichoptiondoessheoffertoBrian?
Cynthiamayconsiderthatforonlya.05%increaseintherateshewillearnanextra$500
comparedtothelowerrateoption.ShemayfurtherbelievethatBrianwillaccepteither
suggestionthatshemakessincehewasreferredtoherandhasfulltrustinher.

WhatoptionshouldsheprovidetoBrian?
Hopefullythedecisionisclear.CynthiashouldofferBrianthelowerratemortgageeventhough
thefindersfeesheearnswillbelessbecauseherinterestsmustcomesecondtoBrians.Thatis
thecorebeliefbehindalwaysactingintheborrowersbestinterests.

Thiswasafairlysimple,straightforwardexamplebutitisimportanttopointoutthatthereare
manyproductsinthemortgagemarkettodaythatwillpaythemortgageagentahigherfinders
feeifheorsheisabletoselltheirclientahigherrate.Bysubscribingtothephilosophythata
mortgageagentmustalwaysdowhatisinthebestinterestsoftheborrowerthesolutionis
alwaysobvious.

Chapter6:TransactionOverview

13
33

Su
uccessTipActinth
hebestinteerestsofth
heclient
Byyalwaysdoinggwhatisinth
hebestintere
estoftheclieent,youwillfiindthatyourreferral
bu
usinessincreaasesovertime
e.Eventhougghyoumaym
makelessmo neyonasinggle
traansaction,youwillgrowyo
ourbusinesstthroughworddofmouthreeferrals,resultingin
inccreasedearniingsinthefutture.Apracticalreasonfoordoingtherrightthing!

ompletelyana
alyzetheborrowersneed
ds
2. Co
Takinggamortgage
eapplicationaandfindingth
herightlendeerandproducctfortheborrrowerisnot
possib
bleunlessthe
emortgageaggenthasdetaailedknowleddgeofaborro
owersneeds.Thisis
differentfromsimplyaskingthe
eborrowerw
whattypeofm
mortgagetheyywouldlike.

Tocompletelyanalyzeaborrow
wersneedsre
equiresthattthemortgageeagentassisttheborroweer
indetterminingwhatthoseneed
dsare.Thatiisanimporta ntdistinction
nfromsimplyyhavingthe
borro
owerexpressw
whattheybe
elievetheirne
eedstobeto themortgageeagent.

Them
mortgageagen
ntmustdeterrminetheoth
herfactorsthhatareimporttanttothebo
orrower.
Some
eofthesefacttorswillinclude:
Theborrowersrisktolerancce.Thiscand
determinewhhetheravariaablerateprod
ductissuitable
er.
forrtheborrowe
Theborrowersintentionsw
withregardsto
ohowlongthheyintendtoliveinthisho
ome.Thiscan
etheralongo
orshorttermmortgageis suitable.
determinewhe
herwords,dooestheborrow
werthinktheeymayneed
Theborrowersdebtexpectaations.Inoth
totakeequityo
outoftheirprropertyinthe
efuturebyreefinancingit?Thiscandetermine
wh
hetheraclose
edoropenmortgageissuiitable.
Theborrowerssavinghabitss.Thiscande
eterminewheethertheborrrowerrequirresmore
agggressiveprep
paymentprivileges.

Su
uccessTipServiceiisthekey
Diffferentiateyo
ourselffromyyourcompetitionbyproviddingmoreseervice.Partoffthisservice
maayincludeaffullfinancialccheckup.Havveyouhearddofagentsco
ompletingbud
dgetsfortheir
bo
orrowers?Pro
obablynot,andifyouhadyouwouldm
mostlikelyrem
memberthem
m.Thatis
tru
ulyadifferenttiator!

3. Ma
akeappropriaterecomme
endationsbasedonthebo
orrowersneeeds
Ifthemortgageaggentembracestheabovep
philosophiestthenthisborrrowerexpecttationisa
naturalextension.Bycompletingafullanalyysisoftheirnneedsandbeiingdetermineedtodowhaat
isintheirbestinte
erests,themo
ortgageagenttwillmakethheappropriatterecommendation,
provid
dedthattheyyhavethereq
quisiteknowledgetodete rminewhattthatrecommeendation
shouldbe.

Thism
meansthat,to
obeabletom
makeanapprropriaterecom
mmendationbasedontheeborrowers
needss,themortgageagentmusstbefullyverrsedonallof thelendersaavailableandtheir
produ
ucts.

Notonlydoesthemortgageage
enthavetob
beawareofp roductsavailabletothem,,butthey
mustalsotakereasonablestepstobeaware
eofproducts offeredthroughlendersn
notdealing

134

Chapter6:TransactionOverview

ebrokeragein
ndustry.Thismayinclude majorbanksoranyotherrlender.Thiss
withtthemortgage
isacrriticalpointbe
ecauseamorrtgageagentcannotmakeeanappropriaaterecommeendationif
theyaareunawareofallofthem
mortgageproductsavailabbletotheborrower.

Takinggreasonablestepstoensu
urethatthem
mortgageageenthasthisin
nformationmayseemlike
anoverwhelmingttask,butitsim
mplyrefersto
oensuringthaatthemortgaageagentkno
owsproductss
towh
hichtheborro
owershouldh
havereasonableaccess.

Su
uccessTipStayuptodateon
nlendersp
products
Re
eviewlenderm
marketingmaaterialsandcommunicatioonsdailytoensurethatyo
ouhavethe
mo
ostuptodate
einformation
nonlendersproductsanddattendtradeeshowsandllender
presentationsw
wheneverposssible.Bydoiingsoyouwi llbeabletocconfidentlyreecommend
eborrower.
productstothe

Forin
nstance,ifthe
ereisasmallccredituniontthatdoesntddealwithmortgageagentssandonly
serviccesasmall,lo
ocalcommuniitythathasju
ustloweredthheirratesforthenexttwo
oweeks,a
mortggageagentmightnotbeawareofthis.Norcouldthheybeexpecttedtobeawaareofthis.

bankthatdoesnotdealwitthbrokershaasdonethesaame,the
If,ontheotherhand,amajorb
mortggageagentsh
houldbeawareofthis.Inthismanner heorshecan
nprovidewhaattheytruly
believvetobethem
mostappropriaterecommendationtottheborrower.

4. Facilitatethetrransactionto
osuccessfulco
ompletion
Aborrowerfurtherexpects,and
dhastherigh
httoexpectt hatthemortgageagentw
willfacilitate
thetrransactiontoasuccessfulccompletion.Inotherwordds,themortggageagentwiillbebytheirr
sideu
untilthetranssactionclosess.

Succe
essfulmortgaggeagentswilladvisethecclientofalloffthestepsintthetransactio
onandstayin
n
touch
hwiththemth
hroughout,evvenwhenthe
emortgageaggentisnolon
ngerinvolved
d.For
example,onceheorshehasfulfilledthelendersconditioonsthereisn
nothingelsefforthe
mortggageagentto
odoexceptw
waitforthetraansactiontocclose.

ever,successffulmortgageagentswillfo
ollowupwiththeborroweertoensurethatrequired
Howe
appoiintmentshavebeensched
duledandpreparationshavvebeenmade.Notonlyw
willthis
provid
detheborrow
werwithadde
edsecurityan
ndpeaceofm
mindbutwillensurethattthemortgagee
agenttisawareofaanyissuesthaatarise,allow
winghimorheertoassistinsolvingtheisssuebefore
thetrransactionisjeopardized.

Conclusion
Some
eoftheconce
eptsdiscussed
dinthissectio
onmay,uponncloserexam
minationofthebrokerage
industry,seemtoggobeyondwh
hatmanymo
ortgageagenttsdeemnecesssary.Howevver,bygoing
beyon
ndwhatmosttaredoing,amortgageaggentisdestineedtodifferen
ntiatethemseelvesfrom
theircompetitionaandexceedth
heirclientse
expectations.

Thatistrulythepaathtosuccesssinthisindusstry.

Chapter6:TransactionOverview

13
35

Su
uccessTipAdoptth
hefourborrrowerexp
pectationss
Ad
doptthefourborrowerexp
pectationsassyourfourCooreValuesorPhilosophiesandwrite
the
emdown.Ke
eepthemwithyouatalltimesandmakkecertainthaatyourclientssknowthat
yo
ousubscribetothem.Inso
odoingyouw
willexceedyoourclientsexxpectationsin
nvirtually
evverytransactio
on.

6.3 The Step


ps in a Brrokered Transacti
T
ion

Abrokeredmortgaagetransactio
onhasaseto
oftypicalstepps.Wellbegiinbylistingth
hemandthen
n
describeeachoneindividually.
1. Attractingaaclient
2. Firstcontacct
3. Theinitialcconsultation
4. Filecreationandmanagement
5. Applicationanalysis:Borrowerincom
meandGDS/TTDSratios
6. Applicationanalysis:BorrowerCreditt
7. Applicationanalysis:Thepropertyan
ndLTVratio( includesordeeringanapprraisalif
applicable)
8. Choosingalender
9. Submittingtheapplicatio
on
10. Obtainingthecommitme
ent
11. Preparingd
disclosuredoccuments
12. Presentingthecommitm
mentanddisclosuredocum
ments
13. Meetingconditions
14. Instructingthelawyer
15. Thelawyer//clientmeetin
ng
16. Fundingthe
etransaction
17. Filesubmisssiontothebrrokerage
18. Receivingcommissions
19. Recordkeeping

Thefo
ollowingisad
descriptionoffeachofthessesteps.

1.AtttractingaClient
Attracctingaclientreferstoanyactivitythatresultsinam
mortgageagentobtainingaapotential
borro
ower.Thiscan
nbeachieved
dbymarketin
ng,advertisingg,orreferral..

2.FirrstContact
Thisissthefirsttimethatthepo
otentialborro
owerandthe mortgageageenthaveconttact,beiton
theph
hone,throughemailorfaccetoface.

3.Th
heInitialConssultation
TheIn
nitialConsultaationisthesttepinwhichttheagentcom
mpletestheb
borrowersap
pplicationand
d
determinesthene
eedsofthebo
orrower.Atthisstagethe agenthasno
otcompletedadetailed
analysistodeterminetheoptio
onsavailablettotheborrow
werbuthasafirmundersttandingof
whattheborrowerwishestoacccomplish.

136

Chapter6:TransactionOverview

eCreationan
ndManageme
ent
4. File
Them
mortgageagen
ntcreatesthe
eborrowersfile,typically inbothpapeerformatand
dusinghisor
herorriginationsofftware.

Pa
auseforcla
arification
nOriginattionsoftwa
are
OrriginationSofftwareisthecomputerpro
ogramwhich themortgaggeagentusestoinputthe
bo
orrowersapp
plication.Thisssoftwareisd
designedtoccalculaterequ
uiredratios,p
pullacredit
bu
ureaureport,electronicallyysubmittheaapplicationtooalender,asswellasprovideother
fun
nctionsforth
hemortgageaagent.

5. Ap
pplicationAnaalysis:Borrow
werIncomeandGDS/TDS Ratios
Them
mortgageagen
ntanalysesth
heborrowerssincometoddeterminetheeamountoftthemortgagee
forwh
hichtheborrowercanquaalifybasedon
ntheavailableeborrowerd
documentatio
onandthe
incom
meratios,theGDSandTDSS,bothofwhiichareexplaiinedindetailinalaterchaapter.

6. Ap
pplicationAnaalysis:Borrow
werCredit
Them
mortgageagen
ntwillobtainacreditrepo
ortusinghisoorheroriginationsoftwaree.The
industryjargonforrthisisreferrredtoaspullingacreditrreport.Themortgageagentwillthen
analyzeit.Thisanalysiswilldetterminewhichlendersmaayapprovetheapplication.

7. Ap
pplicationAnaalysis:ThePrropertyandLTTVRatio
Them
mortgageagen
ntbeginsaprreliminaryanalysisoftheppropertytod
determinewh
hichlenderwiill
accep
ptthisproperttytypeandth
hemaximumloanamounttthatcanbeapprovedbasedonthe
valueoftheprope
erty,referredtoastheloan
ntovalueor LTV.TheLTV
Visexplained
dindetailinaa
latercchapter.Dep
pendingonth
hetypeofthe
etransaction,anappraisal(avaluationofthe
prope
ertytobemortgaged)mayyberequired.

Pa
auseforcla
arification
nAppraisal
An
nappraisalisareportcreaatedbyacertifiedappraiseer(theindivid
dualconductiingthe
ap
ppraisal)tode
etermineado
ollarvalueoftheproperty anddescribeeitscondition
n.

der
8. Choosingalend
Based
dontheanalyysiscomplete
edsofar,the mortgageageentwillnowdecideonanappropriate
lende
ertowhichtosubmittheaapplication.TThemortgageeagentrequirressignificanttknowledge
regard
dingthenum
merouslenderrsguidelinestodetermineetheapproprriatelenderfo
orthe
borro
ower.

9. SubmittingtheApplication
UsinggtheOriginatiionSoftware,,themortgaggeagentelecttronicallysub
bmitstheapp
plication.If
thele
endercannotacceptelectrronicsubmisssions,themorrtgageagent mayberequiredtoprint
theap
pplicationusingtheOrigin
nationSoftwareandfaxitttothelenderr.Thereisno
olegal
requirrementonho
owanapplicaationissubmiittedtoalendder.Itissoleelyuptothelenderonhow
w
itwillacceptamortgageapplication:byemaail,fax,paperrformatorelectronicallyvviathe
origin
nationsoftware.

Chapter6:TransactionOverview

13
37

O
Commitmentt
10. Obtainingthe
Ifapp
proved,thelenderwillsendthemortgaageagentacoommitmentleetter.Acommitment
letterrisanofferfromthelende
ertotheborrowertofunddthemortgaggebasedontheborrowers
abilityytomeetcertaincondition
nsthatarelisstedinthecoommitmentleetter.

11. PreparingDiscclosureDocum
ments
Ineve
erybrokeredtransactionin
nOntario,the
emortgagea gentmustprrovidetheborrowerwithaa
borro
owerdisclosurre.Thisdocu
umentdisclosestheterms ofthemortggageaswellasthe
associatedcostsin
nvolvedinitb
beingobtained.Typicallytthisdocumen
ntisproduced
dbythe
Origin
nationSoftwaarebasedontthelendersccommitmentletterinadditiontootherrinformation
fromtheborrowerrsapplication
n.

12. Presentingthe
eCommitmen
ntandDisclossureDocumennts
Them
mortgageagen
ntmustthenpresenttheccommitment letter,borro
owerdisclosurre,andan
amorttizationsched
duletothebo
orrowerforsigning.Them
mortgageageentmustleaveeacopyof
bothttheamortizattionschedule
eandsignedb
borrowerdiscclosurewithttheborrowerr.Once
comp
plete,thesign
nedcommitmentletterisssentbythem
mortgageagen
nttothelend
der.

Pa
auseforcla
arification
nAmortizzationscheedule
An
namortizationscheduleissaprintoutoffallofthemoortgagepaym
mentsduringttheterm,
inccludingtheam
mountofinte
erestandprin
ncipalperpayymentandtheoutstandinggmortgage
baalanceaftereaachpaymentismade.

13. MeetingCond
M
itions
Inthe
elenderscom
mmitmentlettertherewillbealistofcoonditionsthaatmustbemeetbeforethe
mortggagecanbefunded.Oneo
ofthemanycconditionsmaaybetoprovvidethelendeerwith
appro
opriateincom
meverification
n.Thecommitmentletterrwilltypicallyydescribewhat
docum
mentationiscconsideredaccceptabletotthelender.Ittisuptothe mortgageagenttoadvisee
thebo
orrowerofth
heconditionsandassisttheborrowerinnmeetingtheeconditionsttoensurethaat
them
mortgageisfunded.

nstructingthe
eLawyer
14. In
Oncesatisfiedthattalloftheconditionshave
ebeenmet,t helenderwilllsendinstrucctionstothe
lawye
erwhoisclosingthetransaactiononbeh
halfofthelennder.Certainlenderswilld
dictatethe
lawye
erwhowillbe
eusedtoclosethetransacctionwhileottherswillallow
wtheborrow
wertochoosee
hisorrherownlaw
wyer.Itisimp
portanttonottethatwhilettheborrowerrpaysthelaw
wyersfee,the
lawye
erisactuallyw
workingprimaarilyonbehalfofthelend er.

15. Th
heLawyer/Bo
orrowerMeetting
Thelaawyerwillcon
ntacttheborrowerandarrangeforan appointmenttfortheborro
owertosign
theclosingdocumentsatthelaawyersoffice
e.Thelawyerrwillalsoinfo
ormtheborro
owerofthe
mentsrequire
edtobebrou
ughtwiththe borrowerto thismeeting.Oncethelaawyerhas
docum
comp
pletedtheapp
propriatetaskks,fundswillberequesteddfromthelen
nderfordepo
ositintothe
lawye
erstrustacco
ount.

138

Chapter6:TransactionOverview

16. FundingtheTransaction
Oncethelawyerhascompletedtheappropriatetasks,themortgagewillberegisteredandthe
fundswillbedisbursedbythelawyerfromthelawyerstrustaccount.

17. FileSubmissiontotheBrokerage
Beforeanagentwillreceivehisorhercommissionthecompletedmortgagefilemustbe
submittedtothebrokerageforacompliancereview.Thiswillensurethatthetransaction
compliedwithapplicablelegislationandthatallappropriatedocumentsareinthefile.The
brokeragewillthenstorethisfile.Basedonlegislationtheregulatorhastherighttoinspect
thesefilesforcompliance.

18. ReceivingCommissions
Uponreceiptoftherequireddocumentationfromthelawyerindicatingthatthetransactionhas
beensuccessfullyfunded,thelenderwillforwardthefindersfeeorcommissiontothe
brokerage.Inthecasewherethereisnofindersfee,themortgageagentwillhavechargedthe
borrowerafeeforarrangingthemortgage.Thisfeeistypicallytakenfromthemortgage
advanceonclosingandissenttothemortgageagentsbrokeragebythelawyer.Themortgage
agentsbrokeragewillthenpaythemortgageagentthefindersfeebasedonthecontractthat
themortgageagenthaswiththebrokerage.

19. RecordKeeping
ByRegulationthebrokerageisrequiredtokeepcertaindocumentationonfileforasetnumber
ofyears.ThesefilesmaybeperiodicallyauditedbyFSCO.Itsalsoagoodpracticefortheagent
tomakeelectroniccopiesofthefiledocumentsandkeepthemsecurelystoredincaseneeded
inthefuture.

Chapter6:TransactionOverview

6.4

139

Key Terms and Definitions

Advertising
Apaid,controlledmessagethroughanonpersonalmedium.Typesofadvertisinginclude
publicity,publicrelations,productplacement,sponsorship,andsalespromotion.

Advisor
Anexpertwhoprovidesobjectiveadvice.Amortgageagent,forexample,actsasanadvisortoa
borrower.

Application
Aformusedtorecordinformationaboutapotentialborrowersstateofaffairs,including
financial,creditandemployment

Budget
Anestimateofincomeandspending

Commission(fromalender)
Acommissionorfeepaidtoamortgagebrokeragebyalender.Thisfeeisusuallybasedona
certainnumberofbasispointsmultipliedbythemortgageamount.

Commission(fromabrokerage)
Theamountpaidtothebrokerormortgageagentwhocompletedthetransaction.Thisis
typicallybasedonapercentageofthecommissionorfindersfeepaidbythelendertothe
mortgagebrokerage.

CommitmentLetter
Adocumentillustratinganofferbyalendertoaborrower,includingthetermsandconditionsof
thatoffer

Conditions(relatingtoaCommitmentLetter)
Thesearetherequirementsofthelenderthatmustbemetbeforethemortgagewillbefunded

DisclosureDocuments
ThesearethedocumentsprescribedundertheMortgageBrokerages,lendersand
AdministratorsAct,2006(formerlytheMortgageBrokersAct)thatmustbeprovidedtothe
borrower(andtheinvestorinthecaseofaprivatetransaction)beforethemortgagecanbe
funded.ThesedocumentsincludetheInvestor/LenderDisclosureforBrokeredTransactions,
theInvestor/LenderDisclosureStatementforBrokeredMortgagesonRenewal,andthe
borrowerdisclosure.

FindersFee
Acommissionorfeepaidtoamortgagebrokeragebyalender.Thisfeeisusuallybasedona
certainnumberofbasispointsmultipliedbythemortgageamount.

Marketing
Presentingproductsorservicestopotentialcustomersinafashionthatpositivelypromotesthe
productorserviceandmakescustomerseagertobuyorusethoseproductsorservices

140

Chapter6:TransactionOverview

Referral
Aclientorcustomerwhohasbeenadvisedbyathirdpartytousetheproductorserviceof
another

Remuneration
Apaymentorrewardprovidedtosomeoneforaproductorservicerendered

Chapter6:TransactionOverview

6.5

14
41

Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1.

2.

3.

4.

5.

Disscusstheexpectationsthaatlendersmakeregarding theirbusinesssdealingswiitha
mortgageagen
nt.
Disscusstheexpectationsthaatborrowersmakeregardiingtheirexpeectationsofaamortgage
agent.
Ifaafindersfeeis85bps,how
wmuchwouldalenderpaaythemortgaagebrokeraggeona
$350,000mortggagetransacttion?
Disscussthepositivesandneggativesofcre
eatingabudg etfortheborrrower.
Wh
hatstep(s)inthemortgagetransaction
ndoyoufeel is/arethemo
ostimportanttandwhy?

142

Chapter7:InsuraanceintheM
MortgageIndu
ustry

Chapter
C
r 7: Insu
urance in the Mortggage Inddustry
Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Explainthepurposeandbeenefitsofmorrtgagedefaul tinsurance
Discussthehis
D
storyofCMHCandtheintroductionof mortgagedefaultinsuranceinCanada
Describethec
D
currentprograamsofferedb
bydefaultinssurers
Discussthebe
D
enefitsofmorrtgagecredito
orandlifeinssurance
Describethed
D
differencesbe
etweenmortggagecreditorrlifeinsuranceandtermliffeinsurance
Discussthebe
D
enefitsofandneedforpro
opertyinsurannce
Discussthebe
D
enefitsoftitle
einsurance
Describethec
D
coveredande
excludedriskssoftitleinsurrance
Explainthepurposeandbeenefitsoferroorsandomisssionsinsurancce

Intro
oduction

Insuraanceandthemortgageind
dustryhaven
neverhadasssignificantarrelationshipaastheydoin
todayysmortgagemarket.Lend
dersareprote
ectedbydefaaultandtitleiinsurancewh
hileborrowers
areprrotectedbycreditor/lifein
nsuranceasw
wellasproperrtyandtitlein
nsurance.Mo
ortgage
agentts,brokersandbrokeragessfindtheirprrotectionine rrorsandomissionsinsuraance.

While
etheseveralttypesofinsurranceprovide
efardifferenttcoveragefortheirrespecctive
policyyholders,itisatruismthattinsuranceisprovidingsiggnificantprotectionforacchanging
marke
et,especiallyfromthevan
ntagepointoffthemortgaggeborrowerw
whoismorep
proneto
mortggagefraudthaneverbeforre.

Thiscchapterwillexxplorethevariousformso
ofinsuranceaavailableandtheirimpactonthemulti
billion
ndollarCanad
dianmortgaggeindustry.

7.1

Mortga
age Defau
ult Insurance

Wha
at is Morttgage De
efault Ins urance?
Mortggagedefaultiinsuranceisaaninsurancep
policybetweeentheinsureerandthelen
nderthatwill
comp
pensatethele
enderforlossessufferedonaninsured loan.Itsim
mportanttonotethat
mortggagedefaultiinsurancedoe
esnotcompe
ensatetheboorrower.

Bac kground
TheC
CentralMortgageandHoussingCorporattion,aCrownnCorporation
nnowknownasCanada
MortggageandHou
usingCorporaation(CMHC)throughthe NationalHouusingAct,195
54(NHA,
1954))establishedmortgagedeffaultinsurancceinCanada in1954.Theeoverridinggoalofthe
NHA,1954wastoincreasethesupplyofmo
ortgagefunds availableintthemortgageemarket,
becau
use,asoftheendofthese
econdworldw
war,therewaasasignifican
ntincreaseinfamily
formaationandimm
migrationand
dthereforeth
heneedforneewhousing.Previouslegislationthat
attem
mptedtomeetthisneedw
wasfoundtob
beinsufficienttandinneed
dofreform.

Chapter7:InsuraanceintheM
MortgageIndu
ustry

14
43

ethatCMHCcreatedfordefaultinsura nceisstillinusetoday.
Thebasicstructure
In196
63,theMortggageInsurancceCompanyo
ofCanada(M ICC),aprivateinsurer,entteredthe
Canad
dianmarket.Theindustryycontinueditsexpansioni n1973withttheformation
noftwootheer
comp
paniesthatevventuallymergedin1978ttoformtheInnsmorMortgaageInsuranceeCompany.
1981sawthemerggerofInsmorrandMICC,w
withthenewccompanyretaainingtheMIICCname.GEE
CapitaalMortgageInsuranceCan
nadaentered
dthedefaultiinsurancemaarketin1995andinso
doinggacquiredthe
emortgagein
nsuranceporttfolioofMICCC,leavingthemarketwithtwoinsurerss:
CMHC
CandGECapitalMortgage
eInsuranceCanada,laterrreferredtoassGEMIC.In2
2005GEMIC
underrwentstructu
uralchangesaandwasrenamedGenworrthFinancialM
MortgageInsurance
Comp
panyofCanad
da,commonlyyreferredtoassimplyGennworth.

Asof2006,CMHCdominatedth
hemortgagedefaultinsurrancemarket,,owningapproximately
70%o
ofitcomparedto30%byG
GenworthFin
nancial.Also in2006theA
AIGUnitedGu
uaranty
MortggageInsurancceCompanyC
Canada,comm
monlyreferreedtoassimplyAIG,thelargestgenerall
insuraancecompanyintheUnite
edStates,entteredtheCannadianmarkeet.OnApril16,2010,a
Canad
dianprivatein
nvestorgroup
p,comprisedoftheOntar ioTeachersPPensionPlanandNationall
MortggageGuaranttyHoldingsIn
nc.,acquiredA
AIGUnitedG uarantyMorttgageInsuran
nceCompanyy
Canad
da.Thistransactioncreate
edtheonly10
00%Canadiannownedprivatemortgageeinsurance
comp
pany,knownaasCanadaGuarantyMortggageInsurancceCompany((CanadaGuaaranty)

How
w Mortgag
ge Defau
ult Insura nce Workks
Aspre
eviouslystate
ed,mortgagedefaultinsurranceisapoliicybetweenttheinsuranceecompany,
CMHC
C,Genwortho
orCanadaGu
uaranty,andtthelender.Ittisdesignedttocompensatethelenderr
ifthelendersufferrsalossonan
ninsuredmortgage.Thei nsurancecom
mpanychargeesthe
mortggagedefaultiinsurancepre
emiumtothelender.How
wever,thelen
ndertypicallypassesthat
premiumontothe
eborrower.N
Normallythelenderwilladddthepremiumtothetottalloan
amou
untandthebo
orrowerwillp
payitbackto
othelenderooverthelifeofthemortgagge,however
thebo
orrowercould
dalsopaythaatamountincashtotheleender.Thisn
normallydoessnthappen
sincetheborrowerisusingallo
oftheirfundsforthedownnpayment.

Iftheborrowergoesintodefau
ult(normallyb
byfailingtom
makehisorheermortgagepayment),the
lende
ermustunderrtakestepsto
ocollectthed
defaultedpayyments.Iftheelenderfailstocollect
thesepaymentsan
ndhastopow
werofsalethe
eproperty,o neoftwooutcomeswillo
occur.One
possib
bleoutcomeisifthelende
ersellstheho
ouseformoreethanisowin
ngtoit.Inthisscenarioit
mustgivethatprofittothehom
meowner.Thehomeowneerandthelen
nderarethen
ndonewith
oneanother.

Theotherpossible
eoutcomeisifthelenderssellsthehousseforlessthaanisowingto
oit.Inthis
scenaariothelende
ersuffersalosss.Sincethemortgageisddefaultinsureed,thelendeercannow
makeaclaimtotheinsuranceccompanytorecoverthatlooss.Theinsu
urancecompaanythenpayss
enderandthe
ereforethelenderhasnolongersuffereedaloss.Inrreturnforpayyingtheclaim
m,
thele
thele
enderassignsanydebtspaayabletoitbyytheborroweertotheinsurer.Inotherwords,the
mone
eythatthelen
nderwasowe
edbytheborrowerisnow
wowedtotheeinsuranceco
ompany.Thee
insure
ermaythenttakelegalactiionagainstth
heborrowerttorecovertheeclaimthatittpaidtothe
lende
er.IfyoueverrhappentoseeCMHC,Ge
enworthorCaanadaGuaran
ntyasacreditorina
bankrruptcyprocee
edingoracon
nsumerpropo
osal,itismosstlikelybecau
useofthistyp
peofsituation
n.

144

Chapter7:InsuraanceintheM
MortgageIndu
ustry

nder
Beneffitstothelen
Allow
wsthelenderttomakeloansinexcessoff80%loanto valueandrecoverinsured
dlossesby
makin
ngaclaimtottheinsurer.

Beneffitstotheborrower
Allow
wstheborrow
wertoreceiveahighratiom
mortgagewitthfavourabletermsandafavourable
intere
estrate.

Prog
grams
PleaseNote:Regu
ulatorychanggesenactedin
nJuly,2012hhavereducedthemaximum
mLTVof
refinaancesto80%,,themaximumamortizatio
onto25yearrs,themaxim
mumGDSto39%andthe
maxim
mumTDSto4
44%.Thefollowingsection
nsonCMHC, Genworthan
ndCanadaGu
uarantydetail
theircurrentdefau
ultinsuranceprogramsavaailablethrougghtodayslen
nders.Whileofferedby
theseinsurers,nottalllenderso
offertheseinssuredproduccts.Itisalwayysuptotheleenderifit
wishe
estoofferaninsuredproduct.Theinfo
ormationprovvidedbelowiisdirectlyfromthe
respectiveinsurer..

CMH
HC
Thefo
ollowingfigurreillustratestthestandardCMHCpremiiumsandisprovidedassaample
inform
mationonly.Informationissubjecttocchange.Speccificproductiinformationccanbefound
atww
ww.cmhc.ca

Figure18CMHCPrem
miumsasofJan
nuary,20161

Pre
emiumonTo
otal
Loan

Prem
miumonIncrreasetoLoaan
Am
mountforPortorRefi

Upto
oandincludiing65%

0.60%

0.6%
%

Upto
oandincludiing75%

0.75%

2.6%
%

Upto
oandincludiing80%

1.25%

3.15%
%

Upto
oandincludiing85%

1.80%

4.00%
%

Upto
oandincludiing90%

2.40%

4.90%
%

Upto
oandincludiing95%

3.15%

5.65%
%

90.01
1%to95%NonTraditional
Down
nPayment

3.35%

LoantoValueRatio

http:://www.cmhcschl.gc.ca/en/co/moloin/mo
oloin_005.cfm

Chapter7:InsuraanceintheM
MortgageIndu
ustry

14
45

Su
uccessTipPurchaseeplusimp
provementssprogram
m
Be
ecomefamiliaarwiththePu
urchasePlusIImprovementtsprogram.TThisprogram
m,offeredby
allthreeinsurers,canassistrealestatesaalespersonst osellhomesthatneedim
mmediate
repairsthatbuyyersmightno
ototherwiseb
beinteresteddinpurchasin
ng.Helpyourrrealestate
salespersonsellmorehomesandheorshewillhelpyyoufundmoremortgages!!

Gen
nworth Fi nancial 2
Thefo
ollowingfigurreillustratestthestandardGenworthprremiumsandisprovidedaassample
inform
mationonly.Informationissubjecttocchange.Speccificproductiinformationccanbefound
atww
ww.genworth.ca

Figure19GenworthsStandardPrem
miumasofJanu
uary,2016s3

StandardPremiumR
RateChart

Includestheefollowingp
products**

LTV

Prem
mium
Raate

opup
To
Pre
emium

Upto65.00%*
U
*

0.6
60%

0.60%
0

65
5.0175.00%*

0.7
75%

2.60%
2

75
5.0180.00%*

1.2
25%

3.15%
3

80.0185.00%
%

1.8
80%

4.00%
4

85.0190.00%
%

2.4
40%

4.90%
4

90.0195.00%***

3.6
60%

5.65%
5

Homeb
buyer95
CashOutRefinance(max.80%
LTV)
CashbackEquityOw
wner
Occupaancy
FamilyPlan
Insured
dProgressAdvance
Newto Canada
SecondaryHomes(TTypeA)
PurchassePlusImpro
ovements

**FForspecificunderw
writingguidelinesrelatedtothe
abooveproducts,plea serefertotheapp
plicableproduct
oveerview.

m
****ForCashbackEquuityProgramthesstandardpremium
rateeis2.90%andtheepremiumforporttability/topupis
4.255%

*A.25%premiumsurcharggewillbeappliedforeveryy5yearsofa mortizationb
beyondthe
tradition
nal25yearm
mortgageam ortizationpeeriod

Can
nada Gua
aranty
Thefo
ollowingfigurreillustratestthestandardCanadaGuarrantypremiumsandispro
ovidedas
sampleinformationonly.Informationissub
bjecttochangge.Specificp
productinform
mationcanbee
found
datwww.canadaguaranty.ca

2
3

Genw
worthFinanciaal,www.genwo
orth.ca
http:://genworth.caa/en/lenders/p
premiumratetable.aspx

146

Chapter7:InsuraanceintheM
MortgageIndu
ustry

Figure20CanadaGu
uarantyStandardPremiumsaso
ofJanuary,201664

CanadaGuar
C
rantyPremiu ms

StandardPremiumChaart

LoantoValueRattio Single

LowDoc Advantage

RentalAdvaantage
(Selfeemployed)

Refi/Port
Topup

Single

Refi/Port
Topup

Single

Reefi/Port
TTopup

65%
%

0.60%

0.60%

0.80%

1.50%

1.25%

2
2.75%

65.01
170%

0.65%

2.25%

1.00%

2.60%

1.75%

3
3.00%

70.01
175%

0.65%

2.25%

1.00%

2.60%

1.75%

3
3.00%

75.01
180%

1.00%

2.75%

1.64%

3.85%

2.50%

3
3.75%

80.01
185%

1.75%

2.90%

5.50%

85.01
190%

2.00%

4.75%

7.00%

90.01
195%

2.75%

Flex9
95Advantage 2.90%
NOTE::Mortgageinsurancepremiu
umsarenonre
efundable.

Defa
ault Man agement Program
ms (also kknown ass workou
ut
opti ons)

BothC
CMHCandGe
enworthFinaancialprovide
emortgagedeefaultmanagementprograamsthatare
design
nedtoassistborrowerswhogetintofinancialdifficuultyandhaveetroublemakkingtheir
sched
duledmortgaggepayments..

ogramsareprovidedthrou
ughthelendeerinconjuncttionwiththeinsurerand
Typicaally,thesepro
arede
esignedtoprovideasolution.Theseop
ptionscanincclude:
SpecialPaymen
ntArrangements
Alendermaym
makearrangem
mentswithth
heborrowerttorecoverpaaymentarrearrsoverthe
sho
ortestperiod,aslongasittiswithinthe
eborrowersffinancialabilitty.Forexample,witha
CM
MHCpolicyallendermaydothiswitham
mountsuptoo$10,000withhoutCMHCsprior
approval.
eamortization
Re
Alendermayin
ncreasetheam
mortizationo
ofamortgageewhenthedeefaultisduettothe
paymentsnolo
ongerbeingafffordablefortheborrowe r.Forexamp
ple,withaCM
MHCpolicya
len
ndermayexte
endtheamorrtizationupto
o30yearswiithoutCMHCspriorappro
oval.
Capitalization
unt.For
Thisprocedureallowsthelendertoaddttheamountoofarrearstotheloanamou
exaamplewithaCMHCpolicyy,alendermaayincreasethheloanamou
untupto$20,,000onetimee
duringtheborrowersownershipwithouttCMHCsprioorapproval.
Otheroptions

http:://www.canadaguaranty.ca/d
downloads/CG
G_Premium%200Rates_handoout_EN.pdf

Chapter7:InsuraanceintheM
MortgageIndu
ustry

14
47

Lendersmayhaaveadditionaloptionsthattcanbeapprrovedbytheiinsurerbefore
implementation
n.

Moreinformationmaybefoundontheinsurerswebsiteesorbycontaactingthemd
directly.

7.2

Mortga
age Crediitor and Life
L Insurrance

Wha
at is Morttgage Cre
editor Ins
surance?
?
There
earetwotype
esofmortgaggecreditorinsurance.
Thefirstistypiccallyalifeinsurancepolicyyprovidedto aborrowerbbyaninstitutiionallender.
Thesecondisalifeinsuranceepolicyproviidedtoaborrrowerthrougghathirdpartty,suchasthhe
ortgageProte
ectionPlan(M
MPP),thatisn
notaffiliated withaninstittutionallendeer
Mo

orinsurancearedesignedttopaytheinsstitutionallen
nderupon
Bothttypesofmorttgagecredito
death
hoftheinsure
ed.

Lende
ersMortgage
eCreditorInssurance
Thistypeofinsuranceisobtainedbytheborrrowerfromtthelender,ussuallyintheb
branchofthee
erwhentheyapplyforthemortgage.TThistypeofpoolicyisverycconvenientfo
orthe
lende
borro
owertoobtain
nandtheinsu
urancepremiiumisusuallyyincludedintthemortgageepayment,
makin
ngitvirtuallyinvisibletoth
heborrower.

Thistypeofpolicyofferedbyle
endersisagro
ouppolicy,m
meaningthataallborrowersarelumped
togetherinthesam
mecategory.Forexample
e,smokersanndnonsmokeersalikeareccombinedin
thesaameagecateggory,oftenre
esultinginpre
emiumsthat maynotaccu
uratelyreflectthe
conditionofthebo
orrowersheaalth.

Inadd
dition,thistypeofinsuranceispostund
derwritten,m
meaningthattheborrowerrsimplyhastto
answe
erthreebasicchealthquestionsintheaapplicationfo rcoverage.Ifftheborroweeranswersno
o
toallofthequestions,heorsheistypicallyaapproved.If theborroweranswersyesstoanyofthe
questtions,heorsh
hemustsupplyadditionaldetailsalongwiththeapp
plication.Theelendermay
thend
decidewhatssteps,ifany,mustbetake
enforittoap provetheborrowersapplicationfor
insuraance.

Ifthe
eborrowerdiesandaclaim
mismadebytheborrowe rsspouse,esstate,etc.,theinsurance
comp
panywillthenunderwritettheapplicatio
on.Thismeannsthatthein
nsurancecom
mpanywillnow
w
review
whowthosethreequestio
onswereansw
weredandreesearchtheborrowerspastmedical
record
dstoensuretthattheansw
werswereanssweredaccurrately.Iftheyywerenot,th
heinsurermaay
declin
netopaytheclaim.

Ifabo
orrowerdecid
destoswitchlendersatso
omepoint,th eborrowerw
willthenhaveetoreapplyfo
or
insuraancewiththe
enewlender.Thiscouldre
esultinhigheerpremiumsd
duetothebo
orrowers
increaasedageand//orchangesinhisorherm
medicalcondiition.

Theco
overageprovvidedbymorttgagecreditorinsuranceissalsoafactorrtoconsider.Thistypeof
policyyisoftenrefe
erredtoasde
ecliningtermiinsurance.Thhismeansthaattheamoun
ntofthe
coverragedeclinesastheoutstaandingbalancceofthemorttgageisrepaiidbytheborrrower.
Howe
ever,theprem
miumsremain
nconstant.

148

Chapter7:InsuraanceintheM
MortgageIndu
ustry

editorinsuranncewilltypicallyexpirewh
henthe
Regarrdingcontinuedcoverage,mortgagecre
mortggageispaido
offorwhenth
heborrowerrreaches70yeearsofage,reesultinginalo
ossof
coverrageforthepolicyholder.

Finallyy,mortgageccreditorinsurrancehasonlyyonebeneficciary:thelend
der.Thissimplymeans
thatw
whateverthefinancialnee
edsofthesurvvivor(s),theiinsurancepayysthelender,,notthe
survivvingfamilyme
ember(s).

ThirdPartyInsurance
Incom
mparison,the
eMortgageProtectionPlan,whichinsuuresover110,,000peoplefforlife
insuraanceandinexcessof40,000fordisabilityinsurance isportable,m
meaningthattthispolicy
canbetakenwiththeborrowerrtoanewlen
nder.

TheM
MortgageProttectionPlansscharacteristticsvaryfrom
mtypicalmorttgagecreditorrinsurancebyy
includ
dingatotaldiisabilityoptio
on,beinginde
ependentoftthelender,an
ndofferinga6
60dayrefund
d
onpre
emiumsifthe
epolicyholde
erdecidestocancelhisor herpolicy.

Thistypeofplanissonlyavailablethroughamortgageageent,sotheavverageborrow
werdoesnot
haveaccesstoit.

Wha
at is Life Insuranc
ce?
Inthisssection,term
mlifeinsuran
nce,whichisaalifeinsuranccepolicythattisinforcefo
ora
contraactednumbe
erofyearsatw
whichtimeittthencomes upforrenew
wal,willberefferredtoas
lifeinsurance.Thistypeofinsu
urancecontrastswithwho lelifeinsuran
ncethatrequ
uiresthe
insure
edtomakepaaymentsforaasetnumberofyears,how
weverthecovveragecontin
nuesforthe
entire
etyofthepolicyholdersliffe.Thisinsuranceisoftenmoreexpenssivethanterm
minsurance
andissnotsimilare
enoughtomo
ortgagecredittorinsuranceeforanaccuratecomparisson.Life
insuraanceisapoliccypurchasedbyanindivid
dualthatwillppayhisorherrbeneficiarieesintheeven
nt
ofdeaathoftheinsured.Thistyypeofpolicyisdesignedtooreplacethefinancialvalu
ueofthe
perso
onwhopassed
dawayandcoverageisno
ormallyrelateedtoincome,notdebt.Liffeinsurance
canonlybeobtainedthroughalicensedlifeinsurancebr okeroragenttandpartoftheprocessis
determiningtheam
mountofcovveragerequire
edbasedonttheindividualsuniquesettof
circum
mstances.Th
hismayresultinthepolicyholderrequirringmoreinsurancethanw
would
otherwisebeprovidedbymortgagecreditorrinsurance.

nsuranceisprreunderwrittten,meaningthattheindivvidualpolicyholdermustgothrougha
Lifein
health
hquestionnairethatallow
wstheinsurer todetermineeifcoverageiswarrantedandtoset
theprremiumbasedontheindivvidual,notaggroup.Thisissreferredtoaspreunderrwritingas
oppossedtomortgaagecreditorinsurancethaatispostund erwritten.Th
henetresultisthatthe
policyyholdercanbeassuredthaatupondeath
htheinsurer willpayhiso
orherclaimquickly.In
essen
nce,alifeinsu
urancecompaanyhastwoyyearsfromtheedateofapp
provaltodisputea
policyyholdersclaim
montheirinssuranceapplication.Iftheeydonottheinsuranceco
ompanyno
longerhasanyrecourse,meaniingthatthein
nsurercannottrefusetopaaytheinsured
dsclaim.

Lifein
nsurancehaslevelpremium
msthatarevalidfortheteermofthepo
olicyandtheaamountof
coverrageremainsconstant.Whenthepolicycomesupfoorrenewalth
hepremiumw
willmostlikelly
increaase,unlessth
hepolicyholde
erhasimprovvedmedicallyy.Normallyth
hisisnotthecaseandeveen
ifitw
were,thepoliccyholderwou
uldnowbeold
derandrequiirehigherpreemiumsduettoage.

Chapter7:InsuraanceintheM
MortgageIndu
ustry

14
49

Su
uccessTipPartnerwithapro
ofessional
Paartnerwithaq
qualifiedlifeinsuranceprrofessionalanndmakehimorheryourin
nsurance
representative..Tellyourclientthatyou
urinsurancerrepresentativvewillcontacctthemto
disscusstheirinssuranceneed
ds.Youwillasssistyourclieentsandgetrreferralbusinessfromyour
inssurancerepre
esentative.A
Agreatwayto
ogrowyourbbusiness!

Thefo
ollowingfigurreprovidesavisualcompaarisonbetweeenmortgagecreditorinsuranceand
termlifeinsurance
e.

Figure21MortgageCreditorvs.TerrmLifeInsurancee

TermLifeInsurance

MortgageCreditorInsu
urance

Und
derwriting

Postunderrwritten

Con
nvenience

Quickande
easytoqualiffy

Porrtability

None

Pre
emiums

Level

Am
mountofInitia
alCoverage

Determined
dbytheamoountof
themortgaage

Pro
otectionon
deffault/illness

Iftheborro
owerdefaultssor
cannotmakkehisorher
mortgagep
payment,the
insurancew
willceaseastthe
insuranceistiedtothe
mortgagep
payment

Preunderwritten

Mayyrequiremedical
inveestigation,len
ngtheningthee
pro
ocess

Indeependentofalender

Levvel

Detterminedbyttheinsured

Asllongasthein
nsuredcanpay
theinsuranceprremium,the
insu
urancewillco
ontinue,
regardlessofwh
hetherthe
mortgagepaymeentcannotbee
mad
de.

Am
mountofConttinuing
Covverage

Decreases

Con
nstant

Exp
piry

Whenthem
mortgageisppaidor
upontransfertoanewllender

Atttheendoftheeterm

150

Chapter7:InsuraanceintheM
MortgageIndu
ustry

Nam
medbythein
nsured

Iftw
wohomeown
nersare
insu
uredandtherreisa
com
mmondisasteerwhereboth
h
arekilled,twodeathbenefitss
arepaid.

neficiaries
Ben

Lender

Num
mberofDeatthBenefits

One,theou
utstandingbaalance
ofthemorttgage

Spe
eedofClaimP
Payment

Cantakeup
ptoseveralm
months
duetoinsu
urerinvestigattion
Paid
dwithindayss

Wha
at insuran
nce is be
est for yo ur Clientt?
Thegeneralconsensusisthatte
ermlifeinsurranceisabettteroptionforrtheborroweerthan
mortggagecreditorinsuranceforseveralofth
hereasonsnootedabove.However,betttercoveragee
isonlyyapplicablew
whentheterm
minsuranceisinforce.Onnaverage,on
nlyabout20%
%ofmortgagee
agenttsclientsactu
uallytakemo
ortgagecredittorinsurance .Quiteoften
n,thisisduettothe
borro
owerindicatin
ngthatheorsshecurrentlyhasadequatteinsuranceo
orthatheorsshefeelsthatt
insuraanceisnotre
equiredunderrhisorhercirrcumstances..Sincethem
mortgageagen
ntisnota
licenssedlifeinsuraancerepresen
ntativeheorsshecannotdeeterminewheetherthosesstatementsarre
accurate.

Inadd
dition,evenifftheborrowe
erindicatesth
hatheorshe willtaketerm
mlifeinsuran
nceinsteadoff
mortggagecreditorinsurance,th
heborrowerm
maynotseeaalifeinsurancceagentquiccklyenoughto
o
ensurrethatthereiisadequatein
nsuranceinfo
orceassoon asthemortggagebegins.IInmanycasess
thebo
orrowersimp
plyforgetsorputsoffseein
ngthelifeinssuranceagenttandendsup
pnotbeing
prope
erlyinsured.

Oneo
optiontoensu
urethatthecclientisprope
erlyprotecteddistosuggesstthattheborrowertake
thein
nsuranceprovvidedbytheM
MortgagePro
otectionPlanorthecredito
orlifeinsuran
ncepolicyand
d
thenm
meetwithalifeinsuranceagentathisorherconvennience.Whilethisdoesnotaddressth
he
issuessnotedearlie
erregardingthedifference
esincoveragee,itdoesensurethattheb
borroweris
coverredimmediately.Anothersoundbusine
esspracticeisstoobtainth
heborrowersspermission
tohavveyourinsuranceagent(aaninsuranceaagentthatyoouknowandttrust)initiateethecontact
withttheborrowerr.Thisreduce
esthepotentialofthebor rowerforgetttingorneglecctingto
contactaninsuran
nceagentonh
hisorherown.

Inadd
dition,curren
ntlegislationrrequiresthatthemortgageeagentorbrokerofferinssurancetothe
borro
ower.Iftheborrowerdeclines,theagentorbrokersshouldhavettheborrowerrsignawaiveer
declin
ningtheinsurrance.Thisw
willprotectthe
eagentorbrookerifatsom
mepointinthefuturetherre
isaqu
uestionastowhethertheinsurancewaaseveroffereed.Thiscanb
beespeciallyimportantifaa
home
eownerdiesd
duringthemo
ortgageandaspouseorotthersurvivorsuesthemorrtgageagent
orbro
okerfornoto
offeringinsuraanceduringtheapplicatioonphase.

These
estepsareofvitalimportaance.Theywillensurethaat,iftheborro
owerdies,hissorherfamily
willbe
eadequatelyprotected,w
whichshouldb
beanoverriddingconcernfforeverymorrtgageagent..

Chapter7:InsuraanceintheM
MortgageIndu
ustry

7.3

15
51

Properrty Insura
ance

Wha
at is Prop
perty Insu
urance?
Prope
ertyinsurance
eisapolicyofinsuranceth
hatprovidesccoverageforthehomeow
wneragainst
coverredrisks.

Why
y is it nec
cessary?
Basicinsurancetocovertherep
placementoff thebuilding (normallytheehouse)andother
structturesonthep
propertyisvittaltolenderssandisarequuirementoftheStandardChargeTerms.
Thisin
nsuranceprotectstheinsu
uredagainstloss,andbyeextensionprotectsthelend
derssecurityy
fortheloan.Lendersrequireth
hattheinsuraancepolicyhaaveaprovisio
onthatassign
nsthe
eedsfirsttoth
helender.Th
helendercanthendecide whethertoreplacethebu
uilding,which
h
proce
istypical,oruseth
heproceedstopayoffthemortgage.
Iftheborrowerfailstopaytheinsurancepre
emiumtheleenderhastherighttopaytthepremium
onthe
ehomeowne
ersbehalforreplacethep
policy(somei nsurancecom
mpanieswilln
notaccepta
premiumpaymenttfromanyone
ebuttheinsu
ured).Thehoomeownerow
westhelendeerthecosts
involvvedineitheriinstance.

Typ es of Ins urance


Home
einsurance
Thistypeofpolicyisforthehom
meownerand
disdesigned toprotectno
otonlytheph
hysical
building,butallthe
ethingsinthehomeowne
ershouseasw
well.Astand
dardhousein
nsurancepoliccy
willen
nsurethatifssomethinglikkefire,vandalismortheftooccurstheho
omeownerwillbe
protectedandhiso
orhervaluab
bleswillbereplaced.Itisaalsopossibleforahomeow
wnertobe
eoplehavewh
hileontheprropertywhich
hnecessitatesstheneedfo
or
heldliableforaccidentsthatpe
liabilittyinsurance.

Mosthomeinsurancepoliciesccarrystandard
dcoverage.TThefollowingglistsummarizesthis
coverrage.

BuuildingCoveraage
Alllriskcoverageeinsuresthebuildingfortthemostcom
mmontypeso
oflosses.WhenthereisAll
Risskcoveragein
nplace,theb
buildingisinsu
uredforeveryything,unlessitisspecificcallyexcluded
d
fro
omthepolicy(e.g.,intentio
onaldamagetothepropeertybytheow
wnerwouldnotbe
covvered).

NaamedPerilsCoverage
Thisincludesalistofthemo
ostcommontypesofthinggscoveredun
ndertheinsurrancepolicy.
NaamedPerilsin
ncludefire,th
heftandwate
erdamage.Evverythingisliistedverycleearlyinthe
po
olicycontractsothepolicyownerhasacompletean dthoroughu
understandinggofwhatthee
inssurancepolicyycovers.Nam
medPerilsbu
uildingcoveraageisveryrarresinceitlim
mitsthe
am
mountofcove
erage.

Coontents
Alllriskcontentsscoverageinsuresbelongingsinsidethhehousefortthemostcom
mmontypesof

152

Chapter7:InsuranceintheMortgageIndustry

losses.WhenthepolicyownerhasAllRiskcoverage,thecontentsareinsuredforeverything,
unlessitisspecificallyexcludedfromthepolicy.

AstandardhousepolicyprovidesfortheActualCashValue(ACV)replacementofbelongings.
Thismeansthatthepolicyowneronlyreceivesthevalueoftheitem,lessdepreciation.For
example,ifthepolicyownerpurchasedaTV5yearsagofor$1,500,heorshemightonlyget
$500foritifitwasdestroyedinafire.Eventhoughitmaycost$1,800toreplacethatsameTV
today,theinsurancewouldstillonlygivethepolicyowner$500.

ManypeoplechoosetoaddtheReplacementValueoptiontotheircontentscoverage.
Replacementvaluecoveragemeansthatthecontentsofthepolicyownershouseareinsured
fortheamountitcoststoreplacethem.Whentheownerreplacestheitemwithasimilarkind
andquality,withinaspecifiedtime,theinsurerwillpaywhatitcosttoreplacetheitem,not
whatitwasactuallyworthinitsusedstate.Thismeansifa5yearoldTVwaslostinafire,the
ownerwouldgetthefullamountitwouldcosttoreplaceit,evenifthatismorethanwas
originallypaidfortheTV.

DetachedPrivateStructure
Thistypeofcoverageappliestostructuresthatexistonthepropertybutarenotconnected
totheprimaryresidence.Forexample,adetachedgaragecouldbeincludedunderthis
coverage.

AdditionalLivingExpenses
Iftheownerisforcedtoleavethehousebecauseofaloss,thiscoveragepaysforreasonable
andnecessaryexpensestotemporarilyliveawayfromhome.Hotelandfoodcostsarethe
typeofexpensesthatwouldbecoveredundersuchcircumstances.

PersonalLiability
Liabilityisalegalresponsibility.LiabilityInsuranceprovidesprotectionfromhavingtopay
damagestopeople,iftheownerhasbeenfoundresponsibleforunintentionallyinjuring
themordamagingtheirproperty.

Example
Ifsomeoneisinjuredontheinsuredsproperty,theownermayberesponsiblefordamages.For
example,ifsomeoneslipsonthefrontstepsofthisproperty,breaksanarm,andcannotgoto
work,theownercouldbeheldresponsiblefortheperson'slostwages.Thisinsurancecoverage
wouldpaytheinjuredpersonthosedamagesuptothepolicysmaximumcoveredamounts.

Anotherbenefitofliabilityinsuranceisthatitprotectsthepolicyowneranywhereintheworld.
Forexample,ifthepolicyownerwasgolfingandhisorhergolfclubaccidentallyflewoutofhis
orherhands,andstruckandinjuredanotherplayer,liabilityinsurancewouldcoverthis
accident.

VoluntaryPaymentsforMedicalExpenses
Thiscoversmedicalcostsifsomeoneaccidentallyinjureshimorherselfasaresultofyour
personalactivitiesorthewayyouhavemaintainedyourbuilding.Italsocoversinjuries
experiencedbyresidentemployees,suchasnanniesorhousekeepers,whileworkingforyou.
Youdon'thavetobefoundliabletomakeaclaimunderthiscoverage,butsomelimitsdo
applyandmaybedifferentfromcompanytocompany.

Chapter7:InsuranceintheMortgageIndustry

153

VoluntaryPaymentsforDamagetoProperty
Theaccidentalphysicaldamagetothepropertyofothersiscovered.Thismayoccurasa
resultofpersonalactivitiesorthewaythepolicyownersbuildingismaintainedorused.
Petsoranimalsthatareownedorcaredforbythepolicyownermayalsocausedamage.
Thistypeofcoveragewouldalsoincludetheintentionalactsofotherinsuredindividuals
underacertainage(setbytheindividualprovider).

RentalLossInsurance
Inthecasewheretheinsuredpropertyisbeingusedasarental,itisprudenttoobtainthis
typeofadditiontothestandardpolicy.Thisaddition(orriderasitisreferredto)willprotect
theinsuredagainstlossofincomeduetocoveredperils.Forexample,ifthehomeburns
down,thestandardpolicywillcoveritsreplacement.Howeverifitwasbeingusedasa
rental,thestandardpolicywillnotcoverreplacingthelostincomefromtherenterwhilethe
propertyisbeingrebuilt.Thisinsurancecoveragedoes.

CondominiumInsurance
Whenapurchaserbuysacondominium,thepurchaserownsthe"unit"andashareinthe
commonareasofthecondominiumtheroof,basement,elevator,heatingroom,lobby,
swimmingpool,parkinggarage,etc.Anownermaybeheldresponsibleforharmcausedtoany
partofthebuildingortootherswholiveorvisitthecondominiumcomplex.Acondominium
insurancepolicycanremovesomeofthefinancialworriesofcondominiumownership.
Thisinsurancepolicyprovidescoveragefortheownerspersonalproperty,structural
improvementstotheunitandadditionallivingexpensesiftheowneristhevictimoffire,theft,
orotherdisasterlistedinthepolicy.Theownerwillgetliabilityprotectiontoprotecthimorher
fromharmcausedtoanypartofthebuildingortootherswholiveinorvisitthecondominium
complex.Animportantfeatureofthisinsurancepolicyislossassessment.Thecondominium
ownersharesresponsibilitywithothersinthebuildingforcommonproperty.Lossassessment
protectstheownerfromdamagetothesecommonareas.

A"masterpolicy"ispurchasedandprovidedbythecondominiumboard.Thiscoversthe
commonareassharedwithothersinthebuildingliketheroof,basement,elevator,heating
room,lobby,swimmingpool,parkinggarage,etc.forbothliabilityandphysicaldamage.

Sometimesthecondominiumcorporationisresponsibleforinsuringtheindividualcondominium
asitwasoriginallybuilt,includingstandardfixtures.Inthiscase,thecondominiumunitowner
wouldonlyberesponsibleforinsuringpersonalpropertyaswellasanyalterationsthecurrent
ownerorapreviousownerhavemadetotheoriginalstructureofthecondominium,like
remodellingthekitchenorbathtub.Inothercases,thecondominiumcorporationisresponsible
forinsuringonlythebarewalls,floor,andceiling.Theownerwouldberesponsibleforinsuring
personalpropertyplusthingslikethekitchencabinets,builtinappliances,plumbing,wiringand
bathroomfixtures.

LimitationsInHouseInsurance,CondoInsuranceorTenantsInsurancePolicyCoverage
Withstandardhouseinsurance,condoinsuranceortenantsinsurancepoliciesthereare
limitationsregardingtheftcoverageforjewellery,furs,silverware,businessproperty,bicycles,
money,etc.Ifthehomeownerownsanyoftheseitemsheorshewouldberequiredto
purchaseadditionalinsurancetocoverthem.

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Chapter7:InsuraanceintheM
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ngaHouseInssurance,CondoInsurance
e,orTenantsInsuranceDeeductible
Payin
When
naninsuredm
makesaclaim
m,thehomeowneralways paysasmallportionoftheclaim,whilee
thein
nsurancecom
mpanypaystherest.Thep
portionpaidbbythehomeo
owneriscalled
dthe
deducctible.Theam
mountofthedeductibleaffectsthepri ceoftheinsu
urancepolicy.Thehigher
thede
eductible,the
elessthecostoftheinsurancepremium
m.

7.4

Title Ins
surance

Wha
at is Title
e Insuran ce?
Titleinsuranceisaapolicyofinsu
urancethatp
providescoveerageforthettitlerelatedrrisks
associatedwithrealestatetran
nsactions.Itisdesignedtoocovertheun
npredictableor
undettectableissue
essuchasforgery,fraud,m
missingheirs, etc.thatcan
naffectrightssofownership
p.
Becau
useitisinsuraance,atitlein
nsurancepolicymovestheeriskassociattedwithtitlefromthe
home
ebuyer,thele
endinginstituttionorthelaw
wyer,tothettitleinsurer.
Ifthereisaproblemwithtitletthatonlybeco
omesknown afterclosing,,thetitleinsu
urermay
rectifyytheproblem
morcompenssatethetitleinsurancepoolicyholder,prrovidedthetyypeof
proble
emthatsurfaacesiscovere
edbythetitle
einsurancepoolicy.

Typ es of Pollicies
TitleInsurancepoliciescantypicallybebrokendownintootwobasiccaategories:
LenderPolicy
ormallytakenatthereque
estofthelendderuponclossingofarefinancing
Thispolicyisno
traansaction.Th
hesepoliciesm
mayprovideccoveragetobboththelenderandtheho
omeowner,
wh
hichisrecomm
mended.

Ho
omeownersP
Policy
Thispolicyisno
ormallytakenbythenewh
homeownerw
whenpurchassingaproperrty;however
titlleinsuranceccanbepurchaasedatanytiimeduringthhehomeowneersownershiipofthe
pro
operty.
ATitle
eInsurancep
policytypicallyyprotectsagainstthefolloowingrisks:
Deefenceoftitlee
Fraaudandforgeery(includinggtitletheft,thheregistratio nofafrauduulentmortgagge,etc)
Unnenforceabilittyoftheinsurredmortgagee
DeefectsthatwoouldhavebeeenrevealedbbyanuptodaateSurvey
ErrrorsintheSurvey
Leggalservices,includinglawyyernegligencce,lawyerfra ud,lawyerdeeath,disbarm
mentor
rettirement
Deefectsintitlessuchasliens,executions,aadverseclaim
ms,encroachm
ments,unregistered
easements,mortgagesando
otherencumb
brances
Unnmarketabilityyoftitle
Hyydro,tax,waterandgasarrrears
Exeecutionsagaiinstpriorownners
Coondominiumsstatuscertificcates
Septicsystemvviolations
Woorkorders,noonconforminngzoning

Chapter7:InsuraanceintheM
MortgageIndu
ustry

15
55

Re
estrictivecove
enants
Mu
unicipalworkkordersandp
permits
Un
nregisteredhyydroeasemen
nts
Otherriskscove
eredbythepolicy.

ATitle
eInsurancep
policywilltypiicallynotpro
otectagainsttthefollowinggrisks:
Tittleissuesthattariseafterthhepolicydateethatwerennotpresentbeefore(othertthanfraudannd
oth
hercoveredrrisks)
Tittledefectsthaatthehomeoownerwasaw
wareofandtoowhichtheh
homeowneraagreed
Tittledefectsthaatthehomeoownerwasaw
wareofandabboutwhichth
hehomeownerdidnot
infformtheinsurer
Environmentalhazards,unleessnotedonttitle
Leggalityorrents
Firreretrofitcom
mpliance
Coostsofmovinggfencesorbooundarywallss
Lossesfromfaillingtomakeaaclaiminatimelyfashion
Otherexclusionnsincludedinthepolicy.

Soli citors O pinion on


n Title vs
s. Title In surance A Com
mparison

Pa
auseforcla
arification
nSolicito
orsOpinio
ononTitlee
ASolicitorsOpiniononTitleisareporttbythelendeersrealestattelawyeroutliningthe
conditionofthe
etitleofthem
mortgagedprroperty.

TheIssue
T

These
ervices
provid
dedbythe
Solicittor

Costs

SoliciitorsOpinion
nonTitle
Perform
msrequiredssearcheson
title
Facilitaatestheclosin
ng
Provide
esaLetterofOpinionon
title
Legalfe
ees
Disburssements

TitleInsuraance
Applieesforatitleinnsurance
policyonbehalfofthe
homeo
owner

Legalffees
Disburrsements
TitleIn
nsurancePolicy
Totalccostsaretypicallylessduee
tofew
wersearchesrrequired.

LawyerrsMalpracticceInsurance
whichttypicallycove
erslawyer
neglige
ence
Protection

Lawyeernegligence(depending
ontheepolicy)

Titledefects
Fraud,,forgery
Otherprotectionassdescribedinn
TypesofPoliciesseectionabove

156

Chapter7:InsuraanceintheM
MortgageIndu
ustry

Homeoownermustpprovelawyerss ReferttoTypesofPoliciessection
Restriictions

neglige
ence
Typicalcoveragemaaximumis$1
million

Typicalllyonlythehoomebuyer

Whoiscovered?
AfterClosing

Makin
ngaclaim

Solicitoorsopinioncooversissues

Errorssnotmade
bythe
eSolicitor

Fraud
d

Surve
eys

abovee
Coveraagemaximum
muptopolicyy
amoun
nt

Homebuyer,buyersspouseandd
childreen,whomeveerreceives
titleuponhomebuyyersdeath
Basedonpolicycovverage
includesitemsafteerclosing
Homebuyermakesaclaim
directlytotheinsurerfor
covereedrisks

uptoclosing
MustshowSolicitorrnegligence
Mayhaavetosuethe
eSolicitor
Solicito
ormusthavevvalid
malpracticeinsuranceforaclaim
m
tobem
made
NocoverageasSoliccitors
Doesnnotmatterwhhomakesthee
insuran
nceonlycovershimorherr
erroraaslongastheeriskis
covereed

Nocovverage
Fullretroactivecovverage,
includingfraudcom
mmittedby
Solicitor

Generaallyanuptod
datesurveyiss Generallynosurveyyisrequired
require
edforanOpin
niononTitle

The Cost of Title Insu


urance
TitleInsurancetyp
picallycostsbetween$200
0and$300,deependingonthetypeofp
policy,the
prope
ertytypeandthevalueoftheproperty.Thisisaoneetimepremium.

Mak
king a Cla
aim on a Title Ins urance P
Policy
Tomaakeaclaimon
natitleinsurancepolicyth
heinsured(thhehomeown
ner)mustcom
mpletea
statem
mentoflossaandsubmitittothetitlein
nsurerprompptly.Thetitleeinsurerwillp
provide
assistanceincomp
pletingthereq
quireddocum
mentation.

The History of Title I nsurance


e
Thefirsttitleinsurancecompan
ny,theLawPrropertyAssurranceandTru
ustSociety,w
wasformedin
n
Pennssylvaniain18
853.TitleInsu
urancewasde
evelopedinttheUnitedStaatesanduntiltheearly
1990sswasnotavailableinCanaada.Virtuallyyallrealestattetransaction
nsintheUnittedStates
currentlycarrytitle
einsurance,w
whileitspopu
ularityisconttinuingtogro
owinCanada..

Ascan
nbeseenbythefollowinggfigure,thep
popularityofttitleinsurancehasrisendrramatically
overtthepastdecaade,enjoyingnearlya1,40
00%increase inpremiums..However,asthe
popullarityoftitleiinsuranceinccreases,sodo
oesthepercenntageofclaim
ms,asisevideencedbynextt

Chapter7:InsuraanceintheM
MortgageIndu
ustry

15
57

e.ThisFigureillustratesan
nincreasefro
omanaverageeof10%incllaimsin1998
8toanaveragge
figure
ofneaarly30%since
e2004.

Figure22TitleInsura
anceNetPrem
miumsandNetC
Claims

Prov
viders of Title Ins
surance
InOnttariotherearrecurrentlyseveralInsurancecompani eslicensedto
oprovidetitleeinsurance5:
ChicagoTitleInsuranceCompany
FiddelityNationaalTitleInsuranceCompanyy
FirrstAmericanTTitleInsurancceCompany
FirrstCanadianTTitle
Law
wPro
SteewartTitleGuuarantyComppany
TraavelersGuaraantyCompanyyofCanada

Su
uccessTipSuggesttitleinsurrancetoyo
ourclients
Everyhomeownercanbenefitfromthep
protectionthaattitleinsura
anceprovidessagainst
fraaud.Contactyourpastclie
entsandsugggestthattheyytakeoutap
policy.Anddo
ontforgetto
o
askthemaboutttheircurrentfinancingne
eeds;theymaayneedtoreefinancetheirrmortgageorr
consolidatedeb
bt.Anotherw
waytoincreaseyourbusinnessnow!

FSCO
O

158

Chapter7:InsuraanceintheM
MortgageIndu
ustry

Figure23TitleInsura
ancePercenta
ageofClaimstoPremiums

7.5

Errors and Omis


ssions In
nsurance

Wha
at is Erro
ors and Omissions
O
s insuran ce (E&O )?
ErrorssandOmissio
onsinsurance
eisaninsuran
ncepolicythaatcoverstheprofessionalfromclaims
made
eagainsthimorherdueto
onegligenceintheformofferrorscomm
mittedinatraansaction.
Insuraancepoliciespriorto2008
8didnothave
eafraudprovvision.Thereefore,ifthem
mortgageagen
nt
weretocommitfraaudandtheb
borrowersuffferalossheoorshecouldn
notreceiveco
ompensation
fromthebrokerse
errorsandom
missionspoliccy.

UndertheMortgageBrokeragees,lendersandAdministraatorsAct,20006itismandatorythatall
licenssedbrokerage
eshaveapoliicyinplaceth
hatnotonlypprotectsagain
nsterrorsand
domissions
butfrraudaswell.Thepurposebehindthisrrequirementiistobringtheebrokerageccommunityin
n
linew
withotherpro
ofessionsandprovideprottectionforco nsumers.

htheinsurer, andthebrokkersandagen
ntsworking
Thebrokeragewilllhaveamasterpolicywith
forthebrokeragew
willbecovere
edunderthismasterpoliccy.Inotherw
words,individualbrokers
andagentsdonothavetheirow
wnpolicyrath
hertheyareccoveredundeerthebrokeraagesmaster
policyy.

Chapter7:InsuranceintheMortgageIndustry

7.6

159

Key Terms and Definitions

Approvedlender
AlenderapprovedbyCMHC

Beneficiary
Thepersonwhoreceivesthepaymentoftheamountofinsuranceafterthedeathoftheinsured

BusinessforSelf
Anothertermforanindividualwhoisselfemployed

CanadianAssociationofAccreditedMortgageProfessionals(CAAMP)
Themortgageindustrysnationaltradeassociation

Capitalization
Theactofaddingmortgagearrearsorothercostsassociatedwithamortgagetotheprincipal
amount.Forexample,capitalizingalendersfeemeansthatthisfeewouldbeaddedtothe
mortgageprincipalandamortized.

ChattelLoan
Apurchaserborrowsfundsforthepurchaseofmovablepersonalproperty(thechattel)fromthe
lender.Thelenderthensecurestheloanwithamortgageagainstthechattel.

Claim
Alegalactiontoobtainmoney,propertyortheenforcementofarightprotectedbylawagainst
anotherparty.Aninsuranceclaimisaclaimmadeunderthetermsoftheinsurancecontract.

CMHC
CanadaMortgageHousingCorporation

CommonAreas
Theareasofacondominiumbuildingthatarecommontoallunitowners.Forexample,a
swimmingpool,gym,etc.

Condominium
Thewholecollectionofindividualhomeunitsalongwiththelanduponwhichtheysit.Individual
homeownershipiscomposedonlyoftheairspacewithintheboundariesofthehome,as
definedbyadocumentknownasaDeclaration,filedonrecordwiththelocalgoverning
authority.

CondominiumCorporation
ACorporationwithoutsharecapital,createdundertheCondominiumActforthepurposesof
administeringtheoperation,maintenanceandrepairofthecommonelementsandassetsofthe
condominium.TheCorporationisguidedbyaBoardofDirectorsconsistingofhomeowners.

CondominiumStatusCertificate
Adocumentcontaininginformationregardingtheoperational,legal,andfinancialstatusofthe
condominiumcorporation.Thisdocumentcancontainthedeclaration,bylaws,rulesand
regulations,insuranceinformation,reservefundbalance,otherfinancialdisclosures,legal

160

Chapter7:InsuranceintheMortgageIndustry

descriptionoftheunitandmanagementcontract(ifapplicable).Itmayalsoincludeinformation
aboutanylegalfilingsorjudgmentsagainstthecondominium.Abuyershouldalwaysreview
thestatuscertificate.

Deductible
Inrelationtoaninsurancecontract,thisistheinsuredsshareoftheclaim.Theinsuredpaysthe
deductibleandtheinsurancecompanypaystheremainderoftheclaim.

DefaultManagement
Programsinplacebymortgagedefaultinsurersthatallowthelendertoassisttheborrowerin
resolvingmortgagearrears

Depreciation
Depreciationreferstothefactthatcertainassets,normallyphysicalassets,canlosevalueover
time.Theamountofdepreciationiscalculatedbasedonanitemsoriginalpurchasepriceor
economicvalue,itsanticipatedlifeexpectancyanditsresidualvalueatafuturepointintime.

Disbarment
Arevocationofalawyer'sabilitytopracticelaw

Disbursements
Amountspayable.Inmortgagefinancing,disbursementstypicallyrelatetoamountspaidfrom
themortgageproceeds

DownPayment
Anamountofapurchasersmoneyprovidedtothevendorfromhisorherownresources(not
includedinamortgageloan).Undercertainprogramsthisamountmaybeborrowed.

E&OorErrorsandOmissionsInsurance
Insurancethatprovidescoverageforerrorsoromissionsmadebyabrokerage,broker,agentor
Administrator.Thisinsurancemustcontainaprovisionforfraud.

Easement
Therightofuseorpassageoveranotherpersonsownedorleasedproperty.Easementshave
severallegalrequirementsandwillrunwiththeland,orbepassedfromownertoowner.

Encroachments
Whenapieceofrealpropertyhangsfromonepropertyoverthepropertylineofanothers.The
structurethatencroachesmightbeatree,garage,fence,partofabuilding,orotherfixture.

EnvironmentalHazards
Anysituationorstateofeventswhichposesathreattothesurroundingenvironment.Thismay
becausedbychemicalsleakingintothesoil,rupturedgastanksatagasstation,etc.

Executions
AWritofExecutionfiledwiththesheriffinthedistrictinwhichthedebtorlivesorownsland.
Thisallowsaplaintiffwhohassuccessfullyobtainedajudgmentagainstadebtorincourtto
enforcethejudgment

Chapter7:InsuranceintheMortgageIndustry

161

ExtendedAmortizationPeriod
Anamortizationthatexceedstheoriginalamortizationperiod

FireRetrofit
TheMunicipalActandPlanningActpermitoneapartmentinmostdetachedhouses,semi
detachedhousesandsometypesofrowhousesaslongasminimumhealthandsafety
requirementscanbemet.Therequirementsforfiresafetyinsuchunitsareregulatedunderone
oftwoprovincialregulations,eithertheBuildingCodeorSection9.8oftheFireCode.The
requirementsforalegalsecondunitcanbesummedupwiththesefourpoints:theremustbea
fireseparationbetweeneachunit;therehastobeawayforoccupantstoescapefromeach
unit;eachunitmusthavesmokealarms;theunitsmustmeetelectricalsafetystandards

GrossingupTaxableIncome
Theprocessofaddingdeductionsoriginallytakenfromanindividualsincomebacktothat
income

GroupPolicy
Aninsurancepolicythatgroupstogethercertainpolicyholdersbasedongeneralcriteria

HomeBuyersPlan(HBP)
Aprogramthatallowsafirsttimehomebuyertowithdrawupto$25,000inacalendaryear
fromhisorherregisteredretirementsavingsplans(RRSPs)tobuyorbuildaqualifyinghome.A
firsttimehomebuyerisconsideredtobeanindividualwhohasnotownedrealpropertywithin
fouryearspriortopurchasingthecurrentproperty.

HomeInsurance
Insurancetoprotectthehomeowneragainstcoveredrisksandperils

IndependentMortgageagentsAssociationofOntario(IMBA)
TheprovincialmortgageassociationinOntario

Insurancepolicy
Apolicythat,inreturnforthepaymentofapremiumorpremiums,providesinsurancecoverage
totheinsured

Liability
Anobligationofanindividualorotherentitytocompensateforpastoccurrencesthathave
causedinjuryorlosstoanother

Lien
Securityagainstaproperty,eitherrealorpersonal,foradebt

LifeInsurance
Apolicyofinsurancethatprovidesfinancialcompensationtoabeneficiaryuponthedeathof
theinsured

MalpracticeInsurance(Lawyers)
Insurancethatprovidescoverageforactsofnegligenceormalpracticebyalawyer.Thiswill
compensatetheinjuredparty.

162

Chapter7:InsuranceintheMortgageIndustry

MasterInsurancePolicy(Condominiums)
Typicallyfoundwithcondominiumbuildings,thispolicyoutlinesthecoveragefortheentire
building.

MortgageBrokerages,lendersandAdministratorsAct,2006
ThelegislationthatgovernsthemortgagebrokerageindustryinOntario.Thislegislationis
enforcedbyFSCOandreplacesthepreviousMortgageagentsAct.

MortgageagentsAct
ThelegislationpredatingtheMortgageBrokerages,lendersandAdministratorsAct,2006.This
legislationgovernedthemortgagebrokerageindustryinOntariountilJuly1st,2008andwas
enforcedbyFSCO.

MortgageCreditorInsurance
Insurancethatprovidescoveragetotheinsuredsothat,inthecaseoftheinsuredsdeathor
othercoveredrisk,paymentismadetothelender

MortgageCreditorLifeInsurance
Insurancethatprovidescoveragetotheinsuredsothat,inthecaseoftheinsuredsdeath,
paymentismadetothelender

MortgageDefaultInsurance
Aninsurancepolicywhichprotectstheinsured(thelender)againstlossessufferedbythe
defaultoftheborrower

MortgageFraud
Thedeliberateomissionofinformation,useofmisstatementsormisrepresentationstoobtain,
purchaseorfundamortgageloan

NationalHousingAct
Thelegislationthatcreatedmortgagedefaultinsurancein1954

NonOwnerOccupiedProperty
Apropertythatisrented

NonPermanentResident
Referstopeoplefromanothercountrywhohadanemploymentauthorization,astudent
authorization,oraMinister'spermit,orwhowererefugeeclaimantsatthetimeofacensus,as
wellasfamilymemberslivinginthesamedwelling

OwnerOccupiedProperty
Apropertythatisoccupiedbytheowner

Portability
Theabilitytotransfersomethingsuchasamortgageorinsurancetoanotherproperty,or
transfermortgagecreditorinsurancecoveragetoanotherlender

Premium
Anamountpaidinreturnforinsurancecoverage

Chapter7:InsuranceintheMortgageIndustry

163

PremiumSurcharge
Anadditionalpremiumpaidtotheinsurerforadditionalcoverage

PrincipalResidence
Theplaceinwhichanindividualnormallyresides

Privateinsurer
Anongovernmentalinsurancecompany

PropertyInsurance
Insurancethatprotectstheinsuredagainstlossestothepropertyduetofireandothercovered
perils

Reamortization
Theprocessofchangingtheamortizationonacurrentmortgage

Refinance
Theprocessofpayingoffacurrentmortgageandreplacingitwithanother

RentalProperty
Apropertyusedsolelyfortheprocessofrentingtogenerateincomefortheowner

ReplacementValue
Thecosttoreplaceanitemintodaysdollars

RestrictiveCovenant
Arestrictionofuseplacedontitleoftheservienttenementforthebenefitofthedominant
tenement

RRIF
ARegisteredRetirementIncomeFund.Afundpurchasedbyanindividualthatpaysaregular
return

RRSP
ARegisteredRetirementSavingsPlanisasavingsplanthatisregisteredwithCanadaRevenue
Agencyandallowstheindividualtodefertaxes,generallyuntilretirement.

SecondHome
Avacationpropertysuchasacottageorotherpropertynotusedasaprincipalresidence

SelfDirectedRRSP
AtypeofRRSP(RegisteredRetirementSavingsPlan)whoseownerdeterminestheassetmix
heldinthetrust

SelfEmployedborrower
Amortgageborrowerwhoseincomeisderivedfromselfemploymentactivities

SepticSystem
Adomesticwastewatertreatmentsystem(consistingofaseptictankandasoilabsorption

164

Chapter7:InsuranceintheMortgageIndustry

system)intowhichwastesarepipeddirectlyfromthehome.Bacteriadecomposethewaste,
sludgesettlestothebottomofthetank,andthetreatedeffluentflowsoutintotheground
throughdrainagepipes.

SolicitorsLetterofOpinion
Areportbythelendersrealestatelawyeroutliningtheconditionofthetitleofthemortgaged
property

Survey
Adocumentthatdeterminestheboundariesofaproperty

Tenant
Anindividualrentingaproperty

Termlifeinsurance
Alifeinsurancepolicywithaspecifiedtermoramountoftimethatthepolicywillbeinplace

Title
Atermthatreferstotheownershipofaproperty.Ifsomethingisregisteredontitleitmeans
thatitisofficiallyregisteredagainsttheownershipofthepropertythroughtheLandTitles
Office,wherepropertyownershipisrecorded

TitleDefects
Anyproblemthatcloudsthepropertystitle.Atitledefectcanbealien,apersonorentity
thatmayhavehadinterestinthepropertyandneversurrenderedit,oranynumberofother
situationsmakingthetitlelessthanperfect

TitleInsurance
Aninsurancepolicythatprovidesprotectionagainsterrorsintitlesuchassurveyerrors,zoning
infractionsandpropertyencroachments.Itcanalsoprotectthehomeowneragainstfraud.

Underwriting
Theprocessthataproductorserviceproviderusestoassesstheeligibilityofacustomerto
receiveitsproductssuchasmortgagefinancing,insuranceorothercredittoaconsumer

Chapter7:InsuraanceintheM
MortgageIndu
ustry

7.7

16
65

Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Ho
owhasmortgagedefaultin
nsuranceimp
provedthemoortgagemarkket?

2. Wh
hoarethecurrentmortgaagedefaultprrovidersinOnntario?

3. Wh
hatis/arethe
emainbenefitsofmortgaggedefaultinssurancetoa)theborrowerr?b)the
len
nder?

4. Ho
owcanaborrowercurrenttlyindefaultbeassistedbyythelenderaandthemorttgagedefault
inssurer?

5. Ho
owdoestitleiinsuranceben
nefita)thebo
orrower?b)tthelender?c)therealestaatelawyer?

6. Wh
hattypeofin
nsurancewou
uldyousuggessttoapurchaaserofacond
dominium?

7. Wh
henwastitleinsurancefirstintroduced
d?

8. Disscussthemaiindifferencessbetweenmo
ortgagecredi torlifeinsuraanceandterm
mlife
inssurance.

9. Wh
hichcompaniiesarecurren
ntlylicensedttoprovidetit leinsuranceiinOntario?

10. Withouterrors
W
sandomissio
onsinsurance,whatmight theconsequencesbetoaamortgage
bro
okerwhocom
mmitsanerro
orandissued
dbyaclient?

166

Chapter8:CalculatingaMortgagePayment

Chapter 8: Calculating a Mortgage Payment

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Describethecomponentsofamortgagepayment
Describetheeffectofcompoundinterest
UsetheHP10BIIfinancialcalculator
Performaninterestrateconversion
Calculatethepaymentrequiredtorepayamortgagebasedondifferentinterestrates,
mortgageamounts,paymentfrequenciesandamortizationperiods

Introduction

Intodaysmortgagebrokerageindustry,virtuallyallmortgageagentsusemortgageorigination
software.Thissoftwareperformsthecalculationsrequiredtodetermineaborrowersmortgage
paymentandvariousotherfinancialcomponentsofamortgagewithoutthebrokerhavingto
performthesecalculationsmanually.

However,astodaysmortgageagentisaprofessional,itisnecessaryforhimorhertoknow
moreaboutthefinancialcomponentsofamortgagethantheaverageconsumer.Bydoinga
simplesearchontheinternet,aconsumercanfindnumerousdifferenttypesofonlinemortgage
calculatorsthatwillcalculateapayment,accelerateapayment,provideanamortization
schedule,calculateprepaymentpenaltiesandsoon.

Therefore,toknowmorethantheaverageconsumerintodaysinformationage,themortgage
agentmusthaveasolidunderstandingofhowamortgagepaymentiscalculated,includingthe
effectsthatchangingdifferentcomponentsofamortgagehaveonthemortgagepayment.

ThiswillbeachievedbyusingthemostpopularfinancialcalculatorinNorthAmericatoday,the
HP10BII.

8.1

The Components of a Mortgage Payment

Wewillbeginourjourneyofcalculatingamortgagepaymentbyanalyzingthedifferent
componentsofapayment.Therearesixcomponentspresentineachmortgagepayment,and
without5ofthemamortgagepaymentcannotbecalculated.Theyare:

1. ThePresentValue(themortgageamount)
Themortgageamounttypicallyreferstotheamountofmoneythatmustberepaidbythe
borrower

2. TheAmortizationPeriod
Theamortizationperiodtellsushowlongitwilltaketofullyrepaythemortgageamount.The
amortizationperiodisexpressedinyears

Chapter8:CalculatingaMortgagePayment

167

3. TheInterestRate
Theinterestratetellsushowmuchthelenderisreceivingininterestinreturnforprovidingthe
mortgageamount.Thisnumberhastwocomponents:theannualrateandthecompounding
frequency

4. TheCompoundingFrequency
Thecompoundingfrequencytellsushowoftentheannualrateofinterestcompounds,whichin
turntellsusthepreciseamountofinterestthatisbeingcharged

5. TheFutureValue
Thefuturevaluetellsushowmuchmoneywillbeoutstandingatsomefuturepointintime.For
ourpurposesthefutureamountwillalwaysbezerosincethepaymentbeingcalculatedisthe
paymentthatisrequiredtopaytheentiremortgageamountoffoverthefullamortization
period.

6. ThePayment
Onceyouhavetheprevious5components,youcancalculatethepayment.Thepaymenttells
usexactlyhowmuchmoneyisrequiredtobepaidtothelenderineachpaymentperiod.A
paymentperiodwouldbeequaltoamonthifthemortgagehadmonthlypayments,aweekif
themortgagehadweeklypayments,andsoon.

Thesesixessentialcomponentsofamortgagepaymentarereflectedbysixkeysonthe
calculator,whichwillbereviewedonceyouhaveconfiguredthecalculator.

8.2

Configuring the HP10BII

TheHP10BIIhasseveralfunctionsthatallowustoexplainthecomponentsofamortgage
paymentwithouthavingtoresorttoalgebratocalculateapayment.Thefollowingfigureisa
pictureofthecalculator.

168

Chapter8:CalculatingaMortgagePayment

Figure24HP10BIICalculator

Tocalculate
apayment
wellbe
usingthis
rowof
buttons

the+/
button

andthe
shiftor2nd
function
button

Chapter8:CalculatingaMortgagePayment

169

Ourfocuswillrestprimarilyonthetoprowofthecalculator,focusingonthetopfivebuttons.A
fewotherkeyswillbeusedaswellbutthesefivearethekeysyouwillneedtousemostoften.

Asyoucansee,thetoprowsfivebuttonshavewhitelettersonthetopandgoldlettersonthe
bottom.Thismeansthatthesekeysorbuttonshavetwofunctionseach.Oneofthekeys
functionsisaccessedbyusingthewhiteportionofthebuttonandtheotherbyusingthegold
portionofthebutton.

Tousethewhiteportion,alltheusermustdoispressthekey.Thisisincontrasttousingthe
goldportionofthekey.Toaccessthisfunctiontheusermustfirstpressthesecondfunction
key.Thiskeyisthethirdbuttonfromthelowerlefthandcornerofthecalculatorandlookslike
this:

Figure25HP10BIIShift/2ndFunctionKey

Ascalculationsareperformed,eachbuttonrequiredwillbeclearlyindicated.Nothingwillbe
lefttochance.

TurningtheCalculatorON
Thefirststepinourprocessbeginswithturningonthecalculator.LocatetheONkeyatthe
lowerlefthandcornerofthecalculator.Thekeylookslikethis:

Figure26HP10BIION/OFFKey

PresstheONkey.Yourdisplayshouldnowread0.00.Ifitdoesnt,dontworry;simplyfollow
therestofthedirectionsandyouwillendupwiththeproperdisplay.

SettingtheCalculatortoaFloatingDecimalPlace
Thecalculatorcomespreprogrammedwiththedisplaysettoshowanumbertotwodecimal
places.Toperformmortgagecalculations,afloatingdecimalplaceisrequired.Afloating
decimalplacemeansthatthecalculatorwilldisplayanumbertohowevermanydecimalplaces
arerequiredwithoutroundingthenumber.

Toaccomplishthispressthefollowingkeys:

TheShiftKeytoaccessthesecondfunctionkeys.Onceyouvepressedthiskey,
simplypressthenextkey.

170

Chapter8:CalculatingaMortgagePayment

Figure27HP10BIIDisplayKey

TheDisplayKey.Thisisthesecondfunctionunderthe=signonthebutton
locatedonthebottomrow,the4thkeyontherightoftheONbutton.

Figure28HP10BIIDecimalKey

TheDecimalKey.Thisisthefirstfunctiononthisbutton.Thiskeyislocatedon
thebottomrow,the3rdkeyontherightoftheONbutton.

Yourdisplayshouldnowread0(nodecimalpointafterthezero).Ifyourdisplayreadsanything
butasingle0pleaserepeattheabovesteps.

Yourcalculatorisnowreadytobeusedinthefollowingsections.

8.3

Interest Rates

Beforeamortgagepaymentcanbecalculated,itisvitaltounderstandtherolethatinterest
ratesplayintheprocess.InterestratesinCanadaaretypicallycompounded.Thismeansthat
therateischargedmorethanonceperyearwiththeeffectofcharginginterestoninterest.The
effectsofcompoundinterestcanbesignificant.

However,beforetheeffectsofcompoundingcanbediscussed,themethodinwhichinterest
ratesareexpressedorwrittenmustbeexplained.Thestandardformofexpressinganinterest
rateverballyisbyfirstindicatingtherate,thenthecompoundingfrequencyfollowedby
whethertherateiscalculatedatthebeginningofthecompoundingperiodorattheendofthe
compoundingperiod.

Canadianmortgagesarecalculatedinarrears,orattheendofthecompoundingperiod.For
example,ifaborrowerwasmakingmonthlypaymentsonhisorhermortgageandthenext
paymentdatewasJanuary1st,thatpaymentwouldcoverthemonthofDecember.

Forotherfinancing,suchasacarlease,paymentsaremadeinadvancesointerestmustbe
calculatedinadvance.Forexample,ifanindividualhadacarleaseandhisorhernextpayment
wasdueonJanuary1st,thatpaymentwouldcoverthemonthofJanuary.

Therefore,forCanadianmortgagesaninterestrateisexpressedverballyinthefollowing
manner,consideringanannualrateof6%forthefollowingexample:

Therateis6%compoundedsemiannually,notinadvance.

Thatishowtherateisexpressedverbally.However,itisnecessarytowritethesecalculations
andthereforethemethodofexpressingarateonpapermustbeexplained.Thatsame
statementwouldbeexpressedinthefollowingmanneronpaper:

Chapter8:CalculatingaMortgagePayment

171

J2=6%

Jreferstothefactthatthisisanannualinterestrate

2referstothefactthatthisinterestrateiscompoundedsemiannually,ortwiceperyear(there
aretwosemiannualperiodsinayear).6%istherateofinterest.

Iftheratewas6%compoundedannually,notinadvanceitwouldbewrittenas:

J1=6%

Iftheratewas6%compoundedmonthly,notinadvanceitwouldbewrittenas:

J12=6%

Thefollowingchartillustrateshowcompoundingfrequenciesarewrittenforanannualinterest
rate:

Figure29ExpressingCompoundingFrequencies

CompoundingFrequency
Annually
SemiAnnually
Monthly
BiWeekly
Weekly
Daily

Writtenas:
J1
J2
J12
J26
J52
J365

Thenextstepistoexploretheeffectsofcompoundingonaborrowedamount.

Example
Anindividualisborrowing$100,000atJ2=6%,overaoneyearperiodandnotmakingany
paymentsduringthatperiod(thisisanexampleofaninterestaccruingmortgagealthoughnot
apopularmortgageitisbestsuitedtoillustratetheeffectofcompoundinterest).

Duringtheyear,interestwillbechargedtwicesincethecompoundingfrequencyissemi
annually.

Inthefirst6months(firstsemiannualcompoundingperiod)3%willbecharged(6%dividedby
twocompoundingperiods)ontheoutstandingbalanceofthemortgage,asisillustratedbelow:

$100,000x3%=$3,000

The$3,000representstheamountofinterestchargedinthefirst6months.Afterthefirst6
monthstheborrowerwillowetheprincipal($100,000)plustheaccruedinterest($3,000)asis
illustratedbelow:

$100,000+$3,000=$103,000

172

Chapter8:Calcu
ulatingaMorrtgagePaymeent

esecond6mo
onthswhichisthesecondsemiannual compoundin
ngperiod,ano
other3%will
Inthe
bechargedonthecurrentoutstandingbalan
nce,asisillusstratedbelow
w:

$103,00
00x3%=$3,0090

The$3,090represe
entstheamo
ountofinterestchargedinthesecond66months.Affterthesecon
nd
6mon
nthstheborrowerwillowetheoutstan
ndingbalancee($103,000)p
plustheaccru
uedinterest
($3,09
90)asisillusttratedbelow:

$103,000+
+$3,090=$1006,090

Inthissexample,th
heeffectofco
ompoundinte
erest,whichssimplymeansscharginginteereston
intere
est,isclear.

Iftheborrowerwaastoldthathe
eorshewoulldbeborrow ing$100,0000onaninterestaccruing
mortggageoverone
eyearandattheendofth
hatyearwoulldowe$6,0900ininterest,howmuch
would
dtheinteresttratebeifitw
waschargedo
onlyonceayyearcomparedtotwice?W
Written
mathe
ematicallytheequationlo
ookslikethis:

X(theunknow
X
wn)x$100,0000=6,090

X=6,,090/100,0000

X=.06
6090OR6.0900%

Thism
meansthatJ2
2=6%hastheexactsamee
effectasJ1=6..09%.Inotheerwords,theeseinterest
ratesareequivalen
nt.

Pa
auseforcla
arification
nEquivallentinteres
estrates
Tw
wointerestratesaresaidtobeequivaleentif,fortheesameamoun
ntborrowedoverthe
sameperiodoftime,thesam
meamountissowedattheeendofthatp
period.

Whathasjustbeen
naccomplishedisabasicrrateconversioon.Howeverr,toperformthistask
morequicklyande
efficiently,theHP10BIIfinancialcalculaatorwillbeussed.

8.4

Converrting an In
nterest Rate
R
with the HP10
0BII

Becau
usethecalculatorprovidessthepaymen
ntpercompouundingperiod
d,theinteresstratemust
firstb
beconvertedtoitsequivalentinterestrratepercomppoundingperriod.Forexam
mple,if
calcullatingamontthlymortgage
epaymentwh
hentheratefforthemortggageisJ2=6%without
conve
ertingtherate
e,thecalculatorwouldpro
oduceapaym
mentpersem
miannualperiod.Thisisno
ot
thede
esiredcalculaation.

eforearateco
onversionmu
ustfirstbepe
erformedtoc onverttheseemiannualin
nterestrateto
o
There
itsmo
onthlyequivaalentinterestrate.

Chapter8:CalculatingaMortgagePayment

173

ToaccomplishthistaskusingtheHP10BIIfinancialcalculator,thefollowingkeystrokeswillbe
used.

Figure30HP10BIINOM%Key

TheNOM%buttonisthefirstkeythatwillbeusedforaninterestrate
conversion.Itislocatedonthetoprow,thesecondbuttonfromtheleft.
NOM%referstotheannualrateofinterest.

Figure31HP10BIIP/YRKey

TheP/YRbuttonisthesecondkeythatwillbeusedforaninterestrate
conversion.Itislocatedonthetoprow,thesecondbuttonfromtheright.P/YR
referstothenumberofcompoundingperiodsperyear.

Figure32HP10BIIEFF%Key

TheEFF%buttonisthethirdkeythatwillbeusedforaninterestrate
conversion.Itislocatedonthetoprow,thethirdbuttonfromtheleftandright
(themiddlebutton).EFF%referstotheannualrateofinterestwithone
compoundingperiod.

LetslookatanexampletoconverttheinterestrateofJ2=6%toitsequivalentJ1rate.To
performthistaskthefollowingbuttonswillbepressed:

Whatyoushouldnowseeonyourdisplayis6.09.Remembertopressthekeysexactlyasshown
anddonotpressanyotherkeys.Ifyouhavefollowedtheabovekeystrokesyouwillget6.09on
yourdisplay.

174

Chapter8:Calcu
ulatingaMorrtgagePaymeent

Pa
auseforcla
arification
nEinyyourdispla
ay
Ifyyouevergetaanansweron
nyourcalculaatorsdisplay thatlookssim
milartothis:
9.1
1234567E2
thismeansthattyoumustmovethedecim
malplacetwooplacestotheleft,orthenumberof
plaacesindicated
dbythenumberfollowinggtheE.Inthiisexampleth
heactualansw
werwould
be
e.091234567

Toensurethatyou
uareperform
mingthenecesssarysteps,aalwayswritetthekeystrokeesonpaperass
youco
ompletethem
m.Itistherefforenecessarrytostopusinngpicturesan
ndbeginusin
ngthe
appro
opriatenotation.Thefollo
owingchartilllustratesthe process.Fro
omthispointfforward,the
inputttingwillbew
writtenontheleft,thekeyssthatarepreessedwillbew
writtenintheemiddleand
thediisplayedoutp
putontheright.

KEEYSTROKES
INPUT
T
OUTP
PUT
6

SH
HIFTNOM%

SHIFTP/YR
S

SHIFTEFF%

6.0
09

Writin
ngthepreviousexamplew
wouldtherefo
orelookliketthis:

6SHIFFTNOM%

2SHIFFTP/YR

SHIFTTEFF%6.09

Example1
Letsllookatanoth
herexample.
Thein
nterestrateissJ2=4.5%and
dtheJ1equivvalentrateneeedstobecallculated.Thissproblem
would
dbesolvedussingthefollowingformat:

4.5SH
HIFTNOM%

2SHIFFTP/YR

SHIFTTEFF%4.5506
625

There
eforetheJ1raateis4.55062
25%

Pa
auseforcla
arification
nRoundin
nginterestrates
IntterestratesareNEVERrou
unded.Write
etheentireraateasitappeearsonyourd
display.
Ro
oundingtheraatewouldhavetheeffectofchangingttheratethatischargedon
nthe
mo
ortgage.

Chapter8:CalculatingaMortgagePayment

175

Example2
J2=5%,whatistheJ1equivalent?

5SHIFTNOM%

2SHIFTP/YR

SHIFTEFF%5.0625

ThereforetheJ1rateis5.0625%.
NowthatconvertinganinterestratetoitsJ1equivalenthasbeenmastereditisnecessaryto
takethisonestepfurther.Asmentionedearlier,thecalculatorwillprovideapaymentper
compoundingperiod.ByconvertingaratetoitsJ1equivalent,inotherwordsaratewithone
compoundingperiodperyear,thecalculatorwillprovideanannualmortgagepayment.How
manymortgagepaymentsareannual?Virtuallynone!Thereforeaconversiontomatchthe
frequencyofthepaymentmustbecompleted.

Example3
BobwishestotakeamortgagethathasarateofJ2=6%withmonthlypayments.Whatisthe
equivalentannualratewithmonthlycompounding?

Solution:
Thefollowingarethestepsthatmustbecompleted:

STEP
KEYSTROKES
MEANING

Step1:
6SHIFTNOM%
Therateis6%annually.
Inputthecurrentrate

Thereare2compounding

2SHIFTP/YR
periodsperyear.

ThisistheJ1rate.Aratemust
Step2:
alwaysbeconvertedtotheJ1
ConverttoitsJ1
SHIFTEFF%
ratebeforeitcanbeconverted
equivalent
toanotherfrequency.

Weinputthenumberof
compoundingperiodsthatthe
12SHIFTP/YR
Step3:
newequivalentratehas.
Converttotherequired

rate

SHIFTNOM%
Wesolveforthenewrate.

176

Chapter8:CalculatingaMortgagePayment

Thesestepswillbewrittenasfollows:

6SHIFTNOM%

2SHIFTP/YR

SHIFTEFF%6.09

12SHIFTP/YR

SHIFTNOM%5.92634643744

ThereforeJ12=5.92634643744%

Example4
MarywishestotakeamortgagethathasarateofJ2=4%withweeklypayments.Whatisthe
equivalentannualratewithweeklycompounding?Inthisexamplethepaymentsareweekly
whichmeansthattheratemustbeconvertedtoitsweeklyequivalent.Sincethereare52
weeksinayear52mustbeinputtedasthenumberofannualcompoundingperiods.

Solution:

4SHIFTNOM%

2SHIFTP/YR

SHIFTEFF%4.04

52SHIFTP/YR

SHIFTNOM%3.96203408856

ThereforeJ52=3.96203408856%
Bythispointyoushouldbecomfortableperformingarateconversion.Thisisnecessaryto
converttheratestatedbythelenderintoitsequivalentratewiththesamenumberof
compoundingperiodsasthepaymentfrequency.

Ifyouarestillhavingdifficulty,beginthissectionagainandcompletetheexamplesandthe
ReviewQuestionsonrateconversionsuntilyouareconfidentenoughtomovetothenext
section.Thesecalculationsarethenecessaryfirststepinbeingabletocalculateamortgage
payment.

8.5

Calculating a Mortgage Payment with the HP10BII

Beforewecanusethebuttonsrequiredtocalculateamortgagepayment,weneedtoreview
whattheyare,wheretheyareandwhattheylooklike.Takeamomenttoreviewthefollowing
chartandfindthekeysonyourcalculator.

Chapter8:CalculatingaMortgagePayment

177

Figure33HP10BIIKeysUsedforCalculatingaMortgagePayment

TheHP10BIIKeysUsedforCalculatingaMortgagePayment
HOWITIS
WRITTENON
PAPER

KEYORBUTTON

MEANING

SHIFT

Allowsaccesstothesecondfunctionofakey

SHIFTNOM%

BypressingSHIFTfirst,youaccesstheNOM%
keywhichiswheretheannualinterestrateis
inputted.

SHIFTP/YR

BypressingtheSHIFTkey,youaccesstheP/YR
keywhichiswherethenumberof
compoundingfrequenciesperyearisinputted.

PMT

ThePMTkeyrepresentstheperiodicpayment.
Thisisthelastbuttonpressedwhensolvingfor
amortgagepayment.

SHIFTEFF%

BypressingtheSHIFTkey,youaccesstheEFF%
whichprovidestheJ1rateasananswer.

TheNkeyrepresentsthenumberof
compoundingperiodsintotal
(thenumberofyearsmultipliedbythe
numberofcompoundingperiodsperyear).

+/

The+/keychangesavaluetoanegative
amountandisusedrightbeforethePVkey.

PV

ThePVkeyrepresentsthepresentvalueorthe
mortgageamount.Itmustalwaysbe
precededbythe+/key.

FV

TheFVkeyrepresentsthefuturevalue.Itwill
alwaysbe0whencalculatingamortgage
payment.

178

Chapter8:Calcu
ulatingaMorrtgagePaymeent

nvertinganin
nterestrateth
hefoundation
nforcalculatiingamortgaggepaymenth
hasbeenlaid..
Incon
Thenextstepistoexaminethe
eprocessofcaalculatingam
mortgagepayyment,whichisoutlinedin
n
thefo
ollowingchartt.

Figure34Calculating
gaMortgagePa
aymentKeystrrokes

STEP
Step1
1:
Inputthecurrentrrate
Step2
2:
Conve
erttoitsJ1
equivalent

Step3
3:
Conve
erttotherequired
rate
Step4
4:
Inputthemortgage
amou
unt
Step5
5:
Inputthenumberof
comp
poundingperiodsin
total
Step6
6:
InputtheFutureV
Value
Step7
7:
Solveforthepaym
ment

MEANING

KEYSTTROKES
HIFTNOM%
SH

Weinputtheannu
ualrate

SHIFFTP/YR

SHIFTTEFF%

SHIFFTP/YR

SHIFTTNOM%

(Mortgageaamount)+/PPV

(Num
mber)N

0FV
0
PMT
P

Weinputthecomp
pounding
frequeency
Weco
onverttotheJ1equivalentt.
Wem
mustalwaysco
onverttothe
J1rateebeforeweccanconvertto
o
anythingelse.
Weinputthenumb
berof
compo
oundingperio
odsthatthe
neweequivalentrattehas.
Weso
olvefortheneewrate.
Weinputthemorttgageamountt
follow
wedimmediattelybythe+//
key,th
henthePVbu
utton.
Weinputthenumb
berofyears
pliedbythen
numberof
multip
compo
oundingperio
odsperyear
follow
wedimmediattelybytheN
button
n.
Thefu
uturevaluew
willalwaysbe
zero.Input0follow
wed
immediatelybytheeFVbutton.
WeprressthePMTbuttonand
viewttheresultson
nthedisplay.

Pa
auseforcla
arification
nBEGIN
Ninyourd
display
Ifyyourefollowingthestepsexactlyandyyourmortgaggepaymentissstilloffbyafewdollars
orcents,checktomakesure
ethatyourdisplayisNOT showingBEG
GIN.Ifitisyour
calculatoriscalculatinginterrestatthebe
eginningofthheperiod,notttheend.Thisisnot
correct.Tofixtthispressthe
eSHIFTkeyth
hentheBeg/EEndkey(thekkeyonthesecondrow
fro
omthetop,faarright)

Example1
Mr.Borrowerhasbeenapprove
edforamorttgageonhishhomeintheaamountof$20
00,000.The
paymentsaremon
nthlybasedonanamortizaationof25yeearsandanin
nterestrateo
ofJ2=6%.
Whatishismonthlypayment?

Chapter8:Calcu
ulatingaMorrtgagePaymeent

17
79

Solutiion:

6SHIFFTNOM%

2SHIFFTP/YR

SHIFTTEFF%6.09

HIFTP/YR
12SH
SHIFTTNOM%5.92634643744

200,0
000+/PV

0FV

25X1
12N

PMT1,279.61324735

Pa
auseforcla
arification
nRoundin
ngamortg
gagepaym
ment
Fo
orpracticalpu
urposesmortggagepaymen
ntsarealwayysroundedup
ptothenexthighestcent.
Fo
orexample,amortgagepaymentof$1,279.61001111wouldactuaallybe$1,279
9.62.Recall,
ho
owever,thatinterestratessarenever rounded!

There
eforetheroun
ndedpaymen
ntis$1,279.62

Example2
Mrs.H
Homeownerhasbeenapp
provedforam
mortgageonhherhomeinttheamounto
of$420,000.
Thepaymentsareweeklybased
donanamorrtizationof300yearsandan
ninterestratteofJ2=4.5%.
Whatisherweeklyypayment?

Solutiion:

4.5SH
HIFTNOM%

2SHIFFTP/YR

SHIFTTEFF%4.5506
625

52SH
HIFTP/YR

SHIFTTNOM%4.45202652104

420,0
000+/PV

0FV

30X5
52N

180

Chapter8:Calcu
ulatingaMorrtgagePaymeent

488.004417673
PMT4

There
eforetheroun
ndedpaymen
ntis$488.01

Su
uccessTipN
Intheaboveexxampletheam
mortizationiss30yearswitthweeklypayyments.Thattmeansthat
yo
oumustinput30x52asth
heN.AlwaysrememberthhattheNisth
hetotalnumb
berof
compoundingp
periodsmultiipliedbythettotalnumberrofyears.

Example3
Malikkisobtainingasecondmorrtgagetopayyoffhiscredittcarddebt.H
Hehasbeenaapprovedfor
amorrtgageintheamountof$3
32,500.Thep
paymentsareemonthlybassedonanam
mortizationof
15yearsandanintterestrateoffJ2=9.55%wiithaoneyearrterm.Whattishispaymeent?

Solutiion:

9.55SSHIFTNOM%

2SHIFFTP/YR

SHIFTTEFF%9.7780
00625

HIFTP/YR
12SH

SHIFTTNOM%9.36535833066

32,50
00+/PV

0FV

15X1
12N

PMT3
336.737552619

There
eforetheroun
ndedpaymen
ntis$336.74

Pa
auseforcla
arification
nTermseffecton a
amortgag
gepaymen
nt
Intheaboveexxamplethereisaoneyearrterm.Theteermdoesnottaffecttheblended
paaymentasthe
epaymentisccalculatedbasedoncomppletelyrepayin
ngthemortgageoverthe
en
ntireamortizaationperiodo
oftheloan.

Chapter8:CalculatingaMortgagePayment

8.6

181

Calculating an Interest Only Mortgage Payment

Thedifferencebetweenablendedmortgagepaymentandaninterestonlymortgagepaymentis
thataninterestonlymortgagepaymentdoesntcontainanyprincipal.Thatmeansthatthe
amountthatyouborrowwillbetheamountthatyouoweattheendofthetermbecauseyou
areonlyrepayingtheinterestdueduringthemortgageandnotanyoftheprincipal.Thisalso
meansthatinterestonlymortgagesarenotamortizedbecausethereisnoprincipalreduction.

Example1
Johnisobtaininga$14,500secondmortgagefromaprivatelender.Therateis14.5%
compoundedsemiannuallywithmonthlypaymentsofinterestonly.Thetermofthemortgage
is1year.Becauseitisaninterestonlymortgagethereisnoamortization.

Solution:

14.5SHIFTNOM%

2SHIFTP/YR

SHIFTEFF%15.025625

12SHIFTP/YR
thefuturevalueisthe

sameasthepresent
SHIFTNOM%14.08044164941
valuebecauseno

principalisbeingrepaid
14,500+/PV

14,500FV

we'reusing12N
12N
becausethismortgageis

foroneyear
PMT170.1386699303

Thereforetheroundedpaymentis$170.14

182

Chapter8:CalculatingaMortgagePayment

8.7 Using the SHARP EL-738

(refertothisguideonlyIfyouareusingtheSharpEL738Calculator)

NOTE:youdontneedtoknowhowtocalculateanequivalentinterestrateusingthe
SharpEL738.Itisnotpartoftheprocesstocalculateamortgagepaymentasitiswith
theHP.

Example:Weareborrowing$400,000atarateof6.5%compoundedsemiannually(J2),with
monthlypayments.Whatisthemonthlypayment?
Beforeusing,setthecalculatortodisplay9decimalplacesbypressingSETUP009
Afterthisyoushouldsee0.000000000onyourdisplay.

STEP
Step 1:
Clear the
Calculator

KEYSTROKES

2ndF CA

Step 2:
Input the number
of payments per
year

2ndF P/Y 12
ENT

Step 3:
Input the number
of compounding
periods per year

2 ENT

Step 4:
Quit the C/Y input

ON/C

MEANING
Sets the calculator to its
default values
We tell the calculator
how many payments
there are annually.
Monthly is 12; Biweekly is 26; Weekly is
52
Press the down arrow
key first. Your display
will now show C/Y=
Then we input the
number of compounding
periods per year. For
example, a semi-annual
rate has 2 compounding
periods. An annual rate
has 1 compounding
period. A monthly rate
has 12 compounding
periods.
By pressing the ON/C
button we leave the C/Y
input. We can now enter
the rest of the mortgage
information.

What you see


on your
display
0.000000000

P/Y =
12.000000000

C/Y =
2.000000000

0.000000000

Chapter8:CalculatingaMortgagePayment

Step 4:
Input the total
number of
payments in the
entire
amortization
Step 5:
Input the
mortgage
amount, known as
the Present Value
or PV
Step 6:
Input the annual
interest rate
Step 7:
Input the amount
owing at the end
of the
amortization,
known as the
Future Value or
FV
Step 8:
Solve for the
payment
Step 9:
Round the
payment up

183

25 X 12 = N

We input the number of


years multiplied by the
number of compounding
periods per year
followed immediately by
the N button.

ANS=N
300.0000000

400000 +/- PV

We input the mortgage


amount followed
immediately by the +/key, then the PV button.

(-400000)=PV
-400,000.0000

6.5 I/YR

We input the annual rate.

6.5=I/Y
6.500000000

0 FV

The future value will


always be zero. Input 0
followed immediately by
the FV button.

0=FV
0.000000000

We press the PMT


PMT=
button and view the
COMP PMT
2679.295144
results on the display.
Rounding up means that the second decimal place will always go up
to the next highest cent. In this example 2679.295144 becomes
$2,679.30

UsingtheSHARPEL738tocalculateequivalentinterestrates
Example:J2=6%WhatisitsJ12equivalent?

STEP
Step 1:
Clear the
Calculator
Step 2:
Input the number
of compounding
periods per year
Step 3:
Input the rate

MEANING

What you see


on your
display

2ndF CA

Sets the calculator to its


default values

0.000000000

2 (x,y)

Tells the calculator the


first of the variables, the
compounding frequency

2,_
0.000000000

KEYSTROKES

6 2ndF EFF

Converts the rate of


J2=6%
to
its
J1 2,6
EFF
equivalent, which is the 6.090000000
effective annual rate

184

Chapter8:CalculatingaMortgagePayment

Step 4:
Input the effective
annual rate
Step 5:
Input the new
number of
compounding
periods and solve
for the APR

12 (x,y)

6.09 2ndF APR

Tells the calculator the


first of the variables, the
compounding frequency
Converts the
J1=6.09% to
equivalent

12,_
0.000000000

rate of
2,6
EFF
its J12
5.926346437

185

Chapter8:CalculatingaMortgagePayment

8.8 Using the Texas Instruments BAII Plus

(refertothisguideonlyIfyouareusingtheTIBAIIPlusCalculator)

NOTE:youdontneedtoknowhowtocalculateanequivalentinterestrateusingthe
BAIIPlus.Itisnotpartoftheprocesstocalculateamortgagepaymentasitiswiththe
HP.

Example:Weareborrowing$400,000atarateof6.5%compoundedsemiannually(J2),with
monthlypayments.Whatisthemonthlypayment?Beforebeginningyouneedtosetyour
calculatortoafloatingdecimalplace.Press2ndFORMAT9ENTER

STEP

Step 1:
Clear the
Calculator

Step 2:
Input the annual
interest rate (I/Y)

KEYSTROKES

MEANING

What you see


on your display

2nd CLR TVM

2nd is the first button


on the second row from
the top; CLR TVM is
the upper function of
the last button on the
second row from the
top; NOTE: the P/Y
and C/Y will be reset to
1, which is their
beginning value

6.5 I/Y

Step 3:
Input the number
of payments per
year (P/Y)

2nd P/Y 12
ENTER

Step 3:
Input the number
of compounding
periods per year
(C/Y)

2 ENTER

Step 4:
Leave the C/Y
Mode

2nd QUIT

We input the annual


rate.
We tell the calculator
how many payments
there are annually.
Monthly is 12; Biweekly is 26; Weekly is
52
A semi-annual rate has
2 compounding
periods. An annual rate
has 1 compounding
period. A monthly rate
has 12 compounding
periods.
By pressing the 2nd
QUIT buttons we leave
the C/Y input. We can
now enter the rest of
the mortgage
information.

I/Y = 6.5

P/Y = 12

C/Y = 2

186

Chapter8:CalculatingaMortgagePayment

Step 5:
Input the total
number of
payments in the
entire
amortization (N)
Step 6:
Input the
mortgage
amount, known as
the Present Value
or PV
Step 7:
Input the amount
owing at the end
of the
amortization,
known as the
Future Value or
FV
Step 8:
Solve for the
payment (PMT)
Step 9:
Round the
payment up

25 X 12 = N

We input the number of


years multiplied by the
number of
compounding periods
per year followed
immediately by the N
button.

N = 300

400000 +/- PV

We input the mortgage


amount followed
immediately by the +/key, then the PV
button.

PV = -400,000

0 FV

The future value will


always be zero. Input 0
followed immediately
by the FV button.

FV = 0

We press the CPT then


the PMT button and
PMT =
CPT PMT
view the results on the
2,679.295144
display.
Rounding up means that the second decimal place will always go up
to the next highest cent. In this example 2679.295144 becomes
$2,679.30

UsingtheTexasInstrumentsBAIIPlustoconvertaninterestrate
Example:J2=4.5%.WhatistheJ12equivalent?
Weentertherate,thenconverttoitsJ1equivalent,thenconverttoitsJ12equivalent

STEP

KEYSTROKES

Step 1:
Switch to the
conversion mode

2nd ICONV

Step 2:
Clear the
calculators
conversion mode

2nd CLR WORK

MEANING
2nd is the first button on
the second row from the
top; ICONV is on top of
the 2 button
2nd is the first button on
the second row from the
top; CLR WORK is the
upper function of the
button on the lower left
hand side of the
calculator.

What you see


on your
display
Doesnt matter

NOM= 0

Chapter8:CalculatingaMortgagePayment

Step 3:
Input the effective
annual interest
rate (NOM)

4.5 ENTER

Step 4:
Input the number
of compounding
periods per year
(C/Y) of the rate
now

2 ENTER

Step 5:
Convert to the
effective annual
interest rate

CPT

Step 6:
Enter the number
of compounding
periods we want to
convert to

12 ENTER

Step 7:
Convert to the new
interest rate

CPT

187

You will see the NOM=


in the left hand side of
your display.
NOM= 4.5
We input the annual
interest rate.
You will see the C/Y=
in the left hand side of
your display.
The rate has 2
C/Y= 2.
compounding periods,
so we enter 2
compounding periods in
C/Y
You will see the EFF=
in the left hand side of
your display.
We press the CPT
EFF= 4.550625
button (top left button)
to calculate the effective
rate.
You will see the C/Y=
in the left hand side of
your display.
Were converting to
C/Y= 12.
J12, so we enter 12
compounding periods in
C/Y
You will see NOM= in
the left hand side of
your display. We press
NOM=
the CPT button (top left
4.45838349
button) to calculate the
new nominal rate

188

Chapter8:Calcu
ulatingaMorrtgagePaymeent

8.9

Advanc
ced Mortg
gage Callculations
s

PleaseNote:Theffollowingcalcculationsarenotrequired fortestingp
purposesonth
hefinalexam
m.
Theyarehereforyyourinformattionandtoasssistyouifyoouwishtocalculateadditio
onal
comp
ponentsofam
mortgageforyourclient.

Acc elerating
g a Mortg age
Byaccceleratingam
mortgage,the
eborrowerisincreasingthhesizeofthemortgagepaayment.The
follow
wingexampleillustratesho
owtocalculattetheamounntsavedbyaccceleratingamortgage.

Example
Aclienthascomettoyouforadvvice.Shereq
quiresamortggageintheam
mountof$35
50,000.You
haveinformedherrthatyoucan
nobtainthism
mortgagebassedonarateof4.9%,com
mpounded
semiannually,nottinadvance,amortizedovver25yearsw
witha5yearttermandmonthly
payments.Shewo
ouldliketokn
nowwhatthe
eregularpaym
mentisinthissscenario,an
ndhowmuch
shew
wouldsaveifsshedecidedtoacceleratetthismortgageewithweeklyypayments.

Solutiion

Thefirststepthatmustbeunde
ertakenisthe
ecalculationoofthemortgaagepayment.

4.9SH
HIFTNOM%

2SHIFFTP/YR

SHIFTTEFF%4.9600
025

12SH
HIFTP/YR

SHIFTTNOM%4.85
5071533217

350,0
000+/PV

0FV

25x1
12N

PMT2,015.738940
058

Pa
auseforcla
arification
nUsingth
he+/Ke
Key
Wheninputtinggthepresentvalueweuse
ethe+/keeytomakethemortgageaamounta
ne
egativenumber.Thisresultsinthepaymentbeingaapositivenum
mber.Ifyoud
donotusethe
+/keythepaaymentwillb
beanegativenumber.Thi sisimportan
ntinthenextexample
be
ecausewhene
enteringachangedpayme
entamountyyoumustenteeritasaposittivenumberif
yo
ouveusedthe
e+/keyassinstructedabove.Ifyou havent,youwillneedtoeenterthe
changedpayme
entasanegattive!

Chapter8:Calcu
ulatingaMorrtgagePaymeent

18
89

eforetheregu
ularmonthlypaymentinth
hisscenarioi s$2,015.74.Attheendofthe
There
amorttizationofthiismortgagesshewillhavepaid$604,7222($2,015.744x300paymeents).
Howe
ever,themorttgagehasate
ermof5yearrsanditwillnnotrenewontheexactterrmsofthe
currentterm.Itisthereforene
ecessarytocalculatehowm
muchshewilloweattheeendofthefirsst
5yearsofthemortgagetorealisticallydeterrminehowm uchmoneyshewillsaveb
byacceleratin
ng
thism
mortgage.Toaccomplishtthisrequirestthelearningoofanewproccess:calculatiingthe
outstaandingbalancceofamortggage.

Calc
culating the
t
Outsttanding Balance
B
((OSB) of a Mortga
age
Theprocessofcalcculatinganou
utstandingbaalance(OSB)oofamortgageeatapointin
ntime
provid
desthemortggageagentth
heinformatio
onrequiredtoocalculatetheamountsavvedby
accele
eratingamorrtgagepayme
ent.Toaccom
mplishthistasskrequiresussingtwoaddiitionalkeys:
theIN
NPUTfunction
nandtheAM
MORTfunction
n.

TheIN
NPUTfunctionislocatedo
onthefirstbu
uttononthel efthandsideeofthesecon
ndrowfrom
theto
op.TheAMO
ORTfunctionisthesecondfunctionofthheFVbuttonusedinprevvious
calcullationsandislocatedatth
hefarrightofthetoprow..Toaccessth
heAMORTfunction,the
userm
mustfirstpresstheSHIFTkey.

Usinggtheprevioussexamplethe
eoutstandinggbalancewill becalculated
dattheendo
ofitsfiveyeaar
term(sixtymonthllypayments)..Thecalculattionisperfor medusingthefollowingp
process.

Pa
auseforcla
arification
nImporta
antnotea
abouttheH
HP10BII+
IfyyouareusinggtheHP10BII+(nottheHP
P10BII)youneeedtochangethecalculattorfroma
flo
oatingdecimaalplacetoafiixeddecimalplace.Todo thispressSH
HIFT,DISP9.TThiswillset
the
ecalculatorto9decimalp
places.IfyoudontdothissyouwillseethewordRU
UNNINGon
yo
ourdisplaywh
hencompletin
ngstep3.

STEP1:Calculatetthemortgage
epayment

4.9SH
HIFTNOM%

2SHIFFTP/YR

SHIFTTEFF%4.9600
025

12SH
HIFTP/YR

SHIFTTNOM%4.85
5071533217

350,0
000+/PV

0FV

25x1
12N

PMT2,015.738940
058

190

Chapter8:Calcu
ulatingaMorrtgagePaymeent

properlyroun
ndedmortgagepayment.
STEP2:Inputthep

2,015
5.74PMT

STEP3:Calculatettheoutstandingbalanceaattheendof theterm.
Thefo
ollowingkeysstrokesarere
equiredtoacccomplishthis task,where112representssthenumberr
ofperriodsperyearand5representsthenum
mberofyearssintheterm::

12x5INP
PUTSHIFTAM
MORT

6060shouldbedisplayeed.Itisnownecessarytopressthe=
Oncethosekeysarrepressed6
button.Oncepresssed,Amortshouldappe
earatthetoppleftofthedisplay,PRINshould
appeaarbelowitan
nd762.43802562shouldappearbelow that.Amorrtrepresentss
Amo
ortization,P
PRINreprese
entsprinciple
eandthenuumberrepressentsthetotaalprincipal
paidinperiod60
60,whichre
epresentsthe
esixtiethpaym
ment.

Bypre
essingthe=buttonaseccondtimeIN
NTreplacesPRINand1,253.3019742
28replaces
theprreviousnumb
ber.Thisnum
mberrepresen
ntstheamou ntofinteresttpaidinthessixtieth
payment.Bypresssingthe=b
buttonathird
dtime,BAL appears,replacingINTaand
309,2
287.166263rreplacesthep
previousnum
mber.Thisnu mberrepreseentstheoutsttanding
balanceremaininggonthemortggageafterthesixtiethpayymenthasbeenmade(ino
otherwordsaat
theen
ndofthe5ye
earterm).

processiswritttenlikethis:
Thisp

NPUTSHIFTA
AMORT===309,287.1666263
12x5IN

efore,inthissscenario,atth
heendofthe
efiveyearterrmtheclientwillowe$309
9,287.17.
There

Pa
auseforcllarification
nRoundin
ngoutstan
ndingbala
ances
Ou
utstandingbaalancesarealwaysrounde
edoff.Thism
meansthatiftthe3rddecimaalplaceis5o
or
nd
higher,the2 decimalplace
eincreasesbyone;ifitis44orlowerthe2nddecimallplace
re
emainsthesame.
Exxample:
An
noutstandinggbalanceof$
$400,000.123is$400,000. 12becausethe3rddecimaalplaceis3
(w
whichis4orlo
ower).
An
noutstandinggbalanceof$
$400,000.126is$400,000. 13becausethe3rddecimaalplaceis6
(w
whichis5orh
higher)

Itisnownecessaryytocalculatetheoutstand
dingbalanceaattheendoffiveyearsbaasedonan
accele
eratedpayme
ent.Toaccele
eratethismortgagethemoonthlypaymeentisdivided
dbyfour.

$2,01
15.74/4=$50
03.935

mentmustno
owbeinputteedintothecaalculator.Thisswillbedonee
Theacceleratedmortgagepaym
byreenteringthemortgagewithaweeklyp
payment.

Chapter8:CalculatingaMortgagePayment

191

4.9SHIFTNOM%

2SHIFTP/YR

SHIFTEFF%4.960025

52SHIFTP/YR

SHIFTNOM%4.84319177322

350,000+/PV

0FV

25x52N

PMT464.449035727

Theacceleratedpaymentisnowenteredbycompletingthefollowingkeystrokes:

503.94PMT

Nowthatthenewpaymenthassuccessfullybeeninputted,theoutstandingbalanceattheend
ofthetermcanbecalculatedusingthefollowingkeystrokes,where52representsthenumber
ofperiodsperyearand5representsthenumberofyearsintheterm:

52x5INPUTSHIFTAMORT===297,675.736723

Thereforetheamountowingattheendofthefirstfiveyearsusinganacceleratedpaymentis
$297,675.74.Thisequatestoadifferenceof$11,611.43($309,287.17$297,675.74).However,
theclientwishestoknowtheamountthatshewillsaveoverthefirstfiveyearsbyaccelerating
thepayment,andthisamountdoesnotrepresentthesavings.Thisisbecausethepaymenthas
beenincreasedandtheextramoneypaidduringthetermofthemortgagemustbesubtracted
fromthesavings.

Therefore,underthemonthlypaymentscenariotheclientwouldpay$120,944.40duringthe
fiveyearterm($2,015.74x60)andundertheweeklyacceleratedpaymentscenariotheclient
wouldpay$131,024.40($503.94x260).Therefore,theclientisactuallypaying$10,080more
undertheacceleratedscenarioduringthesameperiod($131,024.40$120,944.40).This
amountmustbedeductedfromthedifferencebetweenthetwooutstandingbalances.

$11,611.43$10,080=$1,531.43

Thereforetheclientwouldhaveanetsavingsof$1,531.43overthefirstfiveyearsofher
mortgagebyusinganacceleratedweeklypayment.

192

Chapter8:CalculatingaMortgagePayment

Example
Basedonborrowing$400,000over25yearsatarateofJ2=5%withmonthlypaymentsanda
fiveyearterm,calculatethesavingsrealizedduringthetermofthemortgagebyaccelerating
themortgagepayment.

Solution

Step1:Calculatethepaymentofthemonthly
5SHIFTNOM%
mortgage
2SHIFTP/YR
SHIFTEFF%5.0625
12SHIFTP/YR
SHIFTNOM%4.94869855817
400,000+/PV
0FV
25x12N
PMT2,326.41994015

Step2:Inputthenewpayment
2,326.42PMT

12x5 INPUTSHIFTAMORT===
Step3:CalculatetheOSBofthemonthly
354,030.024726
mortgage

Step4:Calculatetheacceleratedpayment
2326.42/4=581.605

Step5:Converttheratetoitsweeklyequivalent 5SHIFTNOM%
2SHIFTP/YR
SHIFTEFF%5.0625
52SHIFTP/YR
SHIFTNOM%4.94086835724

Step6:Changetheamortizationtoweekly
52x25N

Step7:Inputtheacceleratedpayment
581.61PMT

Step8:CalculatetheOSBoftheaccelerated
52x5 INPUTSHIFTAMORT===
mortgage
340,590.299687

Step9:Usingtheinformationcalculatedintheaboveequation,calculatethetotalsavingsof
theacceleratedmortgage.

Savings=(OSBofmthlymtgOSBofweeklymtg)(TotalweeklypmtsTotalmthlypmts)
Savings=(354,030.02340,590.30)[(581.61x260)(2,326.42x60)]
Savings=$13,439.72($151,218.60$139,585.20)
Savings=$13,439.72$11,633.40
Savings=$1,806.32

Thereforethenetamountsavedoverthetermofthismortgage,byusingacceleratedpayments,
is$1,806.32.

Chapter8:Calcu
ulatingaMorrtgagePaymeent

19
93

Calc
culating the
t
prepa
ayment p enalty on
n a partia
ally open
morrtgage
Inthe
echapter,Ad
dvancedMorttgageConcep
ptswelearneedaboutthedifferentpreepayment
penalties.Inthisssectionweexplorethepro
ocessofcalcu latingthesep
penalties.Lettsbeginwith
h
anexaample.

Barbaara,theborro
ower,hasano
outstandingm
mortgageamoountof$145,533.80.Ontthe36th
payment,shehasd
decidedtore
epaytheentirreamountof theoutstand
dingmortgagee.Thelenderr
hasth
heoptionofcchargingBarb
bara3monthssinterestasapenaltyorttheinterestrrate
differential,whicheveroneishigher.

There
efore,thecurrentrateofin
nterestforassimilarmortggagefromtheelendermusttbeknownto
o
determinewhichp
penaltythele
enderwillchargetheclientt.Forthisillu
ustration,itw
willbe
medthatthellenderscurre
entpostedrateonits2yeeartermmorttgageis6%co
ompounded
assum
semiannually,nottinadvance.

Hercu
urrentrateoffinterestis7.15%compou
undedsemiaannually,with
hmonthlypayyments,a25
yearaamortizationanda5yearterm.Theam
mortizationa ndtermaren
notrequiredforthe3
monthinterestcalculation,how
weverintheIRDcalculatioonthetermissrequiredforcalculating
thenu
umberofmonthsremainin
nginBarbaraasmortgagew
withhercurrrentlenderan
ndthe
amorttizationisreq
quiredwhenccalculatingth
heoutstandin gbalanceatttheendofth
heterm.

3 M onths In terest Pe
enalty
Thefo
ormulausedttodetermine
e3monthsin
nterestpenalttyis:

Penalty=O
OutstandingBalanceoftheMortgagexx(Rate/12m
months)X3m
months

Theraatemustbecconvertedtoitsmonthlye
equivalent(J1 2)sinceasem
miannualrattecannotbe
divide
edbytwelve.Theratewillthenbedividedby100tooconverttheeinterestrateetoadecimaal.
Forexxample,J12=
=7.04576428197isactually.07045764228197whenu
usedinaform
mula.

Penalty=$1
145,533.80x[(7.04576428
8197(equivallentmonthlyrate/100))]/12x3

80x.07045766428197)/122x3
Penalty=($145,533.8

Penaalty=$145,533.80x.005887147023X33

Pe
enalty=$145
5,533.80x.01176144107

Penalty=
=$2,563.49211243

Penalty=$2,563.449

There
efore,thepen
naltythatBarbarawouldh
havetopaybaasedon3mo
onthsinteresstpenalty
equattesto$2,563.49.

194

Chapter8:Calcu
ulatingaMorrtgagePaymeent

Inte rest Rate


e Differen
ntial
Thein
nterestrated
differentialpe
enaltymustbecalculatedttodetermineewhatBarbarraspenalty
willbe
e.Forthefolllowingillustrration,theRaateDifferentiaalreferstoth
hedifferencebetween
Barbaarasrateandthecurrentrrate.

Thefo
ormulausedttodetermine
etheinterestratedifferenttialpenaltyiss:

Penalty=(RateDiffferential/12
2months)x(tthenumberoofmonthsrem
maininginBarbaras
mortggage)x(OutsttandingBalan
nce)

First,theratediffe
erentialmustbeconverted
dtoitsmonthhlyrate,aswasdoneinthe3months
intere
estpenaltycaalculation.Th
herateof7.15
5%compoun dedsemiann
nuallyminustherateof6%
%
comp
poundedsemiiannuallyleaavesadifferen
nceof1.15%,,compoundeedsemiannuaally.Thatratte
isthenconvertedttoitsmonthlyyequivalento
of1.14725444339.Whencconvertedtoitsdecimal
equivalent,thenumberis.0114
47254439.

Penalty=(.0
01147254433
39)/12x(6036)x$145,533.80

Penalty=.000956045366x24xx$145,533.80

Penalty=$3,339.285996149

Penalty=$3,339.229

There
efore,thepen
naltyunderth
heinterestrattedifferentiaalscenariois$$3,339.29.

Conclusion
Inthissscenario,Baarbarawouldbechargedtheinterestraatedifferentialof$3,339.2
29sinceitis
thehiigherofthetw
wopenaltiesthatthelend
derhastheopptionofchargging.

8.10
0 Conclu
usion

Inthisschapteryou
uhavelearned
dhowtocalcculateabasic mortgagepaayment.TheHP10BIIcan
alsob
beusedto:
Calculatetheouutstandingbaalanceofaninterestaccruuingorreverssemortgage
Dissplaytheprinncipaland/orinterestportionofapaym
ment
Dissplaythetotaalamountofprincipaland/orinterestppaidinastreaamofpaymennts(for
exaample,inate
erm)
CalculatetheCoostofBorrow
wing
CalculatethePrresentValueofaninvestm
ment
CalculatetheFuutureValueoofaninvestmeent
CalculatethepaaymentrequiiredtoobtainnaFutureVallue
Calculatetheinnterestratechhargedonam
mortgagewheereitisnotknown
CalculatetheraateofinteresttrequiredtoobtainaFutuureValue,and
Sevveralotherfuunctionswhiccharemoreaadvancedanddaretypicallyytaughtinmoortgage
financingcourses;howeverkeepinmindthatyoucannusethiscalcculatorformaanyfunctions
oth
herthansimp
plycalculatinggamortgagepayment.

Chapter8:Calcu
ulatingaMorrtgagePaymeent

19
95

ortocalculate
eamortgagepaymentcannalsobequitteadvantageo
ouswhen
Usinggthecalculato
meetiingaclientou
utsideofyourofficeandiffyoudonothhaveyourlap
ptop.Inthism
manneryou
cancaalculatethep
paymentforaaclientandtrrulydemonst rateyourpro
ofessionalism!

Su
uccessTipPractice!
Whilethesecalculationspro
obablyseemvverycomplicaated,theoldsaying,Practicemakes
pe
erfectdefinittelyappliesto
ousingthefin
nancialcalcul ator.Bypraccticingthesecalculations
yo
oucanmasterrusingtheHP
P10BIIandconfidentlyperrformthesecalculationsfo
orthebenefitt
ofyourclient!

196

Chapter8:CalculatingaMortgagePayment

8.11 Key Terms and Definitions

AmortizationPeriod
Thetotalamountoftimerequiredtofullyrepayamortgage

CompoundingFrequency
Thenumberoftimesperyearinwhichaninterestrateischarged.Typicalcompounding
frequenciesincludesemiannuallyandmonthly.

EFF%
TheJ1rateortheannualinterestratewithonlyonecompoundingperiod

EquivalentInterestRate
Aratethatisequaltoanother.Tworatesaresaidtobeequalif,forthesameamountborrowed
overthesameperiodoftime,thesameamountisowedattheendofthatperiod

FloatingDecimalPlace
Thecalculatorprovidestheansweronthedisplaytothenumberofdecimalplacesthenumber
requireswithoutrounding.

FV
Thefuturevaluealsoreferredtoastheoutstandingbalanceatagivenpointintime

HP10BII
Thefinancialcalculatorusedtocomputeseveralmortgagecalculations

InterestRate
Therateatwhichinterest,whichisafeepaidtothelenderforborrowingmoney,iscalculated

InterestRateConversion
Theprocessofconvertingaratetoitsequivalentwithadifferentfrequencyofcompounding

MortgageAmount
Theamountofmoneyborrowed,alsoreferredtoasthepresentvalue

N
ThekeyontheHP10BIIrepresentingthetotalnumberofcompoundingperiodsrequiredto
repayamortgage

NOM%
ThekeyontheHP10BIIrepresentingtheannualrateofinterest

OutstandingBalance
Thesameasthefuturevalue,thisistheamountowedatagivenpointintime.

P/YR
ThekeyontheHP10BIIrepresentingthetotalnumberofcompoundingperiodsperyear

Chapter8:CalculatingaMortgagePayment

197

PMT
ThekeyontheHP10BIIrepresentingthepaymentortheamountrequiredtoberepaidper
compoundingperiod

PV
ThekeyontheHP10BIIrepresentingthePresentValue,alsoreferredtoasthemortgage
amount

RoundedPayment
Apaymentthathasbeenproperlyrounded.Amortgagepaymentisroundeduptothenext
highestcentunlessotherwiseindicated.

Term
Acontractedperiodoftimeinwhichmortgagepaymentsaremade.Attheendofthisperiod
thecontractisrenewed,typicallyresultinginadifferentinterestrateandpaymentamount.

198

ulatingaMorrtgagePaymeent
Chapter8:Calcu

8.12
2 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons

1.

2.

No
ote:Thisquesstiondoesnottapplytothe
eSharporTexxasInstrumen
ntscalculatorrs.
Yourclienthasaskedyouwh
hichinterestrateislower::6%compoun
ndedsemian
nnuallyor
93%compoun
ndedmonthlyy.Whichrate
eislower?
5.9

No
ote:Thisquesstiondoesnottapplytothe
eSharporTexxasInstrumen
ntscalculatorrs.
Performthefollowingratecconversions:
a. J12=7%.W
WhatistheJ4
4equivalent?
b. J4=3.2%.W
WhatistheJ1
12equivalentt?
c. J12=3%.W
WhatistheJ2
2equivalent?
d. J365=18%.Whatisthe
eJ1equivalen
nt?

3. Yourclienthasaskedyoutotellhertheaamountofhe rmortgagep
paymentbaseedonthe
folllowingpropo
osedmortgagge:$295,500mortgageam
mortizedoverr35yearswitthaninterestt
ratteof4.25%co
ompoundedssemiannuallyy,notinadvaance,withweeeklypaymen
ntsanda3
yearterm.Whaatisherprop
posedpaymen
nt?

4. Calculatethepaaymentforth
hefollowingm
mortgages:
a. $470,000m
mortgage,25yyearamortizaation,monthllypayments,3yearterm,J2=6%
b. $350,000m
mortgage,40yyearamortizaation,biwee klypaymentss,5yearterm
m,J2=5.57%
c. $20,000seccondmortgagge,15yearam
mortization,m
monthlypaym
ments,15yeaarterm,

J2=14%
d. $1,250,000mortgage,35
5yearamortization,weekklypayments,,5yearterm,,J2=3.75%

5. Yo
ourclientdoe
esnotqualifyyforaninstitu
utionalmortggagesoyouh
havearranged
daprivate
se
econdmortgaageforhim.TThemortgage
eamountis$$34,500andttheinterestraateis13%
co
ompoundedssemiannuallyy.Themonth
hlypayments areinterestonlyforoneyyear.Whatiss
th
heamountofftheproposedmortgagep
payment?(H int:thepreseentvalueandthefuture
vaaluearethessamebecause
ethereisnop
principalbeinngrepaid)

Chapter9:AttractingaClient

199

Chapter 9: Attracting a Client

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Discusstheimpactofregulationandlegislationonthemarketingactivitiesofmortgage
agents
DiscusstheimportanceofanddifferencesbetweenamissionandvisionStatement
Discusstheimportanceofdifferenttypesofbusinesscards
Explainnetworkingandhowtobesuccessfulatit
Explainthemarketingofintangibles
Discussthebenefitsoftestimonials
Illustratehowtodifferentiateoneselffromthecompetition
Explaindatabasemarketing
Discussvariousmethodsofobtainingreferrals

Introduction

Inthemortgagebrokerageindustry,therearetwovitalcomponentstosuccess:attractinga
clientandbeingabletoachievethatclientsfinancingneeds.Withoutaclientamortgage
agentstechnicalexpertiseinmortgagefinancingisuseless.Todaysmortgagebrokerage
industryiscomprisedofoverninethousandmortgageagentsinOntario,allofwhomarevying
fortheconsumersattention.

Somedothisextremelywellbutittakesmostseveralyearstoobtainalevelofsuccessthat
equatestoacomfortablelifestyle.Thisisdueinlargeparttoalackofunderstandingthatinthe
mortgagebrokerageindustrythemajorityofworkthatisperformedissalesrelated.Theability
toobtainamortgagebrokersoragentslicense,whilevitallyimportant,isoflittleconsolationif
thebrokeroragentdoesnthaveasufficientflowofclientstogenerateasustainableincome.

Inreferringbacktothe8020rulediscussedearlier,itis,atleastanecdotally,afactthattwenty
percentofsalespeoplewillproduceeightypercentofthebusinessinanycommissionbased
industry.Thisisatruismforseveralreasons,butprimarilybecausethecommissionedagentis
hisorherownboss.Ifheorshehasafocused,disciplinedandcommittedbossthensuccesscan
follow.However,ifhisorherbossallowsfrequenttimeoffanddoesnotprovideastructured
environmentinwhichtoflourishtheagentwilltypicallyfail.

Thenetresultofthisrelationshipisthatthecommissionedagentmusthaveadedicationtohis
orhersuccessthat,attheoutsetofhisorhercareer,isequaltothatofanewbusiness.A
recentsurveyproducedbyEntrepreneur.comfoundthatapproximately50%ofbusinessesfailed
duringthefirstfouryearsofbusiness.Thisactuallycontradictsthestatementthateighty
percentofbusinessesfailinthefirstyearofbusiness,astatementthathasattainedthestatus
ofurbanmyth.Bothstatements,however,illustratethedifficultythatnewbusinesseshavein
theearlystagesoftheirdevelopmentandthecommissionedagentisnoexceptiontothisrule.

Asanindividualmakingacareerchange,movingintosalesforthefirsttimeorleavingafinancial
institutiontoundertakeanewchallenge,themortgagebrokerageindustrycanbeanincredibly

200

Chapter9:AttractinggaClient

eproperly.Th
hiscanbede finedashavingasoundteechnical
rewarrdingcareercchoiceifdone
knowledgeofthem
mortgageind
dustryaswellastheabilityytoattractan
ndkeepclientts.

Thiscchapterwillexxploresomessuccessfulstrrategiesforthhemortgageagentinmeeetingthegoall
ofattractingclientts,withafocu
usonadvertissing,networkking,marketin
ng,anddatab
base
management.

9.1 The Impa


act of Reg
gulation and
a Legis
slation

Theactivitiesavailabletoattracctaclientare
enumerous,aandmanyareeimpactedbyylegislation
ando
otherindustryyguidelines.Legislationan
ndindustryguuidelinesaredesignedtopreventsuch
practiicesasmisleaadingadvertissing,thebaitandswitch(pprovidingaco
onsumerwith
hanattractive
offertoobtainhim
morherasacclientbutbeingunableto providethep
productorserviceatthe
indicaatedprice),faalseadvertisin
ngandsoon.

dlegislation
Beforeaddressingthemethodssusedtoattraactaclient,thheindustrygguidelinesand
thataaffectthesem
methodsmusttbediscussed
d.Thefirstseetofguidelinesthatneedtobe
explorediscalledttheCanadianCodeofAdve
ertisingStanddards.

The Canadia
an Code of
o Adverttising Sta
andards
TheC
CanadianCode
eofAdvertisiingStandardsswascreateddbytheadverrtisingindustryin1963to
promotetheprofe
essionalpractticeofadvertiising.ThisCoodeisregularrlyupdatedbyyAdvertising
Stand
dardsCanada,,(ASC),which
hwasfoundedin1957.Thhisnotforprofit,selfregu
ulatorybody
regulaatestheadve
ertisingindusttryandhandlesconsumerrcomplaintsrrelatedtoadvvertising.

TheC
Codepromote
estruth,hone
esty,fairness,,andaccuracyyinadvertisingandiscom
mprisedof
fourte
eenclausesth
hatsetthecrriteriaforacce
eptableadve rtising.Theffollowingisacondensed
versio
onofthoseclauses:

1. AcccuracyandC
Clarity
Adverrtisementsmustnotcontaaininaccurate
eordeceptiveeclaims,statements,illusttrationsor
representations,eitherdirecto
orimplied,witthregardtoaaproductorsservice.Inasssessingthe
truthffulnessandaccuracyofam
message,theconcernisnootwiththein
ntentoftheseenderor
precisselegalityoftthepresentattion.Rather, thefocusisoonthemessaageasreceiveedor
perce
eived,i.e.thegeneralimprressionconve
eyedbytheaddvertisementt.

2. DissguisedAdve
ertisingTechn
niques
Noad
dvertisementshallbepresentedinaformatorstyle thatconcealsitscommercialintent.

3. PriiceClaims
Noad
dvertisementshallincludedeceptiveprriceclaimsor discounts,un
nrealisticpricce
comp
parisonsorexaggeratedclaaimsastowo
orthorvalue.

aitandSwitch
h
4. Ba
Adverrtisementsmustnotmisre
epresentthecconsumersoopportunityto
opurchaseth
hegoodsand
serviccesattheterm
mspresented
d.

Chapter9:AttractingaClient

201

5. Guarantees
Noadvertisementshallofferaguaranteeorwarranty,unlesstheguaranteeorwarrantyisfully
explainedastoconditionsandlimitsandthenameoftheguarantororwarrantorisprovided,or
itisindicatedwheresuchinformationmaybeobtained.

6. ComparativeAdvertising
Advertisementsmustnotunfairlydiscredit,disparageorattackotherproducts,services,
advertisementsorcompanies,orexaggeratethenatureorimportanceofcompetitive
differences.

7. Testimonials
Testimonials,endorsementsorrepresentationsofopinionorpreference,mustreflectthe
genuine,reasonablycurrentopinionoftheindividual(s),groupororganizationmakingsuch
representations,andmustbebaseduponadequateinformationaboutorexperiencewiththe
productorservicebeingadvertised,andmustnototherwisebedeceptive.

8. ProfessionalorScientificClaims
Advertisementsmustnotdistortthetruemeaningofstatementsmadebyprofessionalsor
scientificauthorities.

9. Imitation
Noadvertisershallimitatethecopy,slogansorillustrationsofanotheradvertiserinsucha
mannerastomisleadtheconsumer.

10. Safety
Advertisementsmustnotwithoutreason,justifiableoneducationalorsocialgrounds,displaya
disregardforsafetybydepictingsituationsthatmightreasonablybeinterpretedasencouraging
unsafeordangerouspractices,oracts.

11. SuperstitionandFears
Advertisementsmustnotexploitsuperstitionsorplayuponfearstomisleadtheconsumer.

12. AdvertisingtoChildren
Advertisingthatisdirectedtochildrenmustnotexploittheircredulity,lackofexperienceor
theirsenseofloyalty,andmustnotpresentinformationorillustrationsthatmightresultintheir
physical,emotionalormoralharm.Childdirectedadvertisinginthebroadcastmediais
separatelyregulatedbytheBroadcastCodeforAdvertisingtoChildren,alsoadministeredby
ASC.AdvertisingtochildreninQuebecisprohibitedbytheQuebecConsumerProtectionAct.

13. AdvertisingtoMinors
Productsprohibitedfromsaletominorsmustnotbeadvertisedinsuchawayastoappeal
particularlytopersonsunderlegalage,andpeoplefeaturedinadvertisementsforsuchproducts
mustbe,andclearlyseentobe,adultsunderthelaw.

14. UnacceptableDepictionsandPortrayals
Itisrecognizedthatadvertisementsmaybedistastefulwithoutnecessarilyconflictingwiththe
provisionsofthisclause;thefactthataparticularproductorservicemaybeoffensivetosome
peopleisnotsufficientgroundsforobjectingtoanadvertisementforthatproductorservice.
Advertisementsshallnot:

202

Chapter9:AttractinggaClient

ormofperson
naldiscriminaation,includinngthatbased
duponrace,n
nationalorigin
n,
(a)condoneanyfo
relligion,sexorage;
(b)ap
ppearinarealisticmannerrtoexploit,co
ondoneorincciteviolence;;norappearttocondone,o
or
dirrectlyencouraage,bullying;;nordirectlyencourage,oorexhibitobvviousindiffereenceto,
unlawfulbehavviour;
(c)de
emean,denigrrateordisparrageanyiden
ntifiablepersoon,groupofp
persons,firm,,organization
n,
ind
dustrialorcom
mmercialactivity,professiion,productoorserviceorattempttobringitorthem
m
inttopublicconttemptorridiccule;
(d)un
nderminehum
mandignity;o
ordisplayobvviousindiffereenceto,oren
ncourage,graatuitouslyand
d
witthoutmerit,cconductoratttitudesthato
offendthestaandardsofpu
ublicdecencyyprevailing
am
mongasignificcantsegmenttofthepopulation.

Pa
auseforcla
arification
nAdvertiisingStand
dardsCana
ada
Mo
oreinformatiiononAdverttisingStandaardsCanadaccanbefoundbyvisiting
ww
ww.adstandards.com

Leg islation
Adverrtisingandmaarketing,refe
erredtobyth
heMBLAAandditsRegulatioonsaspublicrelations
materrials,isdiscusssedinfoursp
pecificlocatio
ons:section227oftheMBLLAA,sections7to9of
Regullation187/08
8,sections5to7ofRegula
ation188/08aandsections18to20ofRegulation
191/0
08.

These
ectionsofReg
gulation187//08andRegu
ulation188/088dealwithth
heuseofnam
mesinpublic
relatio
onsmaterialssaswellasaprohibitionontheusageooffalse,misleeadingordeceptive
inform
mation.

Pub
blic Relat ions Mat erials: Ag
gents and
d Brokerss
Tobegin,Regulatio
on187/08de
efinestheterm
mpublicrelaationsmateriialsas:
(a)an
nyadvertisem
mentbythebrrokeroragen
ntinconnectioonwithhisorherstatusaasalicenseeo
or
hissorherdealin
ngortradinginmortgagessthatispubli shed,circulattedorbroadccastbyany
me
eans,or
(b)an
nymaterialth
hatabrokero
oragentmake
esavailabletoothepublicin
nconnectionwithhisor
herstatusasallicenseeorhisorherdealiingortradingginmortgagees.O.Reg.18
87/08,s.1(2)).

Pa
auseforcla
arification
nExampllesofpublilicrelation
nsmaterialls
He
erearesomeexamplesofwhatarecon
nsideredpubl icrelationsm
materials:
Radioad
Businessscards
Magazinead
Newspaaperad,whetheritisa
d
classifie
edadordispllayad
FlyerorBro
ochure
Asign((i.eonabuild
dingorvehicle
e)
Website
Billboarrdorposter
Anadplacedonawebsitte
Benchaad
Anadvertorrial(anarticleethatisan
Aprom
motionalemail
advertisemeent)

Chapter9:AttractinggaClient

20
03

Regulationalssoregulatestheuseofanagentsandbbrokersnameeinthefollow
wingsectionss
ThisR
ofReg
gulation187//08.

oflicenseename
Useo
7.Am
mortgageage
entoragentsshallnotdealortradeinm
mortgagesinaanameotherrthanhisor
herlicenseename.O.Reg.1
187/08,s.7.

Thism
meansthatabrokerorage
entcanonlyd
dobusinessbbyusingtheirnameasitisregistered
withFFSCO.FSCOd
doesallowan
nagentorbro
okertobereggisteredinhissorherfullleegalnameas
wellaasanalsokno
ownas,sothaatifyourlegaalnameis,forrexample,W
Williamandyo
ouareknown
n
asBilll,youcandobusinessusin
ngeithernam
me.

Useo
ofname,etc.,,inpublicrelaationsmaterrials
8.(1))Inallofhisorherpublicrelationsmaterials,amorrtgageagentoragentshallldisclosehis
orherlicenseenameandtheauthorizednameandliccencenumberofthebrokeerageon
wh
hosebehalfheorsheisau
uthorizedtod
dealortradeiinmortgages,andthenam
mesand
numbersmustb
beclearlyand
dprominentlyydisclosed.O
O.Reg.187/008,s.8(1).

(2)Iftheauthorize
ednameofth
hebrokerageis,orincludees,afranchiseenamethattthebrokeragee
isp
permittedtouseunderaffranchiseagre
eement,theppublicrelatio
onsmaterialsmustclearly
ind
dicatethatthebrokerageiisindependentlyowneda ndoperated..O.Reg.187/
7/08,s.8(2).

(3)In
nthepublicre
elationsmate
erials,atleastonereferenccetothebrokkeroragentm
mustinclude
oneofthefollowingtitlesan
ndthemateriialsmayalso includeaneq
quivalenttitleeinanother
lan
nguage:
1. Whenreferrringtoabroke
er,thetitlem
mortgagebrooker,brokeer,courtieren
hypothquesorcourtie
eroranabbrreviationofaanyofthosetitles.
2. Whenreferrringtoanagent,thetitlemortgageageent,agentoragenten
n
hypothquesoranabbreviationofan
nyofthosetittles.O.Reg.187/08,s.8((3).

Prohibitionrepub
blicrelationsmaterials
9.Am
mortgageage
entoragentsshallnotinclu
udefalse,mis leadingordeeceptiveinforrmationinhiss
orherpublicrelationsmaterrials.O.Reg.187/08,s.9.

Pub
blic Relat ions Mat erials: Mortgage
M
B
Brokerag
ges
Regullation188/08
8definespub
blicrelationsmaterials,innrelationtoaabrokerageaas:
(a)an
nyadvertisem
mentbythebrrokerageinco
onnectionwitthitsbusinesssasabrokerragethatis
published,circu
ulatedorbroaadcastbyanyymeans,or
(b)an
nymaterialth
hatabrokeraggemakesavailabletothe publicinconnectionwithitsbusinessaas
ab
brokerage;

ThisR
Regulationalssoregulatestheuseofthe
ebrokeragesnameintheefollowingsectionsof
Regullation188/08
8.

Useo
ofauthorizedname
5.Ab
brokerageshaallnotcarryo
onbusinessin
nanameotheerthanitsau
uthorizednam
me.O.Reg.
188/0
08,s.5.

204

Chapter9:AttractinggaClient

ofname,etc.,,inpublicrelaationsmaterrials
Useo
6.(1))Abrokerage
eshalldisclose
eitsauthorizednameandditslicencenu
umberinallo
ofitspublic
rellationsmaterrialsandthen
nameandnum
mbermustbeeclearlyandprominentlydisclosed.O.
Reeg.188/08,s.6(1).

(2)Iftheauthorize
ednameofabrokerageis,orincludes,afranchisen
namethattheebrokerageiss
permittedtousseunderafraanchiseagreement,thepuublicrelationssmaterialsmustclearly
ind
dicatethatthebrokerageiisindependentlyowneda ndoperated..O.Reg.188/
8/08,s.6(2).

(3)If,,initspublicrelationsmatterials,abrokkerageidentiffiesabrokeroragentbyn
name,the
bro
okerageshallusethenam
meinwhichth
hebrokeroraagentislicenssed.O.Reg.1
188/08,s.6
(3)).

oragent,thematerials
(4)If,,initspublicrelationsmatterials,abrokkeragereferstoabrokero
mu
ustincludeattleastonerefferencetothe
ebrokerora gentthatincludesoneofthefollowingg
titlles,andthem
materialsmayyalsoincludeanequivalennttitleinanotherlanguagee:
1. Whenreferrringtoabroke
er,thetitlem
mortgagebrooker,brokeer,courtieren
hypothqueso
orcourtieroranabbreviiationofany ofthosetitlees.
2. Whenreferrringtoanagent,thetitlemortgageageent,agentoragenten
n
hypothqueso
oranabbreviationofanyo
ofthosetitless.O.Reg.1877/08,s.8(3).

Mislleading, Deceptiv e and Fa


alse Adve
ertising
Assecction9ofReg
gulation187//08states,Amortgageaggentoragentshallnotinclludefalse,
misleaadingordece
eptiveinformationinhisorherpublicrrelationsmateerials.Tofu
ully
underrstandthesco
opeofthisse
ectionrequire
esafullerundderstandingo
ofthetermsm
misleading,
decep
ptiveandfalse.Misleadinggcanbedefin
nedasdecep tiveortendin
ngtocreateaafalse
impre
ession.Misleadingadvertiisingoccursw
whenarepressentationrelaatedtoaprod
ductorservicce
isdecceptive,materiallyfalseormisleadingin
nordertope rsuadetheco
onsumertob
buyit.

Decep
ptivecanbed
definedasthe
eactofconvincinganotheertobelieveinformationthatisnot
true,ornotthewh
holetruthasincertaintyp
pesofhalftruuths,whilefallsecanbedefinedas
delibeeratelydecep
ptive.Falsead
dvertisingisttheuseoffalsseormisleadingstatemen
ntsin
adverrtising.Asadvvertisinghasthepotentialltopersuadeepeopleintocommercialttransactions
thattheymightotherwiseavoid
d,manygove
ernmentsarouundtheworld
duseregulattionsto
contro
olmisleadingg,deceptiveo
orfalseadverttising.

Broke
eragesmustb
bekeenlyawaareofthedeffinitionsofth etermsused
dinthisRegullation,
especciallyinthiscllimateoffinancialturmoilandtheincreeaseofoverssightoflendin
ngand
broke
eringpractices.Severalotherjurisdictio
onshavealre adydeemedphraseologycurrently
usedbysomeOntaariobrokeraggesasdeceptiveormisleadding.Forexaample,theAu
ustralian
estmentCommissionpenaalizedabrokeerageforusingthephrasess,
SecurritiesandInve
independentandimpartialan
ndweworkfformostofthhelenders,w
whenthiswasproven
factuaallyincorrect..Thecontexttisanimporttantfactorwhhenadvertisin
ng.Thesesame
statem
mentsmaybe
econsideredtruewhenm
madebyonebbrokerageand
dfalsewhenmadeby
anoth
her.

Thefo
ollowingisalistofpotentiialterms,phrrasesandscennariosthatm
mayalsobedeeemedtobe
misleaading,decepttiveorfalse,d
dependingon
nthecontextinwhichtheeyareused.

Chapter9:AttractingaClient

205

Haveaccesstoall/workwithalllenders
Whilethebroker/agentmakingthisstatementmaybelieveittobetrue,doesheorsheknow
forcertainthathisorherbrokerageinfacthasaccesstoallofthelendersintheindustry?In
mostcasesthisstatementwillbefactuallyincorrectsinceboththeBankofMontrealandthe
RoyalBankofCanadadonotdealdirectlywithbrokers.

Accesstoover50lenders
Isthistrue?Thequestionthatmustbeaskedbeforeusingthisstatementishowmanylenders
didthebrokerageactuallyuseinthepreviousyear?TheMBLAAanditsRegulationsrequirethis
answertobedisclosedtoborrowerswhenrequested.Ifthebrokeragedidntuseinexcessof
50lendersinthepreviousyear,whywoulditsrepresentativemakethisstatement?Inother
words,whatisthegoalofthisstatement?Inmostcasesthegoalofthistypeofstatementisto
conveytotheconsumerthatthebrokeragecanshopforthebestmortgageforhimorherby
havingaccesstoavastnumberoflenders.Ifthenumber50isfactuallyincorrectthebrokerage
maybeusingmisleadingterminologyinitsadvertising.Itshouldensurethatallofitspublic
relationsmaterialaccuratelyreflectsthenumberoflendersthatithasactuallyusedand
wheneverthisisnotthecasethematerialsshouldbeamended.

Nojob?Nocredit?Noproblem!,Goodcredit,badcreditornocredit...allareapproved!,
Guaranteedapproval
Theseareallstatementsdesignedtogetaconsumerwithdifficultyinobtainingamortgageto
contactthebrokerage,brokeroragent.Whiletheargumentcanbemadethatanyonecanbe
approvedaslongastheyhaveenoughequity,regardlessoftheircircumstances,these
statementscouldbeconsideredmisleading,deceptiveorfalsebecausetheyimplythateveryone
willbeapprovedregardlessoftheircircumstances,whichisclearlynotpossible.

Lowestratesintown
Thisstatementimpliesthatthisbrokeragehasthelowestratesforeveryone.Unlessa
brokeragecanprovethisstatementtobefactual,itcanbeconsideredmisleading,falseor
deceptive.Considerwhatthebrokeragewouldhavetodotoprovethisstatement.Thiswould
requirebeingabletostatewithoutdoubtthatitknowsalloftheotherratesthatevery
brokerageandlenderofferandthatithasthelowestofthemall.Whilepossible,itisnot
probableandthebrokeragewouldmostlikelynotbeabletoprovethisstatement.

Quotingteaserordiscountedrateswithoutadvisingofothercostsordetails
Forexample,quotingarateof1%,whichmaybeathreemonthteaserrate,withoutindicating
thattherateincreasesafterthosethreemonthswouldlikelybeconsideredmisleading,
deceptiveorfalse,aswouldanadvertisementthatofferedarateof1%butdidntdisclosethe
factthattoobtainthisraterequiredtheborrowertopaytobuydowntherate.

TheU.S.FederalTradeCommission(FTC)atonepointin2007statedthatmorethan200
companieshadbeenwarnedaboutpotentiallydeceptivemortgageadvertisements.TheFTC
slammedadvertisersforhighlightingteaserratesandlowpaymentoptionswithoutexplaining
theharshrealityoftheseloanstoconsumers.

Quotingpaymentsbasedonextendedamortizationsthatappeartobelessexpensivethan
regularamortizedmortgage
Awaytomakepaymentsappearlowerthantheywouldtraditionallyappearistousean
extendedamortization.Ifthepaymentisinfactbasedonanamortizationperiodinexcessof25

206

Chapter9:AttractinggaClient

mentitmaybbeconsidered
dmisleadingsincethe
yearsanditisnotdisclosedinttheadvertisem
paymentismostlikelytheprim
marysellingpo
ointoftheaddvertisement..TheBritishC
Columbia
RegisttrarofMortggageBrokersiincludedthisexampleina ninformation
nbulletintottheBC
mortggagebrokeraggeindustry1.

Baita
andswitch
Thisissatermthatreflectswhen
nabrokerage
eattractsconnsumersbyad
dvertisingacertainproducct
ataraatelowerthaanthemarkettrate,butnevveractuallypprovidesthatrate.Forexaample,an
adverrtisementmayboastarate
eof2%toqualifiedborrow
wers(thebaitt).Howevertthebrokerage
mayn
neveractuallyyarrangeam
mortgageatth
hatratebecauuseeithernoconsumercaanmeetthe
qualifficationsforthatproducto
oritdoesntaactuallyexist. Theconsum
meristhenoffferedahigheer
ratein
nlinewithprrevailingmarkketrates(the
eswitch).

Adv ertising Tips


T
Co
ompetitio
on Bureau
u of Cana
ada
When
nabrokerage
eisdevelopingpoliciesand
dprocedures thatensureiitspublicrelaations
materrialsarecomp
pliant,itmaywishtoinclu
udesomeoftthefollowingadvertisingtipsfromthe
Comp
petitionBureaauofCanada..

Do:
Dooavoidfineprintdisclaimeers.Theyofteenfailtochanngethegenerralimpressionnconveyedbyy
anadvertiseme
ent.Ifyoudousethem,maakesuretheooverallimpreessioncreated
dbythead
andthedisclaim
merisnotmissleading.
Doofullyandclearlydiscloseallmaterialinnformationinntheadvertissement.
Dooavoidusingttermsorphraasesinanadvvertisementtthatarenotm
meaningfulan
ndcleartothe
ord
dinaryperson
n.
Doo,whenconduuctingacontest,discloseaallmaterialdetails.
Dooensurethatyoursalesforceisfamiliarrwiththese""DosandDonn'ts."Advertissersmaybe
heldresponsibleforrepresentationsmad
debyemploy ees.

Don't
Doon'tconfuse"regularprice"or"ordinaryyprice"with"manufacturrer'ssuggesteedlistprice"oor
aliketerm.The
eyareoftenn
notthesame.
Doon'tuse"reguularprice"inaanadvertisem
mentunlesst heproducthasbeenofferredingood
faithforsaleatthatpriceforasubstantiaalperiodofti me,orasubsstantialvolum
meofthe
pro
oducthasbee
ensoldatthaatpricewithin
nareasonablleperiodoftime.
Doon'tusethew
words"sale"o
or"special"in
nrelationtot hepriceofaproductunleessa
siggnificantprice
ereductionhaasoccurred.
Doon'truna"salle"foralongperiodorreppeatiteveryw
week.
Doon'tincreasetthepriceofaproductorservicetocoverthecostoffafreeproduuctorservice.
Doon'tmakeapeerformancecclaimunlessyyoucanproveeit,evenifyoouthinkitisaaccurate.
Testimonialsussuallydonotaamounttoad
dequateprooof.
Doon'tsellaprodductaboveyoouradvertiseedprice.
Doon'tundulydeelaythedistriibutionofprizeswhenconnductingacontest.

RegisstrarofMortgaageBrokers,BritishColumbiaa,BulletinMB 06002

Chapter9:AttractinggaClient

20
07

Doon'tforgetthaatnooneactuallyneedstoobemisledfooracourttofindthatanaadvertisemennt
ism
misleading.

9.2 Business
B
s Develop
pment forr Mortgag
ge Agentts

PleaseNote:Theffollowingtop
picsaredesign
nedtoassist youinundersstandinghow
wtomarket
yourselfandbegin
nobtainingclientsasalicensedmortgaggeagent.Ho
oweverthisseectionisnot
includ
dedinthecou
ursesfinalexxamination.

Thefo
ollowingtopiccsaredesigne
edtoassistth
henewmortggageagentin
nlearninghow
wtodevelop
hisorrherbusinesss.Byembraciingbusinessd
developmenttactivitiesimmediatelyup
pongetting
licenssed,thenewm
mortgageage
entincreaseshisorherlikkelihoodofsu
uccess,becausethefactis
thatn
nomortgageaagentcanbesuccessfulwithoutfirstfinndingaclientt.

Miss
sion and Vision Statement
S
ts
Missio
onStatement
AMisssionStateme
entisaplanfo
orcompaniessandpeoplettoaccomplishthegoalsth
heyset.Itis
design
nedtoshapethecompanyysorindividu
ualsidentity andistypicalllybasedonaavision,goal,,
oreth
hics.

AMisssionStateme
entcanbehelpfultoamortgageagent becauseitprresentsawayytoestablish
andunderstandgo
oals,andbringssubstanceandmeaninggtothepurpo
oseofthebu
usiness.

Thefo
ollowingaressomeexamplesofMission
nStatements::

withsuperiorp
productsandservicesbyddevelopinginnovationsandsolutions
"Provvidesocietyw
thatim
mprovetheq
qualityoflifeandsatisfycu
ustomerneedds,andtopro
ovideemployyeeswith
mean
ningfulworkaandadvancem
mentopportu
unities,andinnvestorswithasuperiorraateofreturn
Merckk

"Toenablepeopleandbusinesssesthroughouttheworld torealizetheeirfullpotenttial
Micro
osoft

"Orgaanizetheworld'sinformatiionandmake
eituniversallyyaccessibleaandusefulGoogle

nStatement
Vision
AVisionStatementissomethingthatthebusinessormo rtgageagent aspirestobeecome.It
shouldillustrateth
hecorebelieffofthebusine
essormortgaageagentand
deffectivelyccommunicatee
thattothereader..

Them
mainobjective
eofaVisionSStatementisttoexplaintheecorebeliefo
ofwherethecompanyor
mortggageagentisgoingwithth
hebusiness.

Prope
erlydevelopedMissionand
dVisionstate
ementscanp rovidedailyffocusforthebusinessor
agenttandassistinkeepinggoalsattheforeffront.Thisdaailyrefocusin
ngcansubstan
ntially
increaasethepoten
ntialforsucce
ess.Fortheconsumerthe sestatementtsclearlyandsuccinctly
outlin
nethebeliefsanddirection
nofthebusin
nessorthem ortgageagen
nt.Insodoingtheycan
quicklycommunicaateandarticu
ulatekeymesssagestothe consumer.A
AwelldesigneedMission

208

Chapter9:AttractinggaClient

Visionstateme
entwillassistttheconsume
erinpositive lyrelatingwitththebusineessor
andV
mortggageagent.

municatingyo
ourMissionaandVisionStaatements
Comm
Itisim
mportantthatt,onceconstrructed,these
estatementsaarecommuniicatedtoclien
nts,potentiall
clientsandotherswithintheindustry.Thisccanbedoneiinseveralwayssuchasbyyincluding
theminoron:
Staationary
Buusinesscards
Addvertisementss
Neewsletters
Proomotionalmaaterials
Em
mails
Annyitemsthattthepublicseees.

Bus iness Ca
ards
Grea
atsalesstartwithagreatBusinessCarrd
Jo
oeGirard,W
Worldsgreate
estSalesperso
onaccordinggtotheGuin
nnessBookoffWorld
Records

Thepurposeofaneffectivebussinesscardistoattractanddsetinmotio
onthewheelsofacquiringg
poten
ntialusersofyyourservice.Itprovidesthemortgageagentwith:
Addirectmarkettingvehicle
Appersontopersonsalescalll
Annadvertisemeent
Aleadgeneratoor
Annetworkingtoool
Avvisualrepreseentationofyoou.

obile,miniatureversionof themortgageagent.Forthosejust
Thinkofbusinessccardsasamo
beginning,itisofte
enthemostinexpensive,aaffordabletoool.Itcreatessandmakesaastatement
abouttwhothemo
ortgageagentisandhowh
heorshecondductshisorh
herbusiness.Abusiness
cardisanimagebu
uilder,provid
dingafirstand
dpotentially powerfulimp
pressionthatcanjudgethe
mortggageagentpo
ositivelyorne
egatively.Itccanprovidea ninsightinto
owhatheorsshestandsfor,
especciallyifaMisssionand/orVisionStateme
entisinclude dinit.

Withinthebusinessscardthemortgageagen
ntshouldincluudeallofhisorhercontacct
inform
mation,theU
USPandalogo
o.TheMissio
onand/orVis ionStatemen
nt,abriefbioggraphy,a
coupo
onorhelpfultipsfortheco
onsumermayyalsobeincluuded.

Acard
dcanbemad
detostandou
utfromotherrsbyusingco lour,Mylarorplasticstock,usinga
graph
hic,orincludin
ngapictureo
ofoneself.Ho
owevertheb usinesscardisdesignedth
hecoreideais
simple:beunique.

Chapter9:AttractinggaClient

20
09

nessCardDon
nts
Busin
Neevercrossthinngsoutprinntnewcardsw
wheninfoch angesandch
halkituptoabusiness
expense
Neeveruseasticckeragain,ggetnewcards
Doontuseneonstock,itsofttentoohardtoreadthepprint
DoontusedifficulttoreadfoontTestthefontonfrienddswhowearreadingglasssesand
enlargeitifneccessary
DoontuseskinnylettersUseeeasiertoreead,thickerleetters
Doontuseallcapitalletters,TTHEYRETOO
ODIFFICULTTTOREAD
Doontusetoom
manydifferenttypefaces,theyareconffusing
Doontusescripttorfancyfontsthataretooodifficultto read

Uniq
que Form
ms of Bus
siness Ca
ards
Inatte
emptingtodifferentiateth
hemortgageagentfromhhisorhercom
mpetition,heorshemight
consid
derusinguniq
queformsofbusinesscard
ds.Currentlyythereareau
udioandvideo
obusiness
cards.Bothofferttheabilitytoprovideamo
oreindepthppresentationofproductsaandservices;
evertheycanbeconsiderablymoreexp
pensivethansstandardbusinesscards.
howe

Audio
oBusinessCa
ards
Audio
obusinesscarrdsaredefinittelyanattenttiongrabber,tellingpoten
ntialclientsth
hatthe
mortggageagentisdifferentand
dseriousabouthisorherbbusiness.Theeyarelesslikkelytobe
throw
wnawayandttendtopeakpeoplescuriosity,causinggthemtobelistenedtoin
ntheir
entire
ety.Audiobu
usinesscardsaregaininginpopularityaandcantypiccallybepurch
hasedwith
softw
warethroughb
businessessu
uchasStapless,FutureShopp,etc.

Video
oBusinessCards
Video
oBusinessCarrdsofferthesamebenefittsofaudiobuusinesscardswithfurtherlatitudeinthe
abilityytovisuallycraftamessagge.Theyallow
wthemortgaageagenttoiinterviewpasstcustomers
andhavecustomertestimonials.Testimoniaalsarevitalinnthemarketingofintangiblessuchas
servicces.

oBusinessCarrdsshouldtyp
picallybenolongerthan66to8minuteestoensureth
hatthe
Video
poten
ntialcustomerdoesnotlosseinterest.

TipsfforDistributin
ngBusinessC
Cards
Forbu
usinesscardstobesuccessful,theymu
ustendupintthehandsofpotentialcusstomers.To
achievvethisgoalth
hemortgageagentshould
dalwaysleaveehisorherho
omeorofficeewithatleastt
twenttybusinesscaardsandbep
preparedtogiivethemawaay.Bysettinggagoalofdisstributinga
certaiinnumberofcardsperwe
eek,heorshe
ewillbeable toincreaseh
hisorherexpo
osureto
poten
ntialcustomersandincreasehisorhervolumeofbuusiness.

ndustryeventts,workshops,
Besuretoprovidebusinesscardstofamilyaandfriends,aatseminars,in
netwo
orkingeventss,classes,meetingsandan
nywhereelsetheremightbeapotentiaalcustomer.

210

Chapter9:AttractinggaClient

Su
uccessTipBusinessscards
Ne
everleaveyourhomeoro
officewithouttatleast20bbusinesscardss.Getintoth
hepracticeoff
givvingthemtopeopleyoud
donotknow.Youwillincr easethenum
mberofpeopllewhoare
aw
wareofyourb
businessandtherebyincre
easethenum
mberofpoten
ntialnewcusttomers,which
h
isthegoalofalllsuccessfulssalespeople!

Netw
working
Definition
eareseverald
definitionsoffNetworking,butatitscorre,Networkin
ngisbuildingorexpandingg
There
one'ssocialnetwo
orkorsphereofinfluenceb
byinitiatingm
mutuallyadvaantageousneew
relatio
onshipswithpeople.Netw
workingcanb
beoneoftheemostcostefffectivemean
nsofobtaining
newb
business,whichcanbeesp
peciallyimporrtantfornew
wsalespeoplee.

Thepurposeofnettworkingisto
ocreatemean
ningfulrelatioonships.Todaysenvironm
mentisvery
comp
petitive,andaapersonalrelationshipcan
nseparateam
mortgageageentfromalloffthosewho
aresimplymarketiingandadverrtising.Peopleliketodea lwiththosettheyknowandtrust,and
perso
onalcontactthroughnetwo
orkingcancre
eatethat.

Netw
workingStrate
egiesforFuncctions
Weearanametag
Doonthover,jusstmingle
Coommentoninnterestingartiiclesofclothingasaconveersationstartter
Haaveabusinessscardenlargeedandlaminaatedandweaaritasanametag
Alw
wayssmilean
ndlookintere
ested
Beeconfident
Haavegoalsaboutwhomtom
meet
Thinkofthingstodiscussingroups,likeccurrentaffairss;beuptodaateoncurrentevents
Reememberthegoal:setapppointmentsanndgetcontacctinformationnforyourDattabase
Maarketingproggram
Beeahost,notaaguest
Focusyouratteention,donottletitwander
Followup
Coollectbusinessscards
Haavefun

WherretoNetworkk
ServiceClubs
Churchgroups
ChamberofCom
mmerce
Personalparties
Buusinessfunctioons(i.e.tradeeshows,etc.))

Chapter9:AttractinggaClient

21
11

Su
uccessTipNetworkking
Ne
etworkingisaafantasticme
eansofdevelopingpersonnalrelationships.However,itmustbe
do
oneinmoderration.Ensure
ethatyouinttroduceyoursselftonewpeopleandpro
ovidethem
withabusinessscard,butdo
onottrytose
ellataneventt.Afteryouvvemadeyourrintroduction
n
an
ndhaveveryb
brieflymentio
onedyourlineofbusinesss,changethesubject.Ifth
heyfeelthe
ne
eedtospeakttoyouimmed
diatelytheyw
will.Youdonnotwanttobecomethepeersonthatno
o
on
nelikeshavingathisorhe
erparty!Byapproachingeeventswithadeterminatio
ontosubtly
prromoteyourself,youwillb
bereadilyacccepted.

The Marketin
ng/Adver tising of Intangiblles or Se
ervices
Marke
etingintangib
blesorservice
esisquitediffferentincom
mparisonwith
hmarketingp
productsthata
poten
ntialcustomercanseeand
dfeel.Studiesindicatethaatupwardsoffsixtypercen
ntof
consu
umerswillcho
ooseamortgageagentbasedontheirppriordealingsswiththeageent,the
reputationoftheaagentorbeingreferredtotheagent.

Thiscclearlyindicattesthataperssonalrelation
nshipisvital, whichiswhyynetworkingandpersonal
contactissoimportant.Inmarrketingmortggagefinancingg,whichisan
nintangible,ittisimportantt
touse
emarketingtofocusconsu
umersonkeyyconceptsthaathavetheefffectofturnin
ngthe
intanggibleintothetangible.Th
hefollowingarestrategiesdesignedtomarketthein
ntangible
servicceofmortgaggefinancing.

Testim
monials
Theuseoftestimo
onialscanhavvetheeffecto
ofreducingthheneedofacconsumertotouchorfeell
aprod
duct.Testimo
onialsfromsaatisfiedclienttshavetheefffectofperso
onalizingthep
process.The
consu
umercanrelatetoanotherrpersonwho
ohashadabeeneficialexpeerienceandtrranslatethat
experriencetohimorher.Inessencethisprovidesthecoonsumerwith
hsomethingtangible:
anoth
herconsumerrwhocanbeseenorheard
d.

Clarity
Sinceuncertaintyccausesapprehensionandsstress,itisvittallyimportan
nttoprovideyour
poten
ntialclientwitthclarity.Thismeanscleaarlyoutlining theprocessiinvolvedinob
btaining
mortggagefinancingsothattheclientcanunderstandthaatprogressisbeingmadeaasstepsare
comp
pleted.Thiscaanbedoneverballyorinp
pamphletsorrbrochures.

Atten
ntiontoDetaiil
Sincemortgagefin
nancingisaniintangibleserrvice,itmust bedescribed
dtotheclientt.Thisprocesss
mustbedoneinassmuchdetailastheclientrequires.Asssomeclientssaremoredeetailoriented
thano
others,them
mortgageagen
ntmustfirstd
determinetheeappropriateelevelofdetaailtoprovide
tothe
eclientandth
henensureth
hatheorshepaysparticul arattentionttothesedetaails.Oneof
thefaastestwaysto
oloseaclienttsfaithistob
beuncertainoofthedetailssoftheirappllicationorof
anypartofthemo
ortgageappliccationprocess.

ContinuedContactt
Afterthesaleisco
ompleteandtthemortgagehasclosed,ccontinuetosttayincontacttwiththe
client.ByhavingaacompetentC
CRM(Custom
merRelationshhipManagem
ment)program
mthe
mortggageagentcaanensurethatheorshere
eceivesrepeaatbusinessan
ndreferralsfrromthisclien
nt.

212

Chapter9:AttractinggaClient

Marrketing: th
he Art of Differen tiation
Marke
etingcomesiinavarietyoffformsbutin
nthemortgaggeindustryitisimportanttounderstan
nd
thatm
mostlendersandmortgagebrokeragessareoffering thesamepro
oduct:moneyy.

Sincetheconsume
erseestheprroductasvirtu
uallyidenticaalbetweenbrrokeragesand
dlenders,itiss
necesssarytodevellopamarketingprogramtthatdifferenttiatesonemo
ortgageagenttfrom
anoth
her,whethertthatpersonw
worksforabrrokerageora lender.Thissassiststheco
onsumerin
differentiatingbetweenmortgaageproviderssandmaking thedecisionofwhomtocchoosebased
d
ontho
osedifferences.

Tobeabletoachie
evethisgoal,themortgage
eagentmusttunderstandthecompetittion,the
produ
uctsandserviicesofferedaandfocusontthedifferencees.Someoftthefactorsto
ofocusonaree:

Produ
uctAvailabilitty
Mortggagebrokerageshaveacce
esstoproducctsandservic esprovidedb
bynumerousnonbank
lende
ers,whereasb
banksonlyhaaveaccesstotheirownprooducts.Whilethisdoesno
ot
differentiateonem
mortgageage
entfromanotther,itisamaajordifferenttiationthatneeedstobe
made
ecleartopote
entialclients.However,sincemostconnsumersbelieevethatallm
moneyis
create
edequallyorthatmostlen
ndershaveth
hesameprodducts,simplysstatinginmarketing
materrialsthatthemortgageagenthasaccessstooveravaastnumbero
oflendersisn
notsufficient
tohellptheclientu
understandho
owthatisofbenefittohim
morher.

Byusiingatestimonial,thiscanbesummarizzedquicklyanndefficiently..Forexamplee,includinga
testim
monialinmarketingthatsaays,Ithough
htIknewwhaatIwantedw
whenIwasapprovedatmyy
bank,butafterIsp
pokewithMaalik,mymortggagebroker,IIrealizedthereweremanyymore
optionsavailabletomethanjusstwhatmybankhadofferred.Itwasarealeyeopen
ner,can
clearlydifferentiattebetweenabankandam
mortgageage nt.

Ofcourse,thetesttimonialmusttbehonestandgenuinebbutthisclearlyyillustratesthepowerof
testim
monialbasedmarketinginillustratingthedifferenceesinproductavailabilitybeetween
tradittionallenderssandthemorrtgagebrokerragecommunnity.

Servicce
Serviccecanbeam
majordifferenttiatorbetwee
enmortgage providersifm
marketedpro
operly.If
marke
etedimprope
erlythewordservicewillssimplybeanootheroveruseedwordwithvirtuallyno
mean
ning.Intodayysmarketeve
eryoneprofessestohavessuperiorservvicebut,unlesssthatservice
iscleaarlydefinedtheclaimbeco
omesvague. Tomaketheeclaimimporttantrequiressknowledgeo
of
theco
ompetitionsservicelevelss.Insodoinggthemortgaggeagentcaneexplicitlydem
monstratethee
differencesbetwee
enhisorherserviceandthatoftheco mpetition.

Forexxample,ifthe
emortgageaggentcompletesabudgetttoassistindeeterminingthesuitabilityo
of
financcingsolutionssattheinitiallconsultation
nstage,thiss houldbefocu
usedonsinceemost
mortggagesalespeopledonot.Afurtherexaamplewould beineaseoffcontact.Theephrase,Im
m
availaablesevendaysaweektwentyfourhou
ursadayisnnotonlyinco rrect,butsou
unds
despe
erate.Therearenomortggageagentsw
whowillansw
weraphonecaallinthemiddleofthe
night,,butbyclearlysettingoutthehoursoffcontactand ifthereareo
othermembeersofthe
mortggageagentstteamwhoare
eavailableto
oanswercallss,adifferentiaationcanbem
made.TD
Canad
daTrusthadaaverysuccessfulcampaign
natdifferenttiatingitfrom
mtherestofthebanksin

Chapter9:AttractingaClient

213

Canadabyclearlystatingthatitisopenlongerthananyofitscompetitors.Thatstatement
differentiatedthebank.Ifithadsimplymarketedgreatserviceandconvenienthours,the
distinctionwouldhavebeenlostonmostconsumers.

Professionalism
Anotheroverusedword,itisnecessaryforthemortgageagenttoclearlydefinehowtheyare
professional.Thiscanbedonebyincludingprofessionaldesignationsinmarketingmaterials,
andexplainingthosedesignationswhenappropriate.

NicheMarketing
Nichemarketingistheabilityofamarketertotargetaspecificgroupordemographicanddesign
amarketingcampaignthatanswerstheneedsofthatgroupordemographic.Anexcellent
exampleofnichemarketingcanbefoundintheautomobileinsuranceindustrybycompanies
withaprogramdesignedspecificallyfordriversovertheageoffifty.Thisprogramtargetsa
specificdemographic,onethattheinsurancebrokeragehasdecidedoffershighreturns,and
marketsspecificallytothatgroupthroughmediausedbythatgroup.

Inthemortgagebrokerageindustrythemarketingtendstobeundifferentiated.Advertisements
tendtoincludeseveralmessages,suchasofferingmortgagestoindividualswithpoorcredit,no
income,whoareselfemployed,orwhoarelookingforthebestrates.Whilethiscaststhe
widestnet,itdoesnotspeaktoanyspecifictargetmarket.Therefore,nooneencounteringthis
marketingwillfeellikeitisspeakingdirectlytohimorher,whichisakeyelementofany
marketing.

Potentialareasofnichemarketingforthemortgageagentinclude:
Themedicalprofession
Oftentheseprofessionalsareselfemployedhighincomeearnerswithsignificantdebtthat
couldbenefitfromnonbankproducts
Constructionworkers
Oftenseasonallyemployedworkinglonghours,theymightbenefitfromspecificproducts
fromnonbanklendersaswellasmoreconvenientmethodsofapplyingformortgage
financing.

Theaboveexamplesprovideaninsightintowhatnichemarketingmightbeforthemortgage
agent.Inallcasesnichemarketingrequiresthemarketertoidentifyapotentialnichemarket,
researchwhatthecharacteristicsandneedsofthatmarketareandeitherdeveloporidentify
productsorservicestomeetthoseneeds.

Whateverthemessageendsupbeing,itmusteventuallybedeliveredtothepublic.Thiscanbe
doneinseveralways,ofwhichthefollowingisapartiallist:
Flyers
ClassifiedAdvertisements
YellowPagesadvertisements
UnaddressedadmailthroughCanadaPost
Promotionalitemssuchaspens,fridgemagnets,etc.
Sponsoringanevent
Sponsoringanaward
Hostingorbeingapresenterataseminar

214

Chapter9:AttractinggaClient

Bro
oadcastfaxing
De
eliveringcoup
pons
Be
enchadvertising
Billboards
Ne
ewspaperinse
erts
Ne
ewspaperinte
erviews
Maagazinearticles
Ne
ewsletters
Em
mails
Dirrectmail
Yourwebsite
Orranymeansthatcandelive
eramessagetoawideau dience.

Whateverthemesssageisandh
howeveritisd
delivered,theekeytosucceessfullymarkeetinga
produ
uctorserviceisdevelopinggthestrategyyandthenim
mplementingiit.AsP.T.Barrnumonce
said,withoutprom
motionsome
ethingterrible
ehappensnnothing!

Su
uccessTipMaketh
hephonerring!
Th
hegoalofallmarketingan
ndadvertisinggissimple:toomaketheph
honering!Keeepthisin
mindwhendevvelopingyourrmarketingandadvertisinngpiecesandcreatethemwiththat
ulttimategoalin
nmind.

Data
abase Ma
arketing
Datab
basemarketin
ngisthefuncttionofwareh
housingpotenntialandexisttingclientinfformationin
anele
ectronicmediiumthatallow
wstheuserto
oassembleo rlistthesecliientsingroup
pstowhom
marke
etingeffortsm
maybedirectted.Databassemarketing beginswithaasingleclientandcanbe
builtttoencompasssthousandso
ofclients.Thekeytodata basemarketiingistohaveeasystemin
placewherebyclie
entsreceivem
marketingonaregularbassis.

Listoffpotentialclientsmightin
nclude:
Firrsttimehomeebuyers
Reenewers,and
Reefinancers.

Byseggmentingthe
esepotentialcclientsintocaategories,theemortgageaggentcantailo
orthe
messaage.Forexam
mple,theinfo
ormationsentttofirsttimeehomebuyerrswouldbedifferentthan
thatssenttorenew
wers,andsoo
on.

Inadd
dition,inform
mationsentto
ocurrentclien
ntswoulddiffferfromthatsenttopotentialclients.
Them
mortgageagen
ntwillhaveaamoreperson
nalrelationshhipwithhisorrhercurrentclientsand
mayssendmarketin
ngsuchasbirrthdaycards,quarterlynew
wsletters,andsoon.Theseclients
shouldbepersonallycontactedonaregularbasistoupdaatetheirreco
ordsandensu
urethatthe
inform
mationinthedatabaseisccurrent.Thisalsoprovidessopportunityytosearchfo
oradditional
needsssuchasrefin
nancingforadebtconsolid
dationorhom
merenovationbeforetheclients
mortggageisupforrrenewal.

Chapter9:AttractinggaClient

21
15

emarketingp
programinpl ace,theoddssofobtaininggrepeat
Byhavingaconsisttentdatabase
businessisgreatlyincreased,lo
oweringtheco
ostsassociateedwithobtaiiningbusinesss.

Refe
errals
Referralsrefertotthoseclientsw
whohavebee
enadvisedtoodobusinesswiththemortgageagent
byathirdparty.A
Aclientmayb
bereferredto
ohimorherbbyafinancialplanner,aReealEstate
salepe
erson,aninsu
uranceagent,,apastclientt,orwhoeverrhascomeintocontactwiiththe
mortggageagentinthepast.Thistypeofbussinesstendsttobetheleasstdifficulttocomplete,
sincetheclientisaactingontheadviceofsom
meonewhoisstypicallyafrriendofhisorhers.The
relatio
onshipthatclienthaswith
hthereferralsourcepreveentstheusualapprehensio
onthat
poten
ntialclientshaavewithnew
wsalespeople
e.

TipsfforObtainingReferrals
Doothepeopleyyoudealwithknowyouneeedreferrals??Manypeopplewhoknow
wyouwillthin
nk
youaresosuccessfulthatyo
oudonotnee
edanyreferraals.Ensureth
hattheyrealizeyouneed
everyoneandttreatthemalllwiththepro
ofessionalismtheyhavegrrowntoknow
wandexpect
fro
omyou.
Dooyourreferreersknowtheqquickestandeasiestrouteetogettheirreferraltoyoou?
Pro
ovideyourre
eferrerswithaasimplereferrralformthatttheycanem
mailorfaxtoyyou.Itonly
needssomebassicinformatio
on,suchaswhotheclient is,theirconttactinformatiionandwhat
the
eyneed.
Thankyouletteers:ensurethhatyoualwayyssendathannkyouletterttoyourreferralsource,
wh
hethertherefferralturnsin
ntoaclientorrnot.
Uppdateyourdaatabasewithtthereferralinnformation.
Coontactthepottentialcustom
merassoonaaspossible.
Guuaranteeconffidentialitytooallparties.
Sendathankyoougiftwhentthefinancinggiscompletedd.
Invviteyourrefeerrerstocomppanypartiesttoshowyourrappreciationn.

Su
uccessTipGettingfamilyand
dfriendsm
mortgagess
Do
oingthemorttgageofafam
milymemberorfriendcannbedifficultffornewandeexperienced
aggentsalike.Familyandfrie
endstendnotttowanttol etyouseeth
heircredit,andmaynotbee
co
omfortablewiththethoughtofyoukno
owingtheirprrivatebusinesss.Butdonttworry,
be
ecauseyoucaanstillgetthe
eirbusiness!Isuggestfinddingahighlyssuccessfulaggentorbrokerr
inyourbrokeraage.Partnerwithhimorh
hertodothe mortgagesfo
oryourfamilyyandfriends..
No
owyoucante
ellyourfamilyyandfriends thatyouvebbecomealiceensedagentaandthinkthatt
theyshoulduse
eyourcolleagguetodothe
eirnextmortggage!Justbeesurethatyourcolleague
paaysyouanice
ereferralfee.

216

Chapter9:AttractingaClient

9.3 Key Terms and Definitions

Advertising
Apaid,controlledmessagethroughanonpersonalmedium.Typesofadvertisinginclude
publicity,publicrelations,productplacement,sponsorship,andsalespromotion.

AdvertisingStandardsCanada(ASC)
Thisnotforprofit,selfregulatorybodyfoundedin1952,regulatestheadvertisingindustryand
handlesconsumercomplaintsrelatedtoadvertising.

AudioBusinessCard
AsmallerversionofaCDthatallowstheusertocreatetheirownaudiobusinesscard

BaitandSwitch
Providingaconsumerwithanattractiveoffertoobtainhimorherasaclientbutbeingunableto
providetheproductorserviceattheindicatedprice

BusinessCard
Amarketingtoolthatprovidescontactinformation,alogo,andotherrelevantinformation
aboutthecompany,productsand/orservicesofthecompanyand/ortheindividual

ClassifiedAdvertisement
AprintadvertisementplacedintheClassifiedsectionofanewspaper

DatabaseMarketing
DatabaseMarketingisthefunctionofwarehousingpotentialandexistingclientinformationin
anelectronicmediumthatallowstheusertoassembleorlisttheseclientsingroupsthatcanbe
marketedto.

Flyer
Astandalonemarketingpiece,usuallyon8.5x11inchpaper

Marketing
Presentingproductsorservicestopotentialcustomersinafashionthatpositivelypromotesthe
productorserviceandmakescustomerseagertobuyorusethoseproductsorservices

MissionStatement
AMissionStatementisaplanforcompaniesandpeopletoaccomplishthegoalstheyset.Itis
designedtoshapethecompanyorindividualsidentityandistypicallybasedonavision,goal,or
ethics.

MortgageAgent
IndividualswhoareremuneratedfordealinginmortgagesortradinginmortgagesinOntario,as
employeesorotherwise.MortgageagentsarerestrictedintheirabilitiesbytheMBLAAandits
Regulationsandmustbesupervisedbyalicensedmortgageagent.Mortgageagentsmustbe
licensed.

Networking
Buildingorexpandingone'ssocialnetworkorsphereofinfluencebyinitiatingmutually

Chapter9:AttractingaClient

217

advantageousnewrelationshipswithpeople

NicheMarketing
Marketingtoaspecificaudienceortargetdemographic

Referral
Aclientorcustomerwhohasbeenadvisedbyathirdpartytousetheproductorserviceof
another

StandardsofPractice
Regulation188/08,whichappliestomortgagebrokerages,Regulation187/07,whichappliesto
mortgageagentsandagents,andRegulation189/08,whichappliestoMortgageAdministrators
constitutetheStandardsofPracticeundertheMBLAA.TheseRegulationsdetailthebusiness
rulesthatlicenseesmustfollowtocomplywiththeMBLAAanditsRegulations.

Testimonials
Anendorsementinwriting,verballyorelectronicallybyaclient

TheCanadianCodeofAdvertisingStandards
TheCanadianCodeofAdvertisingStandardswascreatedbytheadvertisingindustryin1963to
promotetheprofessionalpracticeofadvertising

UnaddressedAdmail
Bulk,unaddressedadvertisingthatisdeliveredinbulktoacertainareabyCanadaPost

VideoBusinessCard
AvisualpresentationofasalespersononCD

VisionStatement
AVisionStatementissomethingthatthebusinessormortgageagentaspirestobecome.It
shouldillustratethecorebeliefofthebusinessormortgageagentandeffectivelycommunicate
thattothereader.

218

Chapter9:AttractinggaClient

9.4 Review
R
Questions
Q
s

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Wh
hatisaBaitandSwitch??

2. Wh
hatdoestheCanadianCod
deofAdvertissingStandarddspromote?

3. Wh
hatdoestheMortgageBrrokerages,len
ndersandAdm
ministratorsA
Act,2006prohibit
reggardingadverrtising?

4. Disscussthedifferencesbetw
weenaMissio
onandaVisioonStatement..

5. Wh
hatdoesabu
usinesscardp
providetothe
emortgageaggent?

6. Wh
hatarethebe
enefitsofanaudiobusinesscard?

plainyouranswer.
networkingtyypicallymore
eorlessexpen
nsivethanmaarketing?Exp
7. Isn

8. Inwhatwayscaanamortgage
eagentdifferrentiatehimoorherselffro
omthecompeetition?

9. Wh
hyaretestimonialsbeneficialinthemaarketingofinttangibleprod
ductsorservices?

10. Discussthreew
waysthatam
mortgageagen
ntcanobtainnreferrals.

Chapter10:FirstContact

219

Chapter 10: First Contact

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Explaintheimportanceoftheinitialtelephonecall
Discussthebenefitsofacallscript
Useacallscriptinanincomingandoutgoingtelephoneconversation

Introduction

PleaseNote:Thefollowingtopicsaredesignedtoassistyouinhandlingfirstcontactwitha
potentialclientfromasalesperspective.Howeverthischapterisnotincludedinthecourses
finalexamination.

Firstcontactwithapotentialclientisavitalpartofthemortgageapplicationprocess.Itisthe
mortgageagentsfirstchanceatagoodimpressionandthefirstopportunitytoturnapotential
clientintoanactualclient.

Asdiscussedearlier,thepurposeofamortgageagentsadvertisingandmarketingeffortsisto
initiatefirstcontact.Thepurposeoffirstcontactistwofold:todetermineiftheclientmay
qualifyforfinancing,andtogetanappointment.

Thereareafewdifferentmodelsconcerningtheworkflowofamortgageapplication,including
havingthepotentialclientcompleteanonlinemortgageapplication;howeveritisimportantto
notethatdevelopingarelationshipwithapotentialclientisakeycomponentincompletingthe
mortgagetransaction.

10.1 The Initial Telephone Call

Theinitialtelephoneconversationisvitaltodevelopingarelationshipwithapotentialclient.
Oncethephoneringsthemortgageagentsadvertising/marketinghasbeensuccessful.Ifthe
mortgageagentfindsthatheorsheisreceivingcallsfromclientsthatheorshedoesnotwant,
thenthefirstareatoconsidermodifyingistheadvertising/marketing.

Intodaysenvironment,mostcallsfieldedbymortgageagentshaveonecharacteristicin
common:aquestionabouttherate.Thisisaquestionthatmostconsumershavebeen
programmedtoaskfromtelevisionadvertisingandothermarketingbymajorlending
institutions.Mostconsumersbelievethattheonlydifferencebetweenmortgagesofferedby
lendersrevolvesaroundtheinterestrate;thereforewheninquiringaboutobtainingamortgage
thatistypicallythefirstquestionthatisasked.

Thisquestion,however,isvirtuallyimpossibletoanswersuccessfully.Ifthemortgageagent
answersthisquestionbytellingthecallerwhatthelowestrateis,thecallerwillmostlikelyend
thecallandcontinueshoppingtocomparewhatothermortgageagentshavetooffer.

220

Chapter10:FirstCoontact

eisamodelofbuyingbehaaviourcalledthePhenomeenologicalBu
uyingBehavio
ourModelthaat
There
breakksthebuyingofservicesin
ntofourcateggoriesasseennfromthebuyersperspecctive.They
are:
Neeed
Preepurchasereesearch
Purchase
Poostpurchaseccognitivedisssonance(remorse).

nstheprocesss
Thepotentialpurcchaser,inourcasethepotentialhomebbuyerormorrtgagee,begin
byfee
elinganeedttoobtainmorrtgagefinanciing.Thiscan betriggeredbytheneedtopurchaseaa
home
e,theneedto
orefinance,co
onsolidatede
ebt,etc.Whaateverthereaasonbehindttheneed,thee
needexistsinthep
potentialpurchasersmind
d.

Thenextstep,prepurchaseressearch,isfairlyuniquetosshoppingforhigherpriced
dgoodsand
servicces.Thisactivvityrevolvesaroundreseaarchingandleearningaboutttherequired
dproductor
servicces.Unlikelessexpensiveitemswhereresearchisnnotnormallyd
done,purchasersfeelthe
needtolearnasm
muchaspossib
bleabouttheproductors ervicetheyareconsiderin
ngpurchasingg
tobeabletomake
eaninformed
ddecision.

Thepotentialpurcchaserthenbe
ecomesanacctualuserorppurchaseroftheproducto
orservice,
which
histypicallyfollowedbypostpurchasecognitivedisssonance,com
mmonlyreferrredtoas
buye
ersremorse.

hepotentialm
mortgageborrower,theprrepurchaserresearchstageecanleadtoresearching
Forth
online
eandmakinggseveralphon
necallsbeforefinallysettl ingonamorttgageprovideer.Thismay
resulttinthecalleraskingthesim
mplequestion,Whatisy ourbest5yeearrate?beccauseheor
sheissintheresearrchstageand
dislookingforinformationn,nottoapplyyforamortggage.

ever,amortgaageagent,un
nderstandingthatpartofhhisorherfunctionissales,,mustturn
Howe
thissiimplerequesttforinformattionintoapo
otentialclientt.Thatrequirresaspecificprocessfor
dealin
ngwithincom
mingtelephon
necallsthatle
eaveslittletooonesimagin
nation,andfo
ocuseson
usingacallscript.

Pa
auseforcllarification
nCallscrripts
Acallscriptisaawrittendocumentthato
outlinesorscrriptsaconverrsation.Thisisusedto
allowtheagentttoremainfo
ocusedoncovveringcertainntopicsthatheorshefeeelsare
ne
ecessaryinth
hecallandallo
owstheagen
nttorefertosstandardresp
ponsesfortyp
pical
qu
uestions.Pro
ofessionalage
entsalwaysusseascript,w hetherinpap
performatorrby
co
ommittingthe
escripttome
emory.

There
eisnowayofknowingwho
oiscalling,ho
owheorshe obtainedyou
urtelephonenumberor
whathisorherintentmightbe.Thisuncertaintyrequireestheagentto
oinitiallytreaatevery
incom
mingcallinthesamefashio
on,tailoringttheconversattiontothespecificcallero
onlyaftertheiir
purpo
osehasbeendetermined.

Withinthefirstten
ntofifteense
econds,youm
musttelltheccaller.
Whhoyouare

Chapter10:FirstContact

221

Thebenefityouwillprovidetohimorher

Youhavetodothesametwothingsonanincomingcallasanoutgoingcoldcall,buttheyare
donedifferently.Onanincomingcall,youhavealreadydonesomethingtopromptthe
potentialclienttocallyou,suchasplaceanad.Inmostcases,yourpotentialclientiscontacting
youtoaskonesimplequestion:Whatisyourbest5yearrate?.Itisstronglysuggestedthat
youattempttodeflectthisquestion,forseveralreasons.

First,youdonotknowanythingabouttheclientandwillnotknowiftheyqualify.Ifyoutell
themalowrate,thenfindoutthattheydonotqualifyforit,theymaythinkthatyouare
practicingthebaitandswitch,whichisenticingthemwithonepromiseonlytoswitchlaterto
somethingworse.

Secondly,ifyouimmediatelygivethemtherate,theycansimplyhangupandgotothenextad,
alwayslookingforthelowestrate,continuingtoresearch.Manypeoplewhocallthinkall
mortgagesarecreatedequally,sotheybelievetheonlydifferenceisrate,whichsimplyisnot
thecase.

Thirdly,youneedtodeveloparelationshipwiththispotentialclient,andifheorshehasallof
theinformationthatheorshewanted(i.e.,rate)beforetheagenthasevenintroducedhimor
herselftothecaller,thatcallerwillfeelnoconnectionwiththeagentandwillhavenoproblem
inhangingup.

Thefollowingisanexampleofanincomingcallscriptthatattemptstoaddresstheseissues.
Keepinmind,however,thatnoscriptisperfect.Asuccessfulagentwilleventuallyhaveto
addressconcernsastheyariseinanygivenconversation.

10.2 Incoming Call Script

Thefollowingscriptisabasicexampleofhowtohandleanincomingtelephonecall.Theagents
linesareinnormalfontandpotentialclientresponsesareinitalics.

Good(afternoon,morningorevening),(Yourcompanyname),howmayIhelpyou?

Hi,canyoutellmeyourfiveyearrateplease?

Iwouldlovetosir,butfirstoffletmeintroducemyself.Mynameis(yourname),andmayIask
yournameplease?

Sure,mynameisBobAndrews.

AndwouldyoupreferthatIcallyouMr.Andrewsorbyyourfirstname?

Bobwouldbefine.

Wonderful.Bob,mayIaskwhoreferredyou?

222

Chapter10:FirstContact

ActuallyImcallingfromyouradinthenewspaper.

Super.Bob,mostofmybusinesscomesfromreferralsfromsatisfiedpastclients.MayItreat
youthesamewaythatIwouldtreatoneofmyreferredclients?

Sure.

Great!OkayBob,theratethatIcangetyoudependsonmanydifferentfactors,butIcansay
withtheoutmostofcertaintythatIcangetyouthebestratebasedonyourcircumstances.In
addition,Iwillgetyouthebestoverallmortgagetosuityourneeds.Ihaveafewbriefquestions
Ineedtoaskyoutodeterminewhatwecandotogetyouthebestpossiblemortgage,but
beforeIcontinue,canIgetyourtelephonenumberjustincasewegetcutoff?

Clientanswers.

Thankyou.Now,areyoulookingtopurchaseahome,refinanceyourexistinghome,ordoyou
haveamortgagecomingupforrenewal?

Clientanswers.

Andhowmuchmoneydoyouneed?

Clientanswers.

Andhowwouldyousayyourcreditis?

Clientanswers.

Fantastic.Well,basedonthispreliminaryinformationitsoundslikewehavethreedifferent
programsthatwillmeetyourneeds.Ineedtogointosomemorespecificdetailsaboutyour
situationtoensureIgetyouthelowestpossiblerateandtherightmortgagetosuityourneeds,
soIsuggestwemeettodiscussyoursituationfurther.Ihavesomeavailabletimeeither(give
twopossibledays)ateither(givetwopossibletimes)whichdoyouprefer?

Clientanswers.

Great.CanIgetyourexactaddressplease?

Clientanswers.

Now,IneedyoutohaveafewdocumentsreadyforourchatsothatIcangetyouthebest
mortgageforyourneeds.Ifyoucouldhavea..(listtherequireddocumentsbasedonwhat
theyarelookingfor,i.e.,Purchase,refinance,prequalification,etc.)Doyouhavethosehandy?

Clientanswers.

Andifyoucantfindanyofthosedocuments,dontworry,wecanstillproceedwithoutthem.
SoIwillmeetyouon(reiteratethedateandtime).OnelastquestionBob,doyouhavea
significantother?

Chapter10:FirstCoontact

22
23

Clienttanswers.

Wond
derful.Isuggestthatweallgettogethe
erforthismeeetingsothatwecanaddressany
questtionsyourspo
ousemayhavveaswell.

Thankkyousomuch
hforyourcallandIlookfo
orwardtomeeetingyou.G
Goodbye.

ember:thego
oaloftheadvertisementisstogetpeopl etocall.Theegoaloftheaagentistogeet
Reme
anappointmentw
withthecalleraslongastheagentbelieevesthattheccallerisqualified.Agents
mustalsoconsiderrthatmeetingwiththosewhomaynottqualifyhasitsmerits.Th
heagentcan
practiicehisorherinterviewingtechnique,d
databasethecclientforthefuture(thecclients
situattionmaychan
ngeinthefuture),orobtaiinpotentialr eferralclients.

Tips
s for Suc cess
Practiicemakespe
erfect
Reme
embertopraccticeyourscriiptbeforeyoustartgettin gcalls.Likeccoldcalling,aaskyour
spousseorsignificantother(som
meonewhow
willgiveyouh elpfuladviceonhowyouare
performing)tobeyourincomin
ngcallorpracctisebyrecorddingyourselffandlisteninggtothe
conve
ersation.Inallcases,tryto
orecordyourrselfandrevieewthetapeaafteryourcalls.Thisway
youcaanidentifyifyouaresoun
ndingaggressiive,defensivee,orjustright!

Useamirror
Becau
useasmiletraanslatesacro
ossatelephon
neline,youshhouldensurethatyouarealways
smilin
ngwhenyoureonacall.A
Agreatwaytoensurethattyouareisbyyhavingasm
mallmirrorin
frontofyousothaatyoucanwatchyoursmille.

Write
ethingsdown
n
Besuretohavepe
enandpaperforeachcall.Writedownnthecallersn
nameassoon
nasyougetitt
(there
esnothingm
moreembarrassingthenforgettingacal lersnameafftertheyveju
ustgivenitto
o
you!),,andanyotherdetailsthaatmightbehe
elpful.

Make
ethesewordssyourown
Make
esureyouuse
ewordsandp
phrasesthataarecomfortabbleforyou.IInotherword
ds,rephrase
thesccripttomatch
hhowyouno
ormallyspeak.Thiswillen surethatyou
udonotsoun
ndlikeyouaree
readin
ngfromascript,evenwhe
enyouare!

Dono
otbeafraid
Reme
emberthatthephonecanbeyourbestfriend.Them
morecomforrtableyouareeonthe
phone
e,theeasieriitwillbetom
meetyourobjective:gettinngappointmeentswithqualifiedclients.

224

Chapter10:FirstCoontact

10.3
3 Outgoin
ng Cold Call
C Scrip
pt for Refe
errals

Pa
auseforcllarification
nColdca
alls
Acoldcallisan
noutgoingcallmadetosomeonewhoiisnotknowntotheagentandwhohass
no
otbeenreferrredtohimorrher.Thispotentialclient isconsidered
dcoldorun
nfriendly.Thee
ob
bjectofacold
dcallistotransformtheccoldindividuualintoawaarmprospecct,orsomeone
whoiswarmto
otheideaofd
doingbusinessswiththeaggent.Byfollo
owingascriptt,theagent
hancesofsucccess!
haasthebestch

ditiontoreceivingincomin
ngcallsyoum
maywishtocoontactpotenttialreferralso
ources,such
Inadd
asaR
RealEstateSalespersonorFinancialPlanner.Withinnthefirsttentofifteenseccondsyou
musttellthepoten
ntialreferrer::
Whhoyouare
Thebenefitthatyoucanproovidetohimoorher

Ifyoudont,chanccesareheorsshewillstoplistening.Thiinkofthecoldcallsyoureeceive.As
soonasyourealize
etheyarenottsomeoneyo
ouknow,but theyaresom
meonetryingttosellyou,
youtrrytofindawaytohangup
pthephone.Bypeakinghhisorherinteerestinthefirrsttento
fifteenseconds,yo
ouwillgetsom
meonewhow
wantstohearrmore!Theffollowingisabasicscript
oaccomplishthistask.Th
heagentslineesareinnorm
malfontandp
potential
thatccanbeusedto
clientsresponsesareinitalics.

Hi,myynameis(yourname)and
dImcallingfrom(yourbrookerage),anational(orlargelocal,
local,successful,etc.)mortgage
ebrokerage.Thepurposeebehindmyccalltodayisto
odiscusshow
w
wecaanhelpyoucaanmakemoremoneybyggrowingyour business,allatnocosttoyou.Does
makin
ngmoremoneyanddoingmorebusine
essinterestyoou?

Letth
hemanswer.

ncernbysayin
ng:
Iftheyysayno,addresstheircon

Serio
ously,sir/maam,IrespecttthatyoureaabusypersonnandIwould
dntwanttow
wasteyour
time,butIcanhelp
pyoulikeIve
ehelpedothe
erstoincreas etheirbusineessandmakeemoremoneyy,
allatnocosttoyou.Doesntth
hatsoundlike
esomethingtthatmightbeeworthafew
wmomentsoff
yourttime?

donotorifth eyinsistonh
hangingup,leetthemgo!
Theyshouldrespondpositively,,butiftheyd
Coldccallingisanumbersgamesodontgetcaughtupfigghtingwithyo
ourcoldcall,jjustmoveon
tothe
enextone!

Yes!!

Excelllent!Imsorrry,towhomaamIspeakingg?

ThisissMr.Jones.

Chapter10:FirstContact

225

Great,Mr.Jones,andplease,feelfreetocallme(yourfirstname)

Nowthatyouvegottentheirattention,itstimetofocusonyourstrengths,andwhatyouare
reallycallingabout:helpingthemdomorebusiness,whichwill,undoubtedly,helpyoudomore
business.
Talktothemaboutyourstrategies,including:
Jointadvertising
Referralstothemofpotentialhomebuyers
Jointseminarsandworkshopsfocusingonhomebuyingandmortgaging
Joiningthemattheirsalesmeetingstoaddvaluebydiscussingratesandsalestechniques
Sharingsalestechniquesthatyoukeepuponthroughconstanttraining
Helpingthemcoldandwarmcall
Goingonwalkaboutswiththem(droppingoffflyers)
Helpingthemwithopenhouses,orshowingaproperty
Arrangingofficepartiesforthemandtheirclients.

Now,todiscussthegreatwaysIcanhelpyoumakemoremoneyanddomorebusinessallwe
havetodoisgettogetherforachat.Ihavetimeon(givethemtwochoices,likeTuesdayand
Thursday)ateither(givethemtwooppositechoices,likeonemorningandoneafternoonif
theyarentavailableatthosetimes,askthemwhenitsconvenientforthem).Whichdoyou
prefer?

Thegoalofanycoldcallistogettomeetwiththeclient/referralsource,soeverythingyoudo
mustbededicatedtothatend!

226

Chapter10:FirstContact

10.4 Key Terms and Definitions

CallScript
Awrittendocumentthatoutlinesorscriptsatelephoneconversation,allowingtheuserto
remainfocusedonthepurposeandobjectivesofthecall

ColdCall
Acallmadetoacoldorpotentiallyunfriendlynewclientorreferralsourcewhodoesnotknow
thecaller

PostpurchaseCognitiveDissonance
Commonlyreferredtoasbuyersremorse,thisreferstotheemotionalstateabuyerisinafter
completingwhatistypicallyalargepurchaseandwhoisnolongerinanemotionallycharged
state.

PrepurchaseResearch
Theresearchdonebyapotentialpurchaserofamoreexpensiveitem.Thismayincludeonline
researchaswellascontactingpastclients,callingserviceproviders,etc.

WarmCall
Acallmadetoawarmorpotentiallyfriendlynewclientorreferralsourcewhomayknowthe
callerormayhavebeenreferredtothecallerbyathirdparty

Chapter10:FirstCoontact

22
27

10.5
5 Review Question
ns

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1.

2.

3.

4.

5.

6.

7.

Wh
hatisthetypicalquestionthatapotenttialclientaskkswhenfirstccontactingam
mortgage
agent?
Wh
hatarefivetiipsforsuccessswhenusinggacallscript??
Disscusstheben
nefitsofusinggacallscript.
Wh
hatisacoldccall?
Ho
owcanacoldcallbeturne
edintoawarm
mcall?
Wh
hatinformationshouldbe
eprovidedtothecallerwitthinthefirstttentofifteen
nsecondsofaa
calll?
Wh
hyisitimporttanttodeveloparelationsshipwithapootentialclient?

228

Chapter11:TheInitialConsultation

Chapter 11: The Initial Consultation

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Determinethedocumentationthatmustbeobtainedfromanapplicant
Createamortgagefileonanapplicant
Useafilechecklistandfileworksheet
Discussthelocationsinwhichtheclientmeetingcanoccurandtheadvantagesand
disadvantagesofeachlocation
Determinetheneedsoftheapplicant
Completeamortgageapplication

Introduction

Theinitialconsultationwithyourpotentialclientisamajorstepinthemortgageapplication
process.Thereareseveralconsiderationsforthisstep,including:
Thelocationofthemeeting
Preparingtheclientforthemeeting,includingadvisinghimorherofthetimeinvolved,who
shouldattendandwhatdocumentstohaveavailable
Preparingforthemeeting,includingcreatingablankfile
Verifyingtheclientsidentity
Completingtheapplication
Determiningtheborrowersneeds.

Awellpreparedmortgageagentwillfindthatthemeetingwillusuallyproceedsmoothly
resultinginthepotentialclienttransformingintoaclient.Manymortgageagentsoftenmissthe
differencebetweenapotentialclientandaclient,sinceitcanoccurrathersubtly.However
thereisamajordifference.Apotentialclientisonewhoisnotyetdedicatedtocompletingthe
transactionwiththisparticularmortgageagent.

Aclientisanindividual(s)whohasmadethedecisiontocompletethetransactionwiththe
mortgageagent,usuallybasedonseveralfactors,includingtrustingthemortgageagent,
developingapersonalrelationshipwiththeagent,believingintheagentstechnicalproficiency
andhavingtheagentsatisfythefourborrowerexpectationsfoundinchapter7,whicharethat
themortgageagentwill:
1. Actintheborrowersbestinterests
2. Completelyanalyzetheborrowersneeds
3. Makeappropriaterecommendationsbasedontheborrowersneeds
4. Facilitatethetransactiontoitssuccessfulcompletion.

11.1 Required Documentation

Eachtypeofmortgagetransactionrequiresdocumentationtobeobtainedfromtheapplicantin
additiontoasignedmortgageapplication.Thefollowinglistoutlinesthosedocumentsaswell

Chapter11:TheInitialC onsultation

22
29

epurposebeh
hindobtainingeach.Aclie
entshouldbeeinstructedtoprovidetheese,as
asthe
appliccable,attheinitialconsulttation.

Doc
cumentatiion for al l Transac
ctions
Em
mploymentVe
erification
Em
mploymentdo
ocumentation
nrequiremen
ntsvaryfromlendertolender;howeverrthefollowin
ng
isaalistofdocum
mentationthatistypicallyacceptablefforanemployyee:
LetterofEm
mployment
PayStubs
T4
NOA(NoticeofAssessmentoftenre
equestedwh enthereisco
ommissionincome)
TaxReturn(alsomayberequestedw
whenthereis commissioniincome)

Foraselfemploye
edindividualtthefollowingmayberequuired:
FinancialSttatements
BusinessLiccense
BusinessCh
heque

PIP
PEDAConsen
nt
Thisdocumentallowsthemortgageagen
nttousetheaapplicantspeersonalinform
mationforthe
purposescontainedwithintheconsentfo
orm.

Ph
hotoIdentifica
ation
Photoidentificaationisrequirredtoprovettheidentityooftheapplicant.Theoriginaldocument
sho
ouldbeviewe
edandaphotocopyobtain
nedforthefi le.

ationAgreem
ment(ifappliccable)
Divvorce/Separa
Ifaapplicablethisdocumento
outlinesthettermsandconnditionsofth
heseparationordivorce
andwilltypicalllyincludeanyypaymentsth
hatarerequirredtobemad
deforalimon
ny.

Ch
hildSupportO
Order/Agreem
ment(ifappliicable)
Ifaapplicablethisdocumento
outlinesthettermsandconnditionsofch
hildsupport,iincludinganyy
paymentsthataarerequiredtobemade.

Spe
ecific Doc
cumentat ion for a Purchas e
Thefo
ollowingisalistofdocume
entationthattistypicallyreequiredwhen
naclientispurchasinga
prope
erty:
PurchaseandSaleAgreemen
nt
MLLSListing
Pro
oofofDownpayment
Re
entalLetter(iffapplicable)
Re
ealestatesale
espersonInformation

230

Chapter11:TheInitialC onsultation

Spe
ecific doc umentati on for a Refinancce, Equityy take-Ou
ut and
Swittch
Thefo
ollowingisalistofdocume
entationthattistypicallyreequiredwhen
naclientisreefinancinghiss
orherrcurrentmorrtgage,takinggequityouto
ofhisorherppropertyorsw
witchinglendeerson
renew
wal:
Currentmortgaagestatementt
Charge/Mortgage
Traansfer/Deed
Pro
opertytaxstaatement
Pro
opertyinsuraancepolicy
Mo
ortgagerepayymenthistoryy(ifapplicable)

11.2
2 File Cre
eation

pplicationfileshouldhavethesamecheecklist.Atyp
picalfilecanb
bemadeupof
Everyymortgageap
alegaalsizefilefold
derwithtwofformsstapled
dtotheinsideeofthefoldeer.Onthelefftsidewillbea
checkklistandonth
herightsideaaworksheetffornotesandcalculations..Mortgageagentsmay
havedifferentstylesoffilesand
dtheinformaationmaybe indifferentfo
ormatsorinvvarying
orderrs;howeverth
heinformatio
onisessentialllythesame.

File Checklis
st
Afilechecklistisakeycompone
entforensuringthattherrequireddocu
umentationissobtainedon
n
everyytransaction.Thispreventtstheembarrrassmentofhhavingtogob
backtoaclien
ntfor
additiionaldocume
entationinthefutureandprovidesaquuicksummaryyofwhatisin
nthefile.If
thefilleisbrokenin
ntosectionsb
basedonthechecklist,theeneveryfilew
willfollowtheesameorderr,
allowingthemortggageagentto
oknowwhere
etofindspec ificdocumentsinanyfile.Acoloured
eachsectionoofthefileforreaseoffilinggdocuments..
sheetorfilefolderrcanbeusedtoseparatee
Prope
ercompletion
nofthecheckklistandthew
worksheetwi llallowthem
mortgageagen
nttoquickly
reacquainthimorherwiththefile,especialllyifthefilehaasntbeenworkedonforseveraldays
orifthereareseve
eralfilesbeingprocessedssimultaneoussly.

Thefo
ollowingfigurreisanexampleofafilechecklist,and mayberepro
oducedinwh
holeorinpartt.
Inthe
etopsectionttheclientsco
ontactinform
mationisnoteed.Itishelpfu
ultomarktheebesttime
andcontactnumbertoreachth
heclientshou
uldtheneedaarise.Theneextsectionallowsthe
mortggageagentto
ocheckoffthe
edocumentsthatareinthhefileandactsasareminderfor
docum
mentsthatarretypicallyrequiredforevverytransactioonaswellasthedocumen
ntsspecificallly
foraccondominium
m,refinance,e
equitytakeo
out,switchor purchase.Th
hefinalsectio
onis
dedicatedtodisclo
osuredocume
ents.Eachfilemusthave eachoftheseedocumentsexceptforth
he
Investtor/lenderdissclosure,whichisonlyapp
plicableonprrivatemortgaagetransactio
ons.

23
31

Chapter11:TheInitialC onsultation
Figure35Residentia
alMortgageApp
plicationFileCheecklist

RessidentialMortgageApplicaationFileChecklistt
ClientNames(First,,Last) Source:
Addresss:
HomeTel:()W
WorkTel:() Cell:()
Besttimeandnumbertocontacct:
ClosinggDate:AppliicationNumbber:
Standa
ardDocumen
ntation
EmployymentVerificcation
Sign
nedApplication
n

PIPEEDAConsent

T4s

PaySStubs

Pho
otoID

Cred
ditBureau

Emp loymentLetter

NOA

App
praisalRequestt

Appraisal

RenttalIncomeProo
of

TaxR
Return

Divo
orce/Separatio
onAgreement

FinanncialStatemen
nts

Busin
nessLicense

ChildSupportOrd
der/Agreementt

BusinnessListing

Busin
nessCheque

Oth
her:

Otheer:

Oth
her:

Otheer:

ForCo
ondominiumssOnly
StattusCertificate

MastterInsurancePPolicy

ForRe
efinancing/EEquityTakeO
OutsandSwittches
CurrentMortgage
eStatement

Charrge/Mortgage

Listofdebts/balan
nces(Refinanceonly)

Tran sfer/Deed

PropertyTaxState
ement

ProppertyInsuranceePolicy

MortgageRepaym
mentHistory:_
_______Month
hs
ForPu
urchasesOnlyy

Otheer:

Purchase&SaleA
Agreement

ProoofofDownpayyment/GiftLetter

MLSSListing

RenttalLetter(satissfactoryrentpaid)

ReaalEstateSalesp
personContacttInformation

Otheer:

DisclossureDocume
entation
Sign
nedlenderCom
mmitment

MorttgageSummarry/Amortization

Inve
estor/lenderDisclosure

CredditorInsuranceRequestorW
Waiver

Sign
nedborrowerd
disclosure

Otheer:

Note:TThisformmayybereproduccedwithoutppermission,in
nwholeorinpart

232

Chapter11:TheInitialC onsultation

File Workshe
eet
Afileworksheetisakeycompo
onentusedfo
orrecordingnnotesandmoreimportantlyprovidingaa
quicksummaryofthefile.Thiscanbeparticcularlyimporrtantifmoretthanonepersonisworkin
ng
onthe
efile,ifthem
mortgageagen
ntisworkingonseveralfillessimultaneeouslyorifthefilehasnt
beenworkedonin
nsometime.

Thefo
ollowingfigurreisasample
eofamortgaggeworksheett,whichmaybereproduceedinwholeo
or
inparrt.Inthetopsectionisab
briefsummaryyofthemorttgagerequestt,includingth
heamount,
theraank,thepurposeofthemo
ortgage,theG
GDSandTDS,,thecreditsccoreandthed
datethe
credittreportwaso
obtained.Thisdateshould
dbechangeddwheneveranewcreditreeportispulled
onthe
eclient.Ifthereareseverralcreditrepo
ortsinthefilee,themostcu
urrentwillbeereadily
known.

Figure36Residentia
alMortgageWorksheet

Resid
dentialM
MortgageW
Worksheet
ClientNames(First,,Last) Source:
MortgageAmount:$Raank:1st2nd 3rdOtheer:
PurposseofMortgagge:
LoantoValue:GDS: TDS:
CreditScore:Cre
editBureauD
Date:
Isth
heclientworkingwithanyyotherbrokerorlender? Yes/NoIfyees,whom?
ClientObjectives(i.e.improveccashflow;low
wertheinterrestrate,etc.)

AppliccationChallen
nges:GDS/TD
DS,Credit,Em
mployment,Prroperty,Etc.((explain)

ListofPotentiallen
nders(explain
nwhyforeacch)
1
2
3

FirstContactNotessDateofInquiry

InitialConsultation
nNotesDateofMeeting:

AdditionalNotes(includedateo
ofnoteentry)

Note:TThisformmayybereproduccedwithoutppermission,in
nwholeorinpart

Chapter11:TheInitialC onsultation

23
33

Thenextsectionissusedasapromptforthe mortgageaggenttocheckwhethertheclientis
workingwithorhaasbeenworkingwithanotthermortgageeagentorlen
nder.Thisisimportantto
identiifyquicklyasitwillhelpde
eterminehow
wseriousthe clientisindeealingwithth
hemortgage
agentt.

Su
uccessTipIsyourcclientworkkingwithssomeoneeelse?
To
odetermineiffyourclientisworkingwitthanotherbrrokerorlendeer,usethefo
ollowing
qu
uestion,prefe
erablybeforeyoumeetwiththeclient: Mr.Client,Ineedtoaskyouifyouarre
cu
urrentlyworkingwithanyo
otherbrokerorlenderon yourfinancin
ngneedsasm
mostlenders
willlooknegatiivelyonandn
notdealwith anapplicanttwhoisdealin
ngwithseverralsourcesat
thesametime..AreyoudeaalingwithanyyothersourceesMr.Client??.Thisquesstionisshort
an
ndtothepoin
ntandwillhelptheclientu
understandthhattheyshou
uldonlybedeealingwith
yo
ouandnoone
eelse!

TheC
ClientObjectivvessectionofftheWorkshe
eetensurest hatthemortgageagenthasclearly
identiifiedwhatisimportanttotheclient.Th
hisisparticul arlyusefulif,forexample,,aclient
wishe
estoconsolidatedebtstolowerhisorh
herpayment andthemorttgageagentissableto
accom
mplishthis,bu
utatahigherrratethanthe
eclientwaseexpecting.Byyunderstandiingtheclients
mainobjective,the
emortgageagentcanfocu
usonthefacttthatthismaainobjectivew
wasachieved
d.

TheA
ApplicationCh
hallengessecttionisdesignedtoclearly articulateanyychallengesttheclients
appliccationmayhaave,quicklyandclearlysothatthemorrtgageagentccaneasilyideentifythese
issuessonreviewingthefileorin
ndiscussionswiththelendderortheclieent.

Thenexttwosectionsareavailaablefornotessonthefirst contact,theinitialconsulttationorany
othernotesthatm
mayberelevant.Itisabesstpracticetosummarizeth
hefirstcontaactandinitial
consu
ultationassoo
onastheyhaveoccurredttoallowtheccaptureofallrelevantinfo
ormation.This
canbeimportantfforfuturecon
nversations.

11.3
3 Meeting
g the Client

There
earethreebaasicplaceswh
hereamortgaageagentcannmeetaclien
nt:
Theclientshom
me
Themortgageaagentsoffice
Annotheroutsideelocation.

There
eareseveralp
positivesandnegativesforreachlocatioon,butitisim
mportanttofo
ocuson
provid
dinggoodcusstomerserviccefortheclient,sowherevverisbestforrtheclientisoftenthe
rightcchoice.Whereverthemeetingtakesplaceitisvital thattrustbeecreatedwith
htheclientass
soonaspossible.TThedifferentlocationssim
mplynecessitaatedifferentprocessestocreatethis
trust.

Firs t Impress
sions
Itisim
mportanttob
begineverym
meeting,regarrdlessofwheereitoccurs,w
withapositivveattitudean
nd
professionaldeme
eanor.Tomakeagoodfirsstimpressionnitisimportanttodresslikkea
ntime,andbewellpreparred.Onceintthemeetingaaskopenend
dedquestionss,
professional,beon

234

Chapter11:TheInitialC onsultation

listenwell,andtakkenotes.Takkingnotesfromthebeginnningofthemeeetingbeforeetheactual
intervviewbeginsissanimportan
ntwayoftellingtheclient thatthemorrtgageagentb
believesthat
whattheclienthasstosayisimp
portant,anditis.

Pa
auseforcllarification
nOpeneendedquesstion
An
nopenended
dquestionisaquestionth
hatdoesnoteelicitasinglewordorshorrtresponse.
Fo
orexample,askingaperso
onhowlongh
heorshehas workedathissorherjobw
willelicita
sh
hortresponse
e.Thisisaclo
osedendedquestion.Ask ingapersonttodescribeh
hisorherjob
sh
houldresultin
namuchlonggerresponse,whichwillm
mostlikelyincludehowlon
ngheorshe
haasbeenatthe
ejob.Thisisvitalindevelopingagood dialoguewitthyourclient.

The Clients Home


When
nvisitingaclie
entinhisorh
herhome,itisimportantttopreparetoarriveearly.Thislimits
thepo
ossibilityofgettinglostinunfamiliarte
errainandproovidesthemo
ortgageagenttan
opporrtunitytorevviewtheclientsfilebefore
eenteringhissorherhomee.Abestpraccticeisto
arrive
eatleasttenminutesaheaadofscheduleandparkdoowntheroad
d.Thistimeshouldbe
takentoreacquain
ntoneselfwitththeclientssinformation,,includinghissorhernameeandthe
purpo
oseofthefinaancing.

napproachinggthehomefo
ocusonthetaaskathand.Thismeansthatthemortggageagent
When
shouldclearhisorhermindand
dleaveallofhisorhertrooubles,concerns,plansandanyother
distraactionoutside
eofthehome
e.

Oncetheclientanswersthedoor,themortggageagentshhouldintroducehimorherrself.Providee
theho
omeownerw
withabusinesscard,preferrablyacardw
withaphotoo
onittoputth
he
home
eownerateasseabouttheaagentsidentity.Dontforrgettoshakehands.Whilethismay
seemobvious,itm
maynotbetosomeonewh
hohasnotbe eninsalesbeefore.Theneextstepis
contro
ollingtheenvvironment.Theagentmusstsuggestthaatthemeetin
ngoccurinthekitchenoraa
sittinggroom.Anyplacethatdo
oesnothaveaatelevisiono rotherdistraactionisacceptable.

When
nsitting,them
mortgageage
entmustensu
urethatthecclientisseatedacrossthettableandnott
tothe
eleftorrightofhimorherr.Ifthemeettingincludes aspouseitissimportantto
ohavethem
bothssittingacrossfromtheage
ent.Thisisim
mportantbecaauseiftheaggentendsupbetweenthe
couple,heorshew
willnotbeab
bletogaugeb
bothoftheirrreactionssimultaneously.Bybeingablee
towatchtheclienttsmovementtsandbodylaanguage,theeagentwillbeeabletobettterdeterminee
whotthedecisionm
makeris.

Pa
auseforcllarification
nDecisio
onmaker
Th
hedecisionm
makeristhesp
pouseorindividualinare lationshipwh
hoisprimarilyy
re
esponsibleforrtheultimate
edecision.Th
henondecisioonmakingsp
pouseorindivvidualwill
offtenlookatth
hedecisionm
makerwhenaquestionisbbeingaskedo
oradecisionm
mustbe
made.Byaskin
ngsimpleque
estionsatthe
ebeginningoffthemeetinggyoucandeteerminewho
thedecisionmakerisbywaatchingthisbe
ehaviour.Payyattentionto
oboth,butfo
ocusonthe
de
ecisionmakerr!

Chapter11:TheInitialC onsultation

23
35

Itisnotrudetoaskaclienttoturnoffatelevisionorradiio,orlimittheamountofdistraction
thatm
maybeoccurringaroundtheroom,succhasbyputtinngadoginan
notherroom..Ifthe
mortggageagentte
ellstheclientthathisorhe
erfullattentioonisrequired
dtoensureth
hattheright
produ
uctandbestrrateisattaine
ed,theclientshouldagreeetotherequeest.

Beforebeginningttheinterviewitisimportan
nttocreatetrust.Thisism
muchmored
difficultand
timecconsumingto
odoinaclientshomeaso
opposedtothheagentsoffficesincetheoffice
enviro
onmentinitselfdepictsprrofessionalism
m.Inthehom
meenvironmeenttheagenttmustprove
professionalisman
ndtechnicalp
proficiency.TThisshouldbeedoneattheoutset.Theclientwill
alread
dyunconsciou
uslybegintolookattheaggentasaproofessionalifth
heagentdressses
professionally;how
weverthisisn
notenoughto
ocreatetrusttquickly.

Toacccomplishthisstaskrequirespreparation
n.Afewminuutesshouldb
bespentdiscu
ussingthe
agenttsbackgroundandexperie
ence.Iftheaagentisnew, thenthefocu
usshouldbeonthe
broke
eragesbackground.Thisw
willreassurettheclientthaatheorsheissdealingwith
ha
professional.Once
ethishasbee
enaccomplish
heditistime tomoveonttotakingtheapplication.

The Mortgag
ge Agent s Office
Meetingintheage
entsofficere
equiresthesaameattentionntodetailasmeetinginaclientshomee;
howe
everitiseasie
ertosettheto
oneoftheme
eetingbeforeehand.Given
nthepromineentdisplayoff
anyaw
wards,professsionalaccom
mplishments,diplomas,etcc.,theclientw
willbegintou
unconsciouslyy
developalevelofttrustassoonasheorsheentersthem
meetingroom..Toillustrateethispoint
consid
deradoctor.Ineachexam
minationroom
mtheretendsstobeadiplo
omaonthew
wall.Thisis
design
nedtoreassu
urethepatien
ntthatthedo
octorisindeeddapracticinggprofessional.Thesame
resulttoccurswhen
naclientseesstheevidenceofaccompl ishmentsinttheagentsofffice.Yet
anoth
herexampleisthepromine
entdisplayinggofawardsbbyRealEstateeSalespersons.They
underrstandthatqu
uicklycreatingtrustiskeytoastrongr elationship.

Limitingdistraction
nsbyturningoffcellphonesandclosinngtheofficed
doorisalsoreequired,as
wellaasensuringth
hattheclientorclientsare
eseatedacrosssfromthem
mortgageagent.

Ano
other Outs
side Loca
ation
Amorrtgageagentoncesaidthaathehadove
ertwohundreedofficesinO
Ontario.Hew
wasreferring
toTim
mHortonsloccations.Mee
etingaclientaatanotherouutsidelocatio
on,althoughp
perhapsmoree
conve
enientforthe
eclient,limitssthecontroltthattheagennthasovertheenvironment.This
mean
nsthatdistracctionsmaybe
eunavoidable
e.Tolimittheedistractionss,theagentsh
houldarrive
earlyandchooseaanareawithin
nthelocation
nthathastheeleastamoun
ntoftraffic.

Thesaameprocessthatoccursin
naclientsho
omemusttheenbefolloweed.Ensurethattheclient
orclie
entsareseate
edacrossfrom
mtheagentaandthatthei ntroductioniincludessufficient
inform
mationonthe
eagentscred
dentialstoelicitafeelingooftrustfromttheclient.

11.4
4 Identity
y Verificattion

Intod
daysmortgaggemarket,ide
entitytheftandimpersonaationareasiggnificantconcern,making
itnecessaryforthe
emortgageagenttoverifyytheidentityofhisorherclientattheinitial

236

Chapter11:TheInitialConsultation

consultation.Regardlessofwhethertheappointmentisconductedattheclientsresidenceor
elsewhere,themortgageagentmustobtainphotoidentificationforallclients.

Wherepossibleaphotocopyshouldbetakenofthisidentification,orapicturetaken,either
usingacameraorsmartphone,butifnotpossiblethenanattestationtothefactthatthe
identificationwasviewedmustbemadeandputinthefile.Inallcasesthestatementbelow
thatbestrepresentsthecircumstancesoftheidentityverificationshouldbeincludedinthe
applicationwhensubmittedtothelender,ideallyinthenotessection.

Threeformsoftypicalattestations,basedondifferingcircumstancesare:

Ihave/havenotmettheclientbeforehoweverIhaveviewedphotoidentificationintheform
of(driverslicense,passport,etc,)andattesttothefactthatitappearstobeanaccurate
representationoftheclient,or

TheclientisapreviousclientofmineandIhaveviewedphotoidentificationintheformof
(driverslicense,passport,etc.)andattesttothefactthatitappearstobeanaccurate
representationoftheclient,or

InthecaseoftakinganapplicationbyemailorthroughtheInternetwherepersonalcontactis
notpossible,

Ihave/havenotmettheclientbeforeandhavenotpersonallymettheclientinthistransaction
andthereforecannotverifytheclientsidentifythroughphotoidentification.

Whileobtainingphotoidentificationisnotlegallymandatedasofthedateofpublicationofthis
book,itisabestpracticeandshouldbefollowedwithoutfailtoprotecttheintegrityofthe
transactionandthesecurityofallpartiesinvolved.

Insodoingthemortgageagentaffirmshisorherprofessionalismtobothofhisorherclients:
thelenderandtheborrower.Iftheborrowerprotests,informhimorherthatitisforhisorher
protection.Iftheclientcontinuestoprotestthisshouldbetakenasaredflagforfraudandthe
mortgageagentshouldrefusetocontinuewiththetransactionuntiltheclientagreestoproduce
valididentification.

11.5 The Application Form

Themortgageapplicationformisthedocumentthatisusedtoobtainalloftheinformation
requiredtoqualifytheborrower.Thereisnostandardapplication;manybrokerageshavetheir
ownform.However,allformsrequestthesameinformationfromtheborrowerandtherefore
requirethesameexplanation.

Example
BobClarkhasdecidedthathewantstobuyanewhome.Hesfoundahousecurrentlyunder
constructionandwouldliketoseeifhequalifiesforamortgage.YouhavemetwithBoband
havetakenhisapplication,asillustratedinthefollowingfigure.

23
37

Chapter11:TheInitialC onsultation
Figure37SampleAp
pplicationForm

REEMICMortgagessInc.

Sourcce:Flyer

123A
AnywhereStre
eet,Suite100
0
Toron
nto,ON,M1S5B2
Tel:(4
416)5551212

MortgaageAp
pplicaationForm
m

AP
PPLICANT(S)
Name
eofApplicanttinFull
DOB(MM/DD
D/YYYY) SIN
N
BobC
Clark
03/22/1970
55
55121121
ContaactInformatio
on
Tel:4165559999Cel:6475
5551212 Email:bob.clark@
@hotmail.com
Name
eofCoAppliccantinFull
DOB(MM/DD
D/YYYY) SIN
N
N/A

ContaactInformatio
on

PresentAddress
NoofYeaars
1155RenterBoule
evard,Toronto,ON,M1S1
1N1
4
Previo
ousAddress
No.ofYears

DETAILSOFM
MORTGAGER
REQUEST
Purpo
oseofMortgaage
Purch
haseanewho
omecurrentlyyunderconsttruction
Amou
unt Rate Term
Frequency
F
Amortization
A
DateRequ
uired
Rank(1st,2nd))
th
$500,000 4.5% 5Years Monthly
M
25years
2
February220 ,2013 1st
PARTICULLARSOFSECU
URITY
Lot#
Plan#
Municipallity
O
Occupancy
R
RentalIncomee
99
W1234
W
Toronto
A
Applicants
$N/A
CivicA
Address(ifdiffferentfromPresentAddrress)
otsize
Lo
1234borrowerLan
ne,Toronto,O
ON,M1S1M1
1
50ft.X150ft.
PR
ROPERTYTYP
PEANDCONSSTRUCTION
AnnuaalTaxes
DateA
Acquired
PurchasePrice Down
Present
$500
Payment
Value
(MM//DD/YYYY)
0,000
$3,200
0.00
$0.00
$500,0000
N/A
Detached
Duplex
Triplex
Semi
Condo(M
MtcFee:$___________)
Other
Townhouse
Ageo
ofBuilding:Ne
ewConstru
uction:BrickStoreys:2#ofBedroo
oms:3
Zoning:Residential
Garagge:SingleAtttachedHe
eating:Forced
dAir/Gas

Prope
ertyExtras(Describe)
Finish
hedBasementt,centralair,centralvac,o
outdoorJacuzzzi

238

Chapter11:TheInitialC onsultation

Ran
nk

urrent
Cu
Baalance

DETAILSOFEEXISTINGFIN
NANCING
Rate
R
Paym
ment
Lender
(%)

Renew
wal
Date

To
Remain
n?

1stMtg

N/A

N/A

N//A

N/A

N/A

N/A

2ndMtg

N/A

N/A

N//A

N/A

N/A

N/A

EMPLOYMENTINFORM
MATION
APPLIICANTSEMP
PLOYERSNAM
ME:

SELFEMPLO
OYED?
DeliveryInc.POSITION:TTruckDriver
FastD
ADDR
RESS:600FreiightLane,Torronto,ON
INCOM
ME:$125,000
0PerYear

COAP
PPLICANTSEEMPLOYERSNAME:

SELFEMPLO
OYED?

OTHERINCOME(SPECIFYSOUR
RCEANDAMO
OUNT)
N/A
ASSETSANDLIABILITTIES

TEL.4168
8889999
FAX:4169
9990000

NO.OFYEA
ARS:4

TO
REMAIN??
BANK
KACCOUNT $50,000.00

2007FordF150 $25,000.00 MasterCaard


$ 0.00
$$0.00
Y
Perso
onalEffects $40,000.00
$
$$

RRSP
$25,000.00
$
$$

$
$$

$
$$

OTHER:
$

$
$$

$
$$

$
$$

TOTAL
$140,000.00
0
$ 0.00
$$0.00

NETW
WORTH
ASSETS($14
40,000.00) LIABILITIES($$0.00)=NET
TWORTH$140,000.00

NOTES
Mr.Clarkwouldlikkea25yearaamortizationw
withaloantoovalueof1000%.

CONSENT
C
ASSETTTYPE

AMOUNT

LIABILITYYTYPE

A
AMOUNT

PAYMENT

INCONNECTIONWITHM
MYAPPLICATIONFORCREDIT,I/WE HEREBYAGREETO
OYOUPROCURIN GANYCREDITOR
ROTHERREPORTSSTO
MINE MY ABILITY TO OBTAIN MORTGAGE FINANCING AND SHARE TH
HIS INFORMATION
N WITH OTHER CR
REDIT GRANTORS OR
DETERM
CONSUM
MER REPORTING AGENCIES. I/WEE FURTHER AGREEE THAT YOU MAYY ASSIGN THIS APPPLICATION TO TH
HE LENDER OF YO
OUR
CHOICE AND MAY DESIG
GNATE THE CLOSING LAWYER. I/W
WE ACKNOWLEDG
GE THAT YOU MA
AY RECEIVE A FIND
DERS FEE FROM TTHE
LENDER
R.I/WEFURTHER STATETHATTHE INFORMATIONCONTAINEDINTHIISAPPLICATIONISSACCURATETOTHEBESTOFMY/O
OUR
KNOWLLEDGE. I/WE AU
UTHORIZE YOU TO
O USE THE INFORMATION CONTA
AINED WITHIN TH
HIS APPLICATION AND AS OBTAIN
NED
THROUG
GH THIS TRANSAC
CTION TO PROVID
DE ME/US WITH INFORMATION TH
HAT YOU BELIEVEE MAY BE OF INTEREST TO US IN TTHE
FUTURE
E.

DATE:Jan20,2013
3

APPLICANTSSIGNATUREE:

Bobb Clarkk

23
39

Chapter11:TheInitialC onsultation

Sec tion-by-S
Section Applicatio
A
on Analyssis
Appliccant(s)Inform
mation

Figure38BorrowerA
Application:Info
ormationSectio
on

REEMICMortgagessInc.

Sourcce:Flyer

123A
AnywhereStre
eet,Suite100
0
Toron
nto,ON,M1S5B2
Tel:(4
416)5551212

MortgaageAp
pplicaationForm
m

AP
PPLICANT(S)
Name
eofApplicanttinFull
DOB(MM/DD
D/YYYY) SIN
N
BobC
Clark
03/22/1970
55
55121121
ContaactInformatio
on
Tel:4165559999Cel:6475
5551212 Email:bob.clark@
@hotmail.com
Name
eofCoAppliccantinFull
DOB(MM/DD
D/YYYY) SIN
N
N/A

ContaactInformatio
on

PresentAddress
NoofYeaars
1155RenterBoule
evard,Toronto,ON,M1S1
1N1
4
Previo
ousAddress
No.ofYears

Source
Sourcerefersto
ohowtheapp
plicantheardaboutthem
mortgageagen
nt.Examplesmightbea
refferral,inwhicchcaseitisne
ecessarytoaskwhoreferrredtheappliccant,oranad
dvertisement,
inwhichcaseitisnecessarytoaskwhichadvertisemeenttheapplicantviewed.

orrowersNam
me
Bo
Theapplicantm
mustprovideh
hisorherfullllegalname,asitwillbeu
usedtocompletethecredit
inq
quiryaswellaasonallothe
erloandocum
mentation,inccludingthelegaldocumen
ntationto
reggisterthemo
ortgage.Itisaabestpracticcetoviewphootoidentificaationatthissttagetoensurre
thaattheapplicaantistheperssonthatheorsheisapplyyingas.

pplicantDateOfBirthandCoAppDateofBirth
Ap
Do
ocumenttheaapplicantsan
ndcoapplicantsdateofbbirth.Usetheeapplicationsformat.If
3/7/1980maay
no
oformatissho
own,useafo
ormatthatise
easilyidentifi able.Forexaample,using3
bemisinterpretted.Insteadu
usetheformaatMarch7,11980.

SocialInsurance
eNumber(SIN)
Itishelpfultoh
havethesociaalinsurancen
numberwhenncompletingacreditinquiiry;howeverit
isn
notmandatory.Iftheapp
plicantdoesnotwishtoprrovidehisorh
hersocialinsu
urance

240

Chapter11:TheInitialC onsultation

hemortgageaagentcannottdemandit.A
Anapplicantmaylegallyrefuseto
numberthenth
pro
ovidethisinfo
ormation.

Co
ontactInformaation
Re
ecordtheapplicantscontaactinformatio
on,including hisorherem
mailaddress.Theemail
addresswillbeespeciallyusefulinthefutturewhenmaarketingtoth
heapplicant.Ensurethat
the
emaincontacctnumberisclearlyindicaated.

pplicantsPressentAddress
Ap
Do
ocumenttheaapplicantscu
urrentaddressswithpostal codeandind
dicatethelen
ngthoftime
thaattheapplicaanthasreside
edatthislocaation.Thepoostalcodeiso
ofparticularim
mportancefo
or
the
edefaultinsu
urerastheinssurerhasauto
omatedvaluaationsystemssthatusethissinformation
n
toassistindete
erminingifthe
evaluenoted
dontheappliicationiscon
nsistentintheeareainwhicch
the
epropertyislocated.

Pre
eviousAddress
Ifttheapplicanthasresidedaattheirprese
entaddressfoorthreeyearssorless,them
mortgage
agentshoulddo
ocumenttheapplicantspreviousaddreess.Thetotaalofalladdressesshouldb
be
atleastthreeye
ears.

Co
oApplicantorrGuarantor
Co
oapplicantsp
pousesareinccludedinthesameapplicaation.Allotheerapplicantsnames
sho
ouldbelisted
dintheappliccation,howevvereachappllicantshouldhaveaseparrate
applicationcom
mpletedonhimorhertoe
ensurethatal linformation
niscapturedaandthat
infformationrele
evanttoeach
happlicantisseparate.Foorexample,iffthereisabro
otherwhoisa
coapplicanthissnameshould
dbeincluded
dintheappliccationtoena bleanyoneviewingthe
applicationtokknowthatheorshemustrrefertothebbrothersappllicationasweell.

Pa
auseforcllarification
nCoapp
plicantsand
dguaranttors
Acoapplicantisanindividu
ualwhoisapp
plyingwiththheapplicantaandwhowillbe
re
egisteredontitleand/oron
nthemortgagge.Thecoappplicantsinccomeanddeb
btsare
includedinallm
mortgagecalcculations.
egisteredon titlebutwho
oisguaranteeeingtothe
Aguarantorisanindividuallwhoisnotre
lenderthatifth
heapplicantffailstomeethisorheroblligationsundeertheloanth
he
gu
uarantorwillm
meetthoseo
obligations,su
uchasmakinggtheloanpayyments.Theguarantors
incomeanddebtsarenotin
ncludedinthe
emortgagecaalculationsun
nlessheorsh
helivesin
thesamehome
e.

DetailsofMortgaggeRequest

Figure39BorrowerA
Application:DettailsofMortgag
geRequest

DETAILSOFM
MORTGAGER
REQUEST
Purpo
oseofMortgaage
Purch
haseanewho
omecurrentlyyunderconsttruction
Amou
unt Rate Term
Frequency
F
Amortization
A
$500,000 4.5% 5Years Monthly
M
25years
2

DateRequ
uired
February220th,2013

R
Rank(1st,2nd))
1
1st

Chapter11:TheInitialConsultation

241

Purposeofthemortgage
Thissectionmustbeasdetailedaspossible,indicatingthepurposeorreasonforthe
requestedfinancing.Forexample,ifitisanequitytakeout,theuseoftheproceedsmustbe
indicated.

AmountRequested
Enterthetotalamountthattheapplicantisrequestingbasedonthepreliminary
consultation.Thisamountmaychangeonceithasbeendeterminedifamortgagedefault
insurancepremiumisbeingaddedand/oranyotherfeesneedtobeaddedtothemortgage
amount.

TermofMortgage
Documentthetermthattheapplicantandmortgageagenthavedecidedisappropriatefor
theapplicant.Thisrequiresthemortgageagenttodiscusstheapplicantsfutureplans.

Amortization
TheAmortizationperiodisthetotalnumberofyearsitwilltaketofullyrepaythemortgage,
asdecideduponafteradiscussionbetweenthemortgageagentandtheapplicant.Ashorter
amortizationperiodwillresultinahigherpaymentwhilealongeramortizationperiodwill
resultinalowerpayment.

DateRequired
Iftheapplicationisforthepurchaseofahome,documenttheclosingdateofthepurchase.
Ifitisforaswitchorrenewal,documentthedatethatthetermexpires.Ifitisfora
refinance,documentthedateonwhichtheapplicantrequiresthefundsorthedatethatthe
mortgageagentexpectsthetransactiontofund.DonotuseASAPorAsSoonAsPossible
withoutdiscussingthetimeframewiththeapplicant.Itisimportanttomanagethe
applicantsexpectationsregardingthetimethattheprocesswilltakefromapplicationto
funding.

TypeofMortgage
Documentthetypeofmortgagethattheapplicantisrequesting,suchasaVRMorvariable
ratemortgage,FRMorfixedratemortgage,LOCorlineofcredit,etc.

AcceleratedPayment
Documentiftheapplicantwouldliketoacceleratethemortgagepaymenttorepaythe
mortgageinashorterperiodoftime,whichwillsavetheapplicantmoneyovertime.The
applicantmustunderstandthatanacceleratedmortgagepaymentishigherthanaregular
mortgagepayment.

Rank
Documentwhethertherequestedmortgageisa1st,2nd,3rdorothermortgage.

242

Chapter11:TheInitialC onsultation

urity
ParticcularsofSecu

Figure40BorrowerA
Application:ParrticularsofSecu
urity

PARTICULLARSOFSECU
URITY
Lot#
Plan#
Municipality
O
Occupancy
R
RentalIncomee
99
Toronto
W1234
W
A pplicants
$N/A
CivicA
Address(ifdiffferentfromPresentAddrress)
otsize
Lo
1234borrowerLan
ne,Toronto,O
ON,M1S1M1
1
50ft.X150ft.

umber(Parto
oftheLegalDescription)
LottandPlanNu
Alotreferstoaatractorparcceloflandandeachparcellisassignedaalotnumber,,aswellasa
plaannumberwhichrefersto
otheplan.Th
hisinformatioonistypicallyfoundontheePurchase
andSaleAgreem
ment,theTraansfer/DeedaandCharge/M
Mortgage.

Mu
unicipality(paartoftheLeggalDescription)
Do
ocumentwheretheproperrtyislocated..Thisinform ationistypicallyfoundon
nthePurchasee
andSaleAgreem
ment,theTraansfer/DeedaandCharge/M
Mortgage.

Occcupancy
Iftthepropertyw
willbeoccup
piedbytheow
wneralone,chhecktheapplicantbox.Iffthepropertyy
willberentedtoatenant,ch
heckthetenaantbox.Iftheepropertywillbeoccupieedbythe
wnerandatenant,checkb
bothboxes.
ow

entalIncome
Re
Iftthepropertyisbeingrente
edorleasedttotenants,hoowmuchisth
herent?

CivvicAddressOfTheProperttyToBeMorttgaged
Thisisthestand
dardaddressofapropertyy,includingthhestreetnam
meandnumbeer,city,
pro
ovinceandpo
ostalcode.C
Completethissectioniftheepropertytobemortgageedisdifferentt
fro
omtheapplicantscurrentaddress.Forrexample,ifttheapplicanttiscurrentlyrrentingand
thiisapplicationistopurchasseanotherprroperty,theccurrentaddreesswillbehisorherrental
addresswhilethepropertyttobemortgaggedaddressw
willbetheneewhomeaddress.

LottSize
Inccludethelotsspecificationsshere.

Prope
ertyTypeand
dConstructio
on

Figure41PropertyT
TypeandConstru
uction

DateA
Acquired
(MM//DD/YYYY)
N/A

PR
ROPERTYTYP
PEANDCONS TRUCTION
PurchasePrice Down
Present
0,000
$500
Payment
Value
$0.00
$500,0000

AnnuaalTaxes
$3,200
0.00

Detached
Duplex
Triplex
Semi
Condo(M
MtcFee:$___________)
Townhouse
Other
Ageo
ofBuilding:Ne
ewConstru
uction:BrickStoreys:2#ofBedroo
oms:3

243

Chapter11:TheInitialConsultation

Zoning:Residential
Garage:SingleAttachedHeating:ForcedAir/Gas

PropertyExtras(Describe)
FinishedBasement,centralair,centralvac,outdoorJacuzzi

DatePropertyAcquiredorPurchased
Documentthedatethatthepropertywasoriginallypurchased.

PurchasePrice(IfLessthan2YearsAgo)
Documentthepricepaidfortheproperty.

DownPayment
Documenttheamountofdownpaymentthattheapplicantoriginallyprovided.

PresentValue
Documentthevaluethattheapplicantfeelshisorherhouseiscurrentlyworth.

AnnualTaxes
Documenttheamountoftaxesthatarepaidonthepropertyannually.

IfCondo,CondoMtc.Fee
Ifthepropertytobemortgagedisacondominiumunititwillhaveamaintenancefee.This
amountmustberecordedinthissection,includingwhatitemsareincludinginthefee.

Checktheboxesthatapplyregardingthetypeanddescriptionofthebuilding(s)

PropertyExtras
Listanypropertyextrasofinterestsuchasafinishedbasement,indoororoutdoorpool,etc.

DetailsofExistingFinancing
Thissectionisdesignedtodocumentanyandallexistingfinancingcurrentlyonthepropertyto
bemortgaged.Iftheapplicationisforapurchase,thissectionmaybeleftblank.

Figure42BorrowerApplication:DetailsofExistingFinancing

Rank

Current
Balance

DETAILSOFEXISTINGFINANCING
Rate
Payment
Lender
(%)

Renewal
Date

To
Remain?

1stMtg

N/A

N/A

N/A

N/A

N/A

N/A

2ndMtg

N/A

N/A

N/A

N/A

N/A

N/A

Mortgage(s)
Documentthecurrentoutstandingbalanceofthemortgage,thecurrentrateofinterest,the
amountofthepayment,includingthefrequencyofthepayment(i.e.,monthly,weekly,etc.),
whichinstitutionorprivatelenderthefirstmortgageiscurrentlyheldby,thecontact
informationforthatlenderandifthemortgageistobepaidofffromtheproceedsofthe

244

Chapter11:TheInitialConsultation

newmortgagebeingappliedforifitwillremaininplace.Completethisprocessforall
mortgagesontheproperty,includinganyLinesofCredit.

EmploymentInformation

Figure43BorrowerApplication:EmploymentInformation

EMPLOYMENTINFORMATION
TEL.4168889999
APPLICANTSEMPLOYERSNAME:
SELF
FAX:4169990000
EMPLOYED?
FastDeliveryInc.POSITION:TruckDriver
ADDRESS:600FreightLane,Toronto,ON
INCOME:$125,000PerYear
NO.OFYEARS:4

COAPPLICANTSEMPLOYERSNAME:
SELF
EMPLOYED?

OTHERINCOME(SPECIFYSOURCEANDAMOUNT)
N/A

EmployersName,Address/Tel#
Documenttheapplicantscurrentemploymentinformation.

SelfEmployed?
Iftheapplicantisselfemployed

Position
Documenttheapplicantspositionortitlewithhisorhercurrentemployer.

#ofYears
Documentthenumberofyearsthattheapplicanthasbeenemployedbyhisorhercurrent
employer.

Salary
Documentthesalaryorincomeoftheapplicantbeforetaxesarededucted.

PerYearorMonth
Documentwhetherthesalaryorincomefromtheprevioussectionisanannualormonthly
amount.

OtherIncome
Documentanyotherincomethattheapplicanthasensuringthatfulldetailsareprovided.

PreviousEmployersInformation
Completethefieldsattachedtothissectioninthesamefashionasforthecurrentemployer.

CoApplicantsEmployer
Completethefieldsattachedtothissectioninthesamefashionasfortheapplicant.

245

Chapter11:TheInitialConsultation
FinancialInformation

Figure44BorrowerApplication:AssetsandLiabilities

ASSETSANDLIABILITIES
ASSETTYPE

TO
REMAIN?
$50,000.00

$25,000.00 MasterCard
$0.00
$0.00
Y
$40,000.00
$
$

$25,000.00
$
$

$
$

$
$

$
$

$
$

$
$

$140,000.00
$0.00
$0.00

ASSETS($140,000.00)LIABILITIES($0.00)=NETWORTH$140,000.00

AMOUNT

LIABILITYTYPE

AMOUNT

PAYMENT

BANKACCOUNT
2007FordF150
PersonalEffects
RRSP

OTHER:

TOTAL
NETWORTH

Assets
Documentallassetsownedbytheapplicant.Includeanaddendumifthereisnotenough
spacetolistallofthem.AllpersonaleffectscanbetotalledandlistedasPersonalEffects.If
thismortgageisarefinance,switchorequitytakeout,besuretoincludethevalueofthe
propertyinthissectionaswell.AddupallassetsanddocumentthisasTotalAssets.

Liabilities
Documentallliabilitiesforwhichtheapplicantisresponsible.Includeanaddendumifthere
isnotenoughspacetolistallofthem.Ifthismortgageisarefinance,switchorequitytake
out,besuretoincludetheoutstandingbalanceofthemortgageinthissectionaswell.Add
upallliabilitiesanddocumentthisasTotalLiabilities.

Payments
Documentthepaymenttotalsforeachlistedliabilityasamonthlyamount.Documentthe
totalmonthlyobligationsoftheapplicantinthespaceprovided.

ToRemain?
Documentwhich,ifany,oftheliabilitieswillbepaidofffromtheproceedsoftheproposed
mortgage.

NetWorth
ListtheAssetsandLiabilities.Subtracttheliabilitiesfromtheassetsandlistthisamountas
theNetWorth.

Notes
Detailanythingofimportancethatmayimpacttheapplicantsabilitytoobtainanapproval
and/orthatmayaddtoorclarifyinformationintheapplication.

246

Chapter11:TheInitialC onsultation

orization
Autho
Thissection,oncesignedbythe
eapplicant(s),allowsthem
mortgageageenttoperform
mtherequireed
investtigationsandproviderequ
uiredinformationtopotenntiallenders.

Tips
s for a Co
omplete Applicatio
A
on

pleteallFields
Comp
Ensurrethatallfield
dsoftheapplicationarecompleted,whhetherornottinformation
nisobtained
forthatfield.Fore
example,ifth
hefielddoesnotapplytottheapplicatio
onitisbestto
oenterN/A
orno
otapplicableinthefield.Ifthefieldissleftblanksoomeoneviewiingtheappliccationinthe
future
ewillbeunab
bletodeterm
mineiftheinfo
ormationwassmissedbein
ngenteredorifitwasnot
appliccabletothisaapplicant.
pareInformattionwithDoccumentation
Comp
When
ntakinganap
pplicationverifythatwhattheapplican tissayingmaatchestheinfformation
found
dinthesuppo
ortingdocumentation.Someapplicanttsmayinadveertentlyprovideinaccuratee
inform
mationsuchaasemploymentincomeoroutstanding balancesonhisorhermo
ortgageor
otherdebts.

Signature
When
ncompletingapaperappliication,ensurrethattheappplicant(s)siggn(s)theapplication.By
havingtheclientssignatureontheapplicatiion,themorttgageagenth
hasconsentto
ocomplete
thene
ecessaryinve
estigationstoobtainacom
mmitmentfro malender.A
Althoughverb
bal
autho
orizationisacceptable,som
meapplicantssmaydisputeeprovidingau
uthorizationaatsomepointt
inthe
efuture.Fore
example,ifan
napplicantissdeclinedanddsixmonthslaterattempttstoobtain
financcing,heorshemaynotrecallthereaso
onfortheinq uiryonhisorrhercreditreeport.The
appliccantmaythen
ncontactEqu
uifaxorTransunion(whichhevercreditreeportingagen
ncythe
inquirrywasfoundthrough)and
drequestthatttheinquirybberemoved.EquifaxorTransunionwill
contactthemortgaageagentormortgagebro
okeragetoreequesttheauthorizationfo
orthatcredit
inquirry.Ifthereisnosignedap
pplication,the
eapplicantm
mayhaveacassethatthemortgageagen
nt
initiattedthecredittinquirywithouttheapplicantsauthorrity,whichisabreachofthecontract
betwe
eenthecreditreportingaggencyandthe
ebrokerage. Inthiscasetthemortgageeagentwould
d
bereq
quiredtoprovideaddition
naldetailsabo
outhowtheaauthorization
nwasgivenan
ndwhenit
wasggiventobeab
bletoproveth
hatitwasale
egitimatecredditinquiry.

Notess
Them
mortgageapplicationformitselfdoesno
otprovidesppaceforexplaanatorynotess.The
mortggageagentsh
houldusease
eparatepiece
eofpaperoraaNotespagee,suchastheWorksheet,
tomaakenotesrele
evanttotheaapplication.FForexample, iftheapplicaantindicatestthatheorshee
hashaadpastcredittissues,them
mortgageage
entmustdocuumentthatin
nformationan
ndincludeitiin
thelo
oansubmissio
ontothelend
der.Abestprracticeistoinncludeexplan
natorynotesfforany
poten
ntialquestionsthatalende
ermayhaveaabouttheappplication.

11.6
6 Determiining the Applican
nts Need
ds

Deterrminingtheapplicantsnee
edsisaveryiimportantsteepincomplettingtheapplication.To
determinetheapp
plicantsneed
ds,specificquestionsmusttbeasked.Th
hefollowingfform,which
mayb
bereproducedwithoutpermission,assistsindeterm
miningthosen
needs.Oncetheformhass

Chapter11:TheInitialConsultation

247

beencompletedthemortgageagentcansearchforspecificproductsthatmeettheapplicants
needs.ThefollowingfigureisasampleofanApplicantNeedsAssessmentform.

Figure45ApplicantNeedsAssessment

ApplicantNeedsAssessment

1. Whatareyourgoalswithregardstothismortgage?

Purchase:

PriceRangefrom$__________to$__________
DownpaymentAvailable:$__________________

Obtainalowerrate:

CurrentRate:_________%

Obtainalowerpayment:

CurrentPayment:$__________

ConsolidateDebt:

Amount:$___________

Renovations:

Amount:$__________

TypeofRenovations:__________________________________

Other.Explain:_______________________________________________________________

2. Whatistheamountofthemortgagepaymentthatyoubelievewouldfityourcurrent
lifestyle?

From$__________to$__________

3. Whatinterestraterangedoyouexpecttoobtain?

From__________%to__________%

4. Doyouplanonmovinginthenext5years?Ifyes,when?

5. Doyouplanonchangingemployersinthenext5years?Isyes,when?

6. Doyoubelieveyourcurrenthomewillmeetyourfamilysneedsoverthenextfiveyears?
Yes
No

7. Doyoutypicallyreceivebonusorcommissionincomeinadditiontoyourregularincome?If
yes,howoften?
Annually

Monthly

8. Doyouintendtomakealumpsumpaymentorpaymentsonyourmortgagetopayitoff
faster?
Yes

9. Whichismostimportanttoyou:

No

DebtRepayment:Payingyourmortgageoffassoonaspossible?

248

Chapter11:TheInitialConsultation

CashFlow:Havingaloworthelowestpaymentpossible?

10.Whichismostimportanttoyou:
MortgagePayment:Havingamortgagepaymentthatfitsyourcashflow?
InterestRate:Havingaloworthelowestinterestratepossible?

11.Whenitcomestoyourmortgagepayment,wouldyousaythatyou:
Wouldlikeamortgagepaymentthatstaysthesamemonthtomonth?
Wouldlikeamortgagepaymentthatmightincreaseordecreaseifthereisthepotentialto
savemoney?

12.Ifgiventheoptiontohaveavariableinterestratethatislowerthanafixedinterestrate,
wouldyou:
Bewillingtowatchinterestratesonamonthlybasistoensurethatyourmortgagehasthe
bestratepossible?,OR
Prefertohaveafixedinterestratethatdidnotfluctuateanddidnotrequireregular
attention?

13.Wouldyoupreferapaymentfrequencythatis:
Monthly

BiWeekly

Weekly

AdditionalNotes:

Chapter11:TheInitialConsultation

249

11.7 Key Terms and Definitions

BusinessLicense
Alicenseprovidedtoabusinessthatservesasproofthatabusinessisregisteredand
operational

CivicAddress
Thestreetaddressofaproperty,includingthenumberoftheproperty,thestreet,theunit
number(ifapplicable),theprovinceandthepostalcode

ClosedendedQuestion
Aquestiondesignedtoelicitasinglewordanswersuchasayesorno

CoApplicant
Anindividualwhoisregisteredontitleandwhoisapplyingforfinancingwiththeapplicant

DecisionMaker
Theindividualwhotendstomakethemajorityofthedecisionsforthefamilyunit

File
Thecollectionofrelevantdocumentsrelatedtoamortgagetransaction

FileChecklist
Adocumentthatallowsthemortgageagenttocheckoffthedocumentsreceivedinthefile

FinancialStatements
Formalrecordsofabusiness'financialactivities.Thesestatementsprovideanoverviewofa
business'profitabilityandfinancialconditioninbothshortandlongterm.

Guarantor
Anindividualwhoisnotregisteredontitlebutwhoisguaranteeingthatpaymentswillbemade
tothelenderiftheborrowerdefaults

LegalDescription
Adescriptionoftheproperty,includingthelotandplannumber,andthemunicipality,township
orboroughinwhichthepropertyislocated

LetterofEmployment
Adocumentprovidedbyanemployerthatliststheemployeesposition,lengthofemployment
andincome

MLSListing
MultipleListingService.Thisistypicallyhowrealestatesalespersonsexposeapropertytothe
marketplace.

MortgageRepaymentHistory
Ahistoryoftheapplicantsmortgagepayments,typicallyovertwelvetotwentyfourmonths,
providedbyalender

250

Chapter11:TheInitialConsultation

OpenEndedQuestion
Aquestiondesignedtoelicitaconversationalanswer,notsimplyayesornoanswer

Paystub
Adocumentprovidedtoanindividualbyhisorheremployereachtimetheemployeeispaid(by
cheque,directdepositorother),andisoftenrequiredbyalenderinadditiontoajobletter
and/oranyotherdocumentusedtoverifytheemployeesincome

PIPEDAConsent
ConsentunderthePersonalInformationProtectionandElectronicDocumentsActthatallows
themortgageagenttousetheapplicantsinformationforasetofspecificpurposes

PropertyInsurancePolicy
Aninsurancepolicythatinsuresthepropertyagainstlossesduetofire,vandalism,etc.

PropertyTaxStatement
Astatementprovidedbythemunicipalityinwhichthepropertyislocatedindicatingtheamount
ofannualpropertytaxesandifanypropertytaxesareoutstanding

PurchaseandSaleAgreement
Thedocumentcompletedbyarealestatesalespersonforthesaleofproperty

T4
Adocumentprovidedtoanindividualbyhisorheremployer,typicallywhenthereis
employmentincome,suchassalariedorhourlyincome.Employersarerequiredbylawto
providetheT4sothatemployeesmayfiletheirincometaxreturns.TheT4indicates,among
otherthings,theamountofmoneytheemployeeearnedintheoneyearperiod,aswellasthe
deductionsfromearnings

TaxReturn
ThedocumentrequiredtobecompletedbyataxpayerandsubmittedtoCanadaRevenue
Agencythatdescribesincome,deductions,expenses,etc.asprescribedbytheIncomeTaxAct

Chapter11:TheInitialC onsultation

25
51

11.8
8 Review Question
ns

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. De
escribethedo
ocumentation
nthatmustbe
eobtainedbyyamortgageagentineverymortgage
traansaction.

hatdocumen
ntationistypiccallyrequired
dforaselfem
mployedindivvidual?
2. Wh

3. Wh
hatdocumen
ntationistypiccallyrequired
dforapurchaasetransactio
on?

4. Wh
hatdocumen
ntationistypiccallyrequired
dforarefinannce,equitytaakeoutorsw
witch
traansaction?

5. Disscusstheimp
portanceofth
hefilechecklist.

6. Wh
herearethed
differentplaccesthataclie
entmaybem etandwhataarethepositiivesand
negativesofeacch?

7. Wh
hyisitimporttanttoverifyyanapplicanttsidentity?

8. Disscussthedifferencebetwe
eenacoappllicantandagguarantor.

9. Wh
hyisitimporttanttohavetthemortgage
eapplication signedbytheeapplicant(s)?

10. Howcanamortgageagentdetermineth
heapplicantssneeds?

252

Chapter12:ApplicationAnalysisBorrowerDocuments

Chapter 12: Application Analysis Borrower


Documents

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Analyzedocumentsusedforincomeverification
Analyzedocumentsusedwhenpurchasingaproperty
Completeanapplicationforcreditorinsurance
Identifyinconsistenciesinborrowerdocuments
Identifypotentialfraudulentborrowerdocuments
Reviewborrowerdocumentationforpotentialmisrepresentationorfraud

Introduction

TheChapterontheInitialConsultationidentifieswhichdocumentsmustbeobtainedfroma
potentialclient.Presentedwiththisdocumentation,amortgageagentmustbeabletoreview
eachdocumenttodetermineifthereisanypotentialmisrepresentationorfraud.Thisrequires
themortgageagenttobefamiliarwiththesedocuments,understandtheinformationprovided
ineachanditsrelevancetothemortgageapplication,andbeabletoidentifyinconsistenciesin
thesedocumentsbeforetheyaresubmittedtotheappropriatelender.

Clearlyitisintheagentsbestintereststodosuchareview.Ifanapplicationsubmittedtoa
lendercontainsinformationintheapplicationthatisdifferentthaninthesupporting
documentation,theapplicationprocesswillbesloweddownsignificantlyand/ortheapplication
maybedeclinedbythelender.Thefollowingsectionscontainavisualrepresentationofeach
documentaswellasananalysisofeach.

12.1

Fraud and Forgery

Unfortunatelyeachofthefollowingdocumentscanbeforgedandusedforfraudulentpurposes
inthemortgageapplicationprocess.Tohelpsafeguardagainstsubmittingforgeddocumentsto
alender,theagentmusthaveanunderstandingoftheinformationcontainedineach
document.

Withtodaystechnology,individualswishingtocreateaforgeddocumentcanandwill.They
canusesoftwaretomanipulatedocumentsprovidedbyemployers,thegovernmentorother
participantsinthemortgagetransactiontoappeartobevalid.Becauseforgeryismore
sophisticatedintodaysmarketplacethaneverbefore,itisnecessaryforthemortgageagentto
closelyinspectthedocumentsprovidedbytheborrower.Inthevastmajorityofcases
borrowersarehonestandsupplylegitimatedocumentation.Howeveritisthedishonest
borrowerwhowillcausethegreatestharmtoamortgageagentsreputationifthatmortgage
agentsubmitsforgeddocumentationtoalenderthatheorsheshouldhaveknownwasforged.

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

25
53

ollowingdocu
umentsareprovidedassamplesofwhaatamortgageeagentcaneexpectto
Thefo
receivve,dependinggonthetypeoftransactio
on,aswellas thetypesofinformationtthatcanbe
expecctedtobefou
undinthesed
documents.

12.2
2 Income Docum
mentation

Inthisssectionwew
willbeginbylearninghow
wtoidentifybborrowerdocu
uments,follo
owedbyan
explanationandan
nalysisofthemforaccuraccyandinconssistencies,inccludingpoten
ntialfraud,
where
eapplicable.

T4A
A
AT4A
Aisadocumentprovidedttoanindividu
ualbyhisorhheremployerwhichsummarizesincomee
fromvarioussourccesandisuse
edbytheindivvidualforsubbmittinganannualincomeetaxreturn.
Thisd
documentistypicallyobtaiinedbyabroker/agentwhhentheappliccanthascom
mmissionor
contraactincome,ssuchasacom
mmissionedsaalespersonorrindependen
ntcontractor.Thereare,
howe
ever,othertim
mesthatanapplicantwillrreceiveaT4A
A.

Thetyypesofincom
methatarere
eflectedinaTT4Ainclude:
pensionorsupeerannuation
lum
mpsumpaym
ments
sellfemployedccommissions
annuities
rettiringallowannces
patronagealloccations
RESPaccumulattedincomeppayments
RESPeducationnalassistancepayments
feeesorotheram
mountsforse
ervicesor
othherincomesuuchasresearrchgrants,certainpaymenntsunderaw
wagelossreplacementplan
n,
deathbenefits,andcertainb
benefitspaidtopartnersh ipsorshareholders.
Emplo
oyersmustalsoprepareaT4Aslipiftheyprovidedggrouptermliffeinsurance(taxable
beneffits)forforme
eremployeess,orretirees,evenifthetootalofallben
nefitspaidintthecalendar
yearw
was$500orless.Inadditiion,theemployermustprrepareaT4Aslipiftheyarethe
Admin
nistratorortrrusteeofamultiemployerplanandth eyprovidedttaxablebeneffitsunderthee
planttoemployeess,formeremp
ployees,orretirees,ifthettotalofallbeenefitspaidexxceeded$25.

254

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Figure46SampleT4A
A

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

25
55

ofaT4A
Detailedanalysiso
Thissectiondescribesthesectio
onsofaT4Atthataremosttrelevanttotthemortgageeprocess.

12Socialinsurancenumb
ber
Box1
Emplo
oyersmusten
nterthesociaalinsurancen
number(SIN) oftherecipieentasitappeearsonthe
recipient'sSINcard
d.Ifanemplo
oyercannoto
obtaintheSIN
N,theemployyermustenteerninezeroes.

SuccessTipSSIN
Ifanapplicantpro
ovidesaT4AwithninezerroesinBox122,itdoesntn
necessarilymeean
anythingotherthanthefactth
hattheappliccantdidntprrovidehisorh
herSINtotheeemployer.
Fullvverificationoftheapplican
ntsinformatiionisrequire dtoensurethatheorsheeisactually
thessameindividu
ualnamedinttheT4A.

Box1
13BusinessNumber
IftheT4Aisforab
businessthee
employermustentertheffirstninedigittsoftherecip
pients
businessnumber(BN).

Box1
16Pensiono
orsuperannuation
Iftherecipientrecceivedannuityypaymentsfrromtheemp loyer,theem
mployermustenterthe
taxablepartofann
nuitypaymen
ntsitpaidtoaanemployee orretiredem
mployeeouto
of,orunder,aa
superrannuationorrpensionfund
dorplan,includingdisabillitybenefitsp
paidintheformofalife
annuiity.

Box1
18Lumpsum
mpayments
Emplo
oyersmusten
nterthetaxab
blepartofassinglepayme ntoutofapeensionfundo
orplandueto
o
anyofthefollowin
ngreasons:
witthdrawalfrom
mtheplan,re
etirementfro
omemploymeent,ordeathofanemployyeeorformerr
em
mployee;or
terrminationof,amendmentto,ormodificationoftheplan;or
reiimbursementtofanyovercontributiontotheplan.

Box2
20Selfemplloyedcommissions
Oneo
ofthemostim
mportantsecttionsofaT4A
Aforabrokerr/agent,Box220containsth
heamountoff
comm
missionsanem
mployerpaidtoapersonw
workingasannindependen
ntagent(i.e.,notan
employee).GSTTpaidtotherrecipientonthoseservicessisnotinclud
dedinthisam
mount.

Box2
22Incometa
axdeducted
Thisissthetotalinccometaxdeductedbytheemployerfroomtherecipieent'sremuneerationduringg
theye
ear.Thisinclu
udesthefede
eral,provinciaal(exceptQueebec),andterritorialtaxessthatapply.
Thisb
boxwillbeblaankiftheemp
ployerdidntdeductanyt axesduringttheyear.Amounts
withh
heldunderthe
eauthorityoffagarnisheeorarequirem
menttopaytthatappliesto
othe
emplo
oyee'spreviouslyassessed
dtaxarrearsw
willnotappeaarhere.

256

onAnalysis BorrowerDo
ocuments
Chapter12:Applicatio

61Payer'sBu
usinessNumber(BN)
Box6
Thisissthe15digitBNoftheem
mployer,anddoesnotapppearoncopiessprovidedto
otherecipient.
IftheBNdoesapp
pearthebroke
er/agentshou
uldconfirmthheinformatio
onontheslip
pfromthe
emplo
oyerasthism
maybeasignofaforgeddocument,sinncemanyindiividualsarentawarethat
theBNisnottoap
ppearontherrecipientsslip.

T4
AT4isadocumenttprovidedto
oanindividualbyhisorhe remployerto
osummarizeincomefora
givenoneyearperriod.Thisdoccumentistyp
picallyobtaineedbyabrokeer/agentwhenthe
appliccanthasemploymentinco
omesuchassalariedorho urlyincome.

Everyyemployer(re
esidentornonresident)m
mustprovideaaT4sliptoem
mployeesifitthaspaidits
emplo
oyeesanyoftthefollowinggtypesofinco
ome:
em
mploymentincome
taxxableallowanncesandbeneefits
fishingincomeooranyotherpaymentsforrservicesrenderedduringgtheyear
sallary,wages(includingpayinlieuofterm
minationnotiice,)tipsorgratuities,bon
nuses,
vacationpay,em
mploymentccommissions,grossandinssurableearningsofselfem
mployed
fishers,andallo
otherremune
erationpaidttoemployeessduringtheyyear
taxxablebenefitssorallowancces
deductionswithhheldbytheeemployerdurringtheyearand
pensionadjustm
ment(PA)am
mountsforem
mployeeswhooaccruedabeenefitfortheyearunder
the
eemployersregisteredpe
ensionplan(R
RPP)ordeferrredprofitshaaringplan(DPSP)

Detailedanalysiso
ofaT4
Thissectiondescribesthesectio
onsofaT4th
hataremostrrelevanttoth
hemortgageprocess.

Emplo
oyer'sname
Theoperatingortrradingnameoftheemplo
oyer.

Emplo
oyee'snameandaddress
Theemployee'slasstname,follo
owedbytheffirstnameanddinitial,notiincludingthetitleofthe
emplo
oyee(suchassDirector,Mrr.,orMrs.),fo
ollowedbyth eemployee'ssaddress,inccludingthe
provin
nce,territory,orU.S.state
e,CanadianpostalcodeorrU.S.zipcodee,andcountrry.

Year
Thefo
ourdigitsoftthecalendaryyearinwhichtheemployeerpaidtheremunerationttothe
emplo
oyee.

Chapter12:ApplicationAnalysisBorrowerDocuments

257

Figure47SampleT4

258

Chapter12:ApplicationAnalysisBorrowerDocuments

Box10Provinceofemployment
Oneofthefollowingabbreviationswillindicatewheretheemployeereportedtowork:

AB Alberta
NU Nunavut
BC BritishColumbia
ON Ontario
MB Manitoba
PE PrinceEdwardIsland
NB NewBrunswick
QC Quebec
NL NewfoundlandandLabrador
SK Saskatchewan
NS NovaScotia
YT Yukon
NT NorthwestTerritories
US UnitedStates
ZZ Other
ZZisusedifanemployeeworkedinacountryotherthanCanadaortheU.S.,orworkedin
Canadabeyondthelimitsofaprovinceorterritory(forexample,onanoffshoreoilrig).

Foranyemployeewhoworkedinorwhoseemploymentwaslocatedinmorethanoneprovince,
territory,orcountryintheyear,separateT4slipsarecompleted.Foreachlocation,thetotal
remunerationpaidtotheemployeeandtherelateddeductions,suchasCPP/QPPcontributions,
EIpremiums,andtaxislisted.

Box12Socialinsurancenumber
Theemployee'ssocialinsurancenumber(SIN)asitappearsontheemployee'sSINcard.Ifthe
employerdoesnthavetheSIN,thissectionwillcontainninezeros.

Box14Employmentincome
Thisboxreportsthetotalincomebeforedeductions,includingallsalary,wages(includingpayin
lieuofterminationnotice),bonuses,vacationpay,tipsandgratuities,honorariums,director's
fees,managementfees,andexecutor'sandAdministrator'sfeesreceivedtoadministeran
estate(aslongastheAdministratororexecutordoesnotactinthiscapacityintheregular
courseofbusiness).

Boxes16and17Employee'sCPPorQPPcontributions
ThisboxreportstheamountdeductedfromtheemployeeforcontributionstotheCanada
PensionPlan(CPP)orQuebecPensionPlan(QPP).

Box18Employee'sEI(EmploymentInsurance)premiums
ThisboxreportstheamountofEIpremiumsdeductedfromtheemployee'searnings.If
premiumswerenotdeductedthisboxwillbeblank.Basedonfederalregulations,themaximum
amounttobedeductedforEIpremiumsin2012is$839.97.

25
59

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

SucccessTipEEIpremium
ms
Ifthe
eamountinB
Box18exceed
dsthemaximu
umannualprremium,asin
ndicatedinthechart
below
w,thebrokerr/agentshould
dreviewtheT4toensure thatitisnotfraudulent.TThe
follow
wingtableillu
ustratesthem
maximumamountsofinsuurableearninggsandmaxim
mum
employeepremiumsoverthep
pastseveralyyears.
ear

Max. Ann
nual
Insurab
ble
Earning
gs

Ra
ate (%)

Feder
ral Quebec

Max. A
Annual
Empl oyee
mium
Prem

Max. Annual
Employer Premium

Federal

Quebec

Federal

Quebec

2012

$45,900

1.8
83

1.47

$839.97

$674.73

$1,175.96

$944.62

2011

$44,200

1.7
78

1.41

$786.76

$623.22

$1,101.46

$872.51

2010

$43,200

1.7
73

1.36

$747.36

$587.52

$1,046.30

$822.53

2009

$42,300

1.7
73

1.38

$731.79

$583.74

$1,024.51

$817.24

2008

$41,100

1.7
73

1.39

$711.03

$571.29

$995.44

$799.81

2007

$40,000

1.8
80

1.46

$720.00

$584.00

$1,008.00

$817.60

2006

$39,000

1.8
87

1.53

$729.30

$596.70

$1,021.02

$835.38

20RPPcontrributions
Box2
Thisb
boxreportsth
hetotalamou
unttheemplo
oyeecontribuutedtoaregissteredpensio
onplan(RPP).
Iftheemployeedidnotcontributetoaplan,,thisboxwilllbeblank.

Box2
24EIinsurab
bleearnings
Thisb
boxreportsth
hetotalamou
untusedtocaalculatetheeemployee'sEIpremiums.TThisboxwillb
be
blank if:
theerearenoinssurableearninngs
inssurableearninngsarethesaameastheem
mploymentinncomeinboxx14;or
inssurableearninngsareovertthemaximum
mfortheyearr(seethedesscriptionprovvidedforBox
18)

Box2
26CPP/QPPpensionableearnings
Inmo
ostcases,this boxwillbeb
blank.
Box4
46Charitable
edonations
Thisb
boxreportsam
mountsdeductedfromthe
eemployee'ssearningsforrdonationsto
oregistered
charittiesinCanadaa.

Box2
22Incometa
axdeducted
Thisb
boxreportsth
hetotalincom
metaxdeducttedfromthe employee'srremuneration
n.Thisincludees
thefe
ederal,provin
ncial(exceptQ
Quebec),andterritorialtaxxesthatapply.Ifnotaxeswere
deducctedthisboxwillbeblank.

260

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Su
uccessTipIncometaxrates
Mortgageagen
ntsshouldbeawareofthe
efollowingtaxxestobeded
ductedandsh
houldensure
thattheamoun
ntsontheT4appeartome
eetthefollow
wingtable.Iffamortgageaagentbelievees
thatthetaxesd
deductedinB
Box22areno
otreflectiveooftheapplican
ntsincomeh
heorshe
sh
houldconfirm
mtheinformattionontheslipfromtheeemployerasthismaybeasignofa
fo
orgeddocume
ent.TaxratesscanbeobtainedfromCaanadaRevenu
ueAgencysw
websiteat
htttp://www.craaarc.gc.ca

Fo
or2012,theFFederalratesare:
15%on
nthefirst$42
2,707oftaxableincome,++
22%on
nthenext$42,707oftaxaableincome(oontheportio
onoftaxableincome
over$4
42,707upto$85,414),+
26%on
nthenext$46,992oftaxaableincome(oontheportio
onoftaxableincome
over$8
85,414upto$132,406),+
29%offtaxableincomeover$132
2,406.

or2011,theO
Ontarioratesare:
Fo
5.05%onthefirst$39,020oftaxxableincome,,+
$39,023,+
9.15%onthenext$
%ontheamountover$78,,043
11.16%

54BusinessNumber
Box5
Thisb
boxcontainstthe15digitB
BusinessNumber(BN)thattisusedbyth
heemployerttoreport
deducctionstoCRA
A.TheBNshou
uldnotappeaaronthetwoocopiesoftheeT4slipthataregivento
emplo
oyees.IftheBNdoesappearthebroke
er/agentshouuldconfirmth
heinformatio
onontheslip
fromtheemployerrasthismaybeasignofaaforgeddocuument,sincem
manyindividu
ualsarent
aware
ethattheBNisnottoapp
pearonthere
ecipientsslip .

"Othe
erinformatio
on"area
The"o
otherinformaation"areaattthebottomoftheT4slipphasboxesfo
ortheemployyertoenter
codessandamounttsthatrelatetoemployme
entcommissioons,taxableaallowancesan
ndbenefits,
deducctibleamountts,fishers'inccome,andotherentriesifftheyapply.

Example
40

BoxxCase

22400.98

Amoun
ntMontant


Codess30to85Ta
axableallowaancesandbe
enefits,deducctibleamoun
nts,employm
ment
comm
missions,andotherentries
30 Housing,bo
oard,andlodging
31 Specialworrksite
32 Travelinaprescribedzo
one

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments
33
34
36
37
38
39
40
41
42
43
53
70
71
72
73
74
75
77
78
79
80
81
82
83
84
85

26
61

Medicaltraavel
Personalusseofemploye
er'sautomob
bile
Interestfre
eeandlowinterestloan
Employeeh
homerelocattionloandeduction
Securityop
ptionsbenefitts
Securityop
ptionsdeduction110(1)(d)
Othertaxab
bleallowance
esandbenefits
Securityop
ptionsdeduction110(1)(d.1)
Employmen
ntcommissio
ons
CanadianFForcespersonnelandpoliccededuction
Deferredse
ecurityoption
nsbenefits
Municipalo
officer'sexpe
enseallowancce
StatusIndiaanemployee
Section122
2.3incomee
employmentoutsideCanaada
Numberofdaysoutside
eofCanada
Pre1990pastserviceco
ontributionsw
whileacontriibutor
Pre1990pastserviceco
ontributionsw
whilenotacoontributor
Workers'co
ompensationbenefitsrepaidtotheem
mployer
Fishersgrossearnings
Fishersnetpartnershipamount
Fisherssharepersonam
mount
Placementoremployme
entagencyworkersgrossearnings
Driversofttaxisorotherpassengercaarryingvehicllesgrossearn
nings
Barbersorhairdressersgrossearninggs
Publictransitpass
Employeep
paidpremium
msforprivate
ehealthserviccesplans

Job Letter
Ajobletterisadocumentprovidedtoanind
dividualbyhi sorheremployer.Thisdo
ocumentis
herdocumenntation,toverrifyanapplicaants
oftenrequiredbyaalender,inadditiontooth
emplo
oymentaswe
ellasincome..Thefollowin
ngisasampleeofajoblettter.Alegendisprovidedtto
explaineachsectio
onofthelette
er.Tobeacce
eptablethejooblettershou
uldcontainallofthe
inform
mationidentiffiedintheleggend.Itisimportantthat abroker/ageentreviewtheejobletterto
o
ensurrethatitconttainsallofthe
enecessaryin
nformation,aaswellastocconfirmthatitisauthenticc.
Ifthereareanyspe
ellingerrorstthebroker/aggentshouldreeviewthedocumentcareffully.Ifthe
broke
er/agenthasaanydoubtsre
egardingitsauthenticityheeorsheshou
uldverifyitsccontentsby:
Ensuringthecoompanyexistss.PerformaCCanada411ssearch(www..canada411.ccom)toverifyy
broker/agent shouldcontaacttheborrow
werfor
thaatthecompanyislisted.Ifitisnttheb
furrtherinformaation.Thebro
oker/agentcaanalsovisitthhecompanysphysicaladd
dressto
determineifitisactuallythe
ere.

262

Chapter12:ApplicationAnalysisBorrowerDocuments

Contactingtheemployerusingthecontactinformationfoundinthejoblettertoverifyits
contents.

Regardlessofwhetherthebroker/agentfindsanyreasonstosuspectthattheletterisnot
authentic,heorsheshouldverifytheinformationfoundinthejobletter.

Legend

A:CompanyLetterhead,includinglogo(ifapplicable)andcontactinformation.Ensurethatthis
informationiscorrectbyverifyingitusingCanada411,callingthecontactnumber(s)and/or
visitingthephysicallocation.

B:Date:Thejobletterneedstoberecentinrelationtotheapplication.Ifthejobletterwas
writtenbeforethebroker/agenttooktheapplicationacurrentpaystubshouldalsobe
obtainedtoensurethattheapplicantisstillemployedbythisemployer.Ifthejobletteris
overonemontholdthelendermayrequireanuptodatejobletter.

C:Reline.Thislinemayormaynotbepresent,dependingonthepolicyoftheemployer.

D:Toline.Ifitisaddressedtoaspecificindividual,thatindividualshouldbethebroker/agent
orlender.Ifitisaddressedtoanotherindividualthebroker/agentshouldconfirmthe
identityofthatpersonandthereasonfortheothername.Itmaybeajobletterthatwas
suppliedtoanotherbroker/agentorlender.

E:Position.Thejoblettermustcontaintheapplicantsposition,andifheorsheisfulltime,
parttime,seasonal,temporary,contractoronprobation.

F:Dateofemployment.Thejoblettermustcontainthedatethattheapplicantwasfirsthired.

G:Incomeamount.Thejoblettermustcontaintheamountofannualincomeearnedbythe
applicant,andifitissalary,hourlyorcommissionbased.Anyadditionalincome,suchas
bonusincome,mustbelistedseparatelyfromthesalariedincome.

H:Writersinformation.Thewriterofthejoblettershouldbeclearlyidentifiedsothatheor
shemaybecontactedtoverifythelettersinformation.

Chapter12:ApplicationAnalysisBorrowerDocuments

263

Figure48SampleJobLetter

1234JohnStreet,
Somewhere,ON
A
M4M4M4
Tel:(416)5551212
Fax:(416)5552121

B August29,2012

C Re:EmploymentVerificationofMr.JohnQ.Public

D ToWhomItMayConcern,

AsrequestedbyMr.JohnQ.PublicthisletteristoverifythatMr.JohnQ.Publicisemployedat
E

ABCManufacturingInc.asasalariedAssemblyLineOperator.
HehasbeenemployedinthispositionsinceJanuary17th,2009andearns$75,500per
F
G
year.

Ifyouhaveanyquestionspleasedonothesitatetocontacttheundersigned.

Sincerely,

SarahPublic
H HRAssistant
ABCManufacturingINC.

264

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Pay stub
Apayystubisadocu
umentprovid
dedtoanindividualbyhis orheremplo
oyerandisofftenrequired
byale
enderinaddiitiontoajobletterand/orrotherincom
meverification
n.Apaystubisgenerally
usedttoprovethatttheapplican
ntisstillactive
elyemployeddbytheemployersinceajjoblettermayy
beon
neormorewe
eeksold.Inaaddition,thep
paystubcanbbeusedtoen
nsurethattheeapplicants
earnin
ngsonthejob
bletterareacccuratelyreflectedintheyyeartodatesectionofthepaystub.

Forexxample,ifthe
ejobletterindicatesthatttheapplicant earns$60,0000peryearan
ndthe
paystubisobtainedpreciselyattthemiddleo
oftheyear,ittshouldindiccateayearto
odateincomee
of$30
0,000.

Figure49SamplePaystub

Employee # 0004
STATEMENT OF EARNINGS
BULLETIN DE PAIE
Rate
Amount
Y.T.D.

DEDUCTIONS
RETENUES

1,303.95

NET PAY
PAIE NETTE

Period From
To
2008/10/31
2008/11/14

711.03

2,049.30
16.587.57
21.60

DEPOSIT

Y.T.D

Payday 2008/11/21

0004 12345 12345678911

NET PAY ALLOCATION


DETAILS DE LA PAIE NETTE

477.37

EMPLOYER DEDUCTIONS AND CONTRIBUTIONS


RETENUES DE L'EMPLOYE ET COTISATIONS PATRONALES
Current
Y.T.D.
Type
Current

Department # 99

Type

1,303.95

20 UNION/LOCAL

15 FED. TAX

14. E.I.

56,736.60 13 G.P.P

GROSS PAY
PAIE BRUTE

477.37

37,367.10

1,781.32

1,781.32

19,369.50

Hours

BOB BORROWER

Type
00 Salary

Current
Courant
56,736.60

SUMMARY
SOMMAIRE

Year-to-date
Cumul annuel

Employer # 1234-b TEST COMPANY, 1234 COMPANY LANE, TORONTO, ON, M1M 1M1

265
Chapter12:ApplicationAnalysisBorrowerDocuments

266

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Notiice of As sessmen
nt (NOA)
AnNO
OAisissuedb
bythefederallgovernmenttwhenaperssonaltaxretu
urnhasbeenccompleted
andfiiled.Thisdoccumentprovid
desabreakdo
ownoftheyeearsincomealongwithth
hebalance
owinggorrefunddu
ue.Abroker//agentwilltypicallyobtainnthisdocumeentwhenpro
ocessingan
appliccationusingaaStatedInco
omeprogram
mtoprovidepproofthattheerearenoou
utstanding
backttaxesowingttotheCanadaaRevenueAggency.Thisdoocumentmayyalsoberequ
uiredinotherr
circum
mstances,asd
determinedb
byeachlende
er.

Figure50SampleNO
OA

Canad
daRevenueAgencedu
urevenu
Agenccy
duCanadaa

Date

Aug6,2016

Line

150

236
260
350
6150
420
428
435
437
486
482

me
Nam

RTGAGECLIENT
MOR

SociaalInsuranceno.

000000000

Taxcentrre

ONP3A5C1
SudburyO

TotalIncome
e
Not icethatfiguresup
Deductionsffromtotalinco
ome
to section61500are
NetIncome
wh olenumbersonly
TaxableInco
ome
andddonothaveeany
Totalfederalnonrefundab
bletaxcredits
centts.Havealoo
okfor
this whenreview
winga
TotalOntario
ononrefundabletaxcredits
borrrowersdocument
Netfederalttax
toensureitiis
NetOntariotax
authentic.
Totalpayable
Totalincome
etaxdeducted
d
Paymentonfiling
Totalcreditss
(Totalpayab
bleminusTotallcredits
Balancefrom
mthisassessment DR
BalanceDue
e DR

TaxYear

2015

Summary

Desccription

NOTICEO
OFASSESSMEN
NT T451E(08)

$Amountt

65,00
00
10,50
00
55,00
00
55,00
00
2,00
00
65
50
7,500.0
00
4,000.0
00
11,500.0
00
11,000.0
00
200.0
00
11,200.0
00
300.0
00
300.0
00
300.0
00

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

26
67

Bus iness Lic


cense
ABussinessLicense
emayberequ
uiredbyalendertoprove anapplicantsownershipofabusinesss.

Figure51BusinessLiicense

MaasterBu
usinessLicencee

Date Issued:
I

2013
30116

Bu
usiness Numb
ber: 1234567899

(yyyym
mmdd)

Business Name and


d Mailing Add
dress:
REMIIC MORTGAG
GES,
2175 Sheppard
S
Aven
nue East, Suite 213,
TORO
ONTO, ONTA
ARIO CANAD
DA M2J 1W8
Business
Addreess:

SAM
ME AS ABOVE
E

Teleph
hone:

Ext:

Fax:

Emaill:
Legal
Namee(s):

JOH
HN ADAM PU
UBLIC

Type of
Legal
Entity
y:

LE PROPRIET
TORSHIP
SOL

Business
Activiity:

TRA
AINING OF MORTGAGE
M
BROKERS/AG
B
GENTS

Business Informatio
on
BUSIN
NESS NAME
REGIS
STRATION

Number

456789
1234

Effectivee Date

Expiry Date

(yyyymm
mdd)

(yyyymmd
dd)

20130116

201801116

Page1off1

To the Client:
C
When the Master
M
Business Lic
cence is presented to any Ontario bussiness program, yo
ou are not required to repeat
informattion contained on th
his licence. Each Ontario
O
business pro
ogram is required tto accept this licencce when presented
d as part of its
registrattion process. Call th
he Ontario Busines
ss Connects Helplin
ne at 18005651
1921 or (416) 314
9151 or TDD (416
6) 3268566 if you
have an
ny problems.

To the Ontario
O
business program: A client is not required to repeat
r
any informattion contained in th
his licence in any otther form used in
your reg
gistration process.

268

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Fina
ancial Sta
atements
s
FinancialStatemen
ntscanbedefinedasthep
presentation offinanciald
data,includinggbalance
sheets,incomestaatementsandothersupportingstatemeentsintended
dtocommunicatean
entityy'sfinancialpositionatapointintime.

Typicaallyabookkeeperortheo
ownerofabusinesswillre cordandsum
mmarizethettransactionso
of
thebu
usiness.Thesetransaction
nsincludethe
esaleofmercchandise,payyroll,inventorrypurchases
ando
otherfinancialtransactionssthroughouttheyear.Th isinformationisthencom
mpiledand
financcialstatemen
ntsarepreparred.ThesestatementsconnsistoftheBaalanceSheetandIncome
Statem
ment,thetwo
oprimarydocuments,and
dareaccomp aniedbytheStatementoffRetained
Earnin
ngs,Statemen
ntofChangessinFinancialPosition(SCFFP)andtheNotestotheFinancial
Statem
ments.

Abalaancesheet,illustratedinthefollowingffigure,isadeetailedsnapsh
hotofthefinancialhealth
st
ofab
businessonaspecificdate,,typicallyDeccember31 ; howeverthissdatemightb
bedifferentiff
thebu
usinessis,forrexample,seasonal.Balan
ncesheetsshoowtherelatio
onshipbetweeenthedollarr
amou
untofassets((whatthebussinessowns),liabilities(whhatabusinessowes)ando
owner'sequitty
(whatttheownero
orstockholderrsown).Thetotalsmustbbalancebased
dontheform
mula:

Assets=Liabi
A
lities+OwneersEquity

Thein
ncomestatem
ment,alsorefferredtoasth
heprofitand lossstatement,illustrated
dinnext
figure
e,detailstheamountofm
moneythatthebusinessm adeorlostovveraspecificperiodof
time,typicallyamonth,aquartterorayear.Theincome statementisbasedontheeformula:

Netincome=
=RevenuesEExpenses

Manyybrokersandagentswillo
onlyoccasionaallycomeintoocontactwithfinancialstaatementsand
d
mayn
nothavethettrainingorexxpertisetopro
operlyinterp retthem.Th
hebrokerageshouldhavea
policyyinplacetoh
havefinancialstatementsrreviewed,whhennecessaryy,byastaffm
memberor
anoth
herbrokerwh
hounderstand
dsandcanprroperlyinterppretthesestaatements.

269

Chapter12:ApplicationAnalysisBorrowerDocuments
Figure52SampleBalanceSheet

MortgageagentInc.

BalanceSheet
asatDecember31,2015

Assets

Cash
AccountsReceivable
Inventory
LoanstoShareholders

TotalCurrentAssets

OfficeEquipment
Machinery

TotalNonCurrentAssets

TotalAssets

Liabilities

CurrentLiabilities
AccountsPayable
IncomeTaxPayable
SalariesPayable

TotalLiabilities

Shareholders'Equity:
CommonStock
RetainedEarnings

TotalShareholders'Equity

TotalLiabilities&Equity

2015

2014

$85,333
172,500
18,364
12,328

288,525
15,055
29,580
44,635
$331,160

2015

$51,276
129,657
4,888

185,821
8,992
21,960
30,952
$216,773

2014

$72,166
17,125
75,000
164,291

100,000
66,869
166,869
$331,160

$93,554
14,387
45,000
152,931

50,000
13,842
63,842
$216,773

270

Chapter12:ApplicationAnalysisBorrowerDocuments

Figure53SampleIncomeStatement

MortgageagentInc.

Income
Revenue
CostofGoodsSold

GrossProfit

Expenses
OperatingExpenses
Depreciation
Advertisingandpromotion
Accountingandlegal
Automotive
Bankchargesandinterest
Duesandlicenses
Insurance
Managementfees
Officesupplies
Rent
Telephoneandutilities

TotalOperatingExpenses

NetIncomebeforeTaxes
ProvisionsforIncomeTaxes

NetIncome

IncomeStatement
Fortheyearended2015

2015
$2,375,590
879,566
1,496,024

5,000
25,885
8,500
38,066
2,115
800
2,889
75,000
4,511
14,400
3,487
180,653
1,315,371
328,900
$986,471

2014
$1,713,054
611,055
1,101,999

2,000
13,944
3,078
15,226
1,238
800
3,101
45,000
3,489
14,400
2,433
104,709
997,290
219,404
$777,886

27
71

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

12.3
3 Properrty Docum
mentation
n

Abroker/agentwillberequired
dtosubmitad
dditionaldocuumentstoallenderbasedonthe
purpo
oseofthemo
ortgage.Fore
example,anM
MLSlistinganndpurchaseaandsaleagreeementwill
mostoftenberequ
uiredbyalen
nderinapurcchasetransacction,whileapropertytaxbillwillbe
requirredforaswittchorrefinance.

Multtiple List ing Serviice (MLS )


MLSaallowsrealestatesalespeo
opletoseeprropertiesbeinngsoldbyoth
heragents,abenefitto
bothbuyersandse
ellersofreale
estate.TheM
MultipleListinngServiceeffficientlydistributes
inform
mationsothaat,whenareaalestatesalesspersonisinttroducedtoapotentialhomebuyer,the
salesp
personmaysearchtheMLLSsystemand
dretrieveinfoormationabo
outallhomesforsaleina
givenareaorprice
erange,whetherunderalistingcontracctbythatsaleespersonsbrrokerageorb
by
anyoftheotherpaarticipatingbrokers.

MLS,then,functionsasahugedatabasethatallowsreal estatesalesp
peoplerepressentingsellerss
underralistingcontracttowidelyshareinforrmationabouutpropertiesw
withrealestaate
salesp
peoplewhom
mayrepresenttpotentialbu
uyers.TheM
MLScombinesthelistingso
ofallavailablee
prope
ertiesthatare
erepresented
dbybrokersw
whoarebothhmembersoffthatMLSsysstemandof
CREA,,theCanadianRealEstate
eAssociation.Manylendeersrequiretheeborrowerto
oprovidea
copyo
oftheMLSdo
ocumenttop
provethatitissanarmslenngthtransactioninotherrwords,the
prope
ertyhasbeenofferedtoth
hepublic.The
efollowingissasampleofanMLSdocument.

Figure54SampleMLLSlisting

CiviccAddress

1234 Borro
ower Lane

$32
29,900For Sale

Toronto,O
OntarioM1M1M1 W2045732D
PtLt00RPPlanM1234
SPIS:N

Legal
Deescription

SemiDetacched

Frontting
E
On
n:

2Storey

Acreaage: <.49

Dir/Cross
SSomewhere/Anywhere
St:
Lot:

66.85X34 Metrees

Last
New
w
Status:

Rooms:

OpenHouse: Oct1
OpenHouseNotes:

From: 9am
m To: 5pm

2xx4,1x2
TB
BAmeans
ToBe
A
Advised

LotIrreg: B
BacksWesterlyySun

6+2

B
Bedrooms: 3
W
Washrooms:

MLS#: W12345

Property
Taxes

Taxes:$3,,100/2014

Occup: Owner
DOM: 10

Pleaseleaveshoesonporch

Holdover: 90

Possessio
on:

Nov29/Tbaa
/Flx
PIN#:

272

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Exterio
or:
Kitcchens:

Fam
mRm:

Other
Drive
e:

Base
ement: Finished
Full

CAC:
C

Mutual

Zoning:

GarType
e/Sp Attache
acess:
d/1
Parkin
ng
Space
es:

Gas

UFFII:

No

Force
edAir

Pooll:

None

Firepllace/Stv:N
Heat:
H

Brick

CableTV:

615

ApxxSqft:

1100
01500

Assesssment:

Public
Transit

Rec
Centre

Hydro
o:

Gas:

Phonee:

Water:

Municipal

WaterSupplly:

Sloping

ApxxAge:

Residential

Sewers:

Sewers

SpecDesigg: Unknown
Farm/Agr::

#Roo
om

Level

Dimensions(fft)

1Livin
ng

Ground10.99 x 14
4.8 Hardwood
dFloor Open Concept

2Dining

Ground9.91 x 11.3
38 Hardwood
dFloor Comb inedW/Living OpenConcept

OverlookPatio

3Kitcchen Ground9.88 x 10.0


01 CeramicFloor

B/IDisshwasher

4BreakfastGround10.5 x 10
0.1 CeramicFloor

FamilyySizeKitchen W/OToDeck

5Masster

2Nd

18.01 x 10
0.1 SemiEnsu
uite

His/HeersClosets

Broadloom

62nd
dBr

2Nd

10.99 x 10.0
01 Wainscottting

Broaddloom

LargeCloset

73rdBr

2Nd

10.01 x 9.5
55 ClosetOrgganizers Windoow

Broadloom

8Recc

Bsmt

15.49 x 10
0.2 Finished

StuccooCeiling

Broadloom

9.42 x 6.3
33 PartlyFinished

Fluoreescent

4PcBath

9Laundry Bsmt

CeramicBackSplash

Immaaculate&CleanThruOutHom
me&Area,BrighttHome,UpgraddesGalore,BeeautifulStripHdwd
Flrs&C
Ceramics,OutstandingFinishedBsmtWithRecRomm&4 PieceBath&Ln
ndry
Area&
&Cantina,InterlockingStoneFFrontWalkwayy&Front&RearGardens*Fron
ntPorch,HugePrivateRear
Deck*
*WroghtIronG
Gate
Fridge
e,Stove,BiDw,BiMicrowave,Cac,El.Grg.Ope
ener&2Remottes,AllShutterss&Blinds&Wind
dow
Coverrings,Elfs,HighEffFurn&Hwt,SurrondSound
dSpkrs,Mirr.C lst.Drs,BiShelvves,Hot&ColdH
H2OOutside
Frnt&
&Back,Brss&GlsssDoorInsrt,Sh
hower&ClosetValences
ExcellentLayout,CompletelyFinish
hedTop2Botto
omWithQualittyExtras&UpggradesThruOu
ut,Quiet
Streett,WalkToPub//SepSchool,ExxcellentHome&
&Neighbourhoood,GreatFamilyHome,EasyTo
Show&
&Sell*Lockboxx*

ContrractDate:5/10
0/2015SunilLiister4165551212 REMICR
REALESTATEBR
ROKERAGE
Exp
piryDate:9/30
0/2015

Tel: 41665551212
Fax:41665552121

Agre
eement of
o Purcha
ase and Sale
S
Theagreementofpurchaseand
dsaleisadoccumentused whenrealesstateinOntarrioisbeing
purch
hasedorsold.Inallcases,wheretheap
pplicantisap plyingforam
mortgagetop
purchasea
newo
orresalehom
me,thelenderrwillrequireafullycompl etedpurchasseandsaleaggreement.Th
he

Chapter12:ApplicationAnalysisBorrowerDocuments
followingsampleformisusedtodemonstratehowatypicalpurchaseandsaleagreement
shouldbecompletedbytherealestatesalesperson.

Figure55SampleAgreementofPurchaseandSale

273

274

Chapter12:ApplicationAnalysisBorrowerDocuments

Chapter12:ApplicationAnalysisBorrowerDocuments

275

276

Chapter12:ApplicationAnalysisBorrowerDocuments

Chapter12:ApplicationAnalysisBorrowerDocuments

277

278

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

12.4
4 Other Documen
ntation

Aspre
eviouslymentioned,thedocumentsthaatthemortgaageagentmu
ustobtaininaanygiven
transaactionwillbebasedonthe
epurposeofthemortgagee.Inaddition
n,otherdocumentation
mayb
berequiredto
oproveinform
mationprovid
dedintheappplication.Wevealreadyreviewedthee
incom
meandpropertydocumenttation,nowittstimetorevviewtheotheerdocumentssthatmaybee
reque
estedbyalen
nderorthatamortgageaggentmayfind useful.

Gift Letter
Agiftletterisadocumentthatoutlinesthettermsofagiffteddownpaymentinapu
urchase
transaaction.Mone
eyprovidedb
byafamilyme
embertobeuusedasadow
wnpayment,aslongasitiis
notre
epayabletoth
hatfamilyme
ember,canbe
eusedinlieu oftheborrowerhavingto
ousehisor
herow
wnfundsforthedownpayyment.Thisfformmustbeecompletedb
byboththerecipients,or
thepu
urchasers,an
ndthedonorss,whoarethe
efamilymem
mbersprovidin
ngthegifttotherecipientts.

Thisformwillbere
equestedbytthelendertoprovetotheelenderthattthedownpayymenthasno
ot
beenborrowed.

Figure56SampleGifftLetter

GIFTLEETTER
R
_____
___________
____________
__
(date))

ToWh
homitmayconcern:

Thisle
etterconfirmsthattheundersignedism
makingafinaancialgiftof$$________________

to:__
____________
___________
____________
_______________________________________
(printtnamesofreccipients)

forussetowardthe
epurchaseofthepropertyylocatedat:
_____
___________
____________
___________
________________________________________
(addressofproperrtybeingmorttgaged)

We,theundersignedRecipientssandDonors,herebycertifythat:
a) Thesefundsare
eagenuinegiftfromtheD
Donors;assucch,arenotreequiredtoberepaidatanyy
tim
me,and
b) No
opartoftheffinancialgiftisbeingprovidedbyanythhirdpartyhavvinganyinterrest(directo
or
ind
direct)inthesaleofthesu
ubjectproperty,and
c) TheDonorisan
nimmediateffamilymembe
er.

Recipients

Name
e:

__
____________
__________

Name:

________________________

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments
Signatture:

Date:

__
____________
__________

Signatur e:

________________________

__
____________
__________

Date:

________________________

__
____________
__________

Name:

________________________

__
____________
__________

Signatur e:

________________________

__
____________
__________

Date:

________________________

__
____________
__________

Relation ship:

________________________

__
____________
__________

Address::

________________________

__
____________
__________

City,Proov.:

________________________

__
____________
__________

Telephonne:

________________________

27
79

Don
nors

e:
Name

Signatture:

Date:

Relatiionship:

Addre
ess:

Prov.:
City,P

Telephone:

Prop
perty Ass
sessmentt
APropertyAssessm
mentisadocumentprovid
dedbytheM unicipalProp
pertyAssessm
ment
Corpo
oration(MPAC)tohomeow
wnerstoillusttratethevaluueofahome,,asassessedor
determinedbyMP
PAC,forthep
purposesofcaalculatingproopertytaxes.

Abroker/agentmaayfindthisussefulinassistingtodeterm
mineavalueo
ofapropertyinaswitchor
refinaancetransaction,beforean
nappraisalhaasbeencomppleted,ifthehomeownerdoesnothavve
anyin
nformationon
nthepotentiaalvalueofthehome.

Itsim
mportanttonotethatMPA
ACusesanautomatedvaluuationmodelorAVMtocaalculatethe
value.Thisassessm
mentistypicaallynotaccep
ptedbylendeerstoprovep
propertyvaluee,andthe
broke
er/agentshou
uldbeawaretthatthevalue
eshownont hisdocumenttmaydifferffromthevalue
asdetterminedbyaanappraisal.Itis,howeve
er,validtobeeusedtoprovvideageneraalideaofwhaat
thevaalueoftheprropertymayb
beforusebythemortgageeagent.

280

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Figure57SamplePro
opertyAssessmeent

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

28
81

Morrtgage St atement
Amorrtgagestatem
mentisadocu
umentprovid
dedbyahomeeownerscurrrentmortgaggeproviderto
o
theho
omeownerde
etailingthecu
urrentfinancialstandingoofthemortgaage,includinggits
outstaandingbalancce,interestraate,timerem
maininginthetermandoth
herimportantfinancial
inform
mation.Thisdocumentistypicallyobtaainedbyabrooker/agentin
naswitchorrrefinance
transaactiontoshow
wtheoutstan
ndingbalance
eoftheexistiingmortgagee.Whilethem
mortgage
statem
mentmaybeseveralweekksormonthsold,thebrokker/agentcan
ncalculatetheecurrent
balanceatthedate
eoftheappliicationbyusingtheoutstaandingbalancceatthedateeofthe
statem
ment.Thisisvitaltodeterrminetheexaactamounto fprincipalthatmustbereepaidtothe
currentlenderoncclosing.

While
eitisimportantforthebro
oker/agentto
oobtainamoortgagestatem
menttocalcu
ulatethe
currentoutstandin
ngbalanceoftheapplicanttsmortgage,,thisdocumeentisnotusedbythenew
w
lende
ertodetermin
netheamoun
ntrequiredto
opayoffthem
mortgage.Th
henewlendeerwillrequestt
astatementdirecttlyfromthecurrentlenderrbeforeclosi ng,toensureethattheinfo
ormationis
accurateandthatttherearenoarrearsonth
hecurrentmoortgage.

282

Chapter12:ApplicationAnalysisBorrowerDocuments

Figure58SampleMortgageStatement

SUPERBANKINC.
November21,2011

Mr.J.Borrower
123KingstonStreet,Southwest,
Toronto,ON,M1M1M1

MortgageNumber:1155667898

AnnualMortgageStatement
StatementPeriod:
PropertyAddress:

January1,2011toDecember31,2011
123KingstonStreet,Southwest,Toronto,ON,M1M1M1

MortgageDetails
MaturityDate
InterestRate(asatstatementdate)
PaymentFrequency
Principal,InterestandTaxPayment

July28,2014
6.89%
Monthly
$1,550.47

TransactionSummary
OpeningPrincipalBalance
AdvancesDuringStatementPeriod
PrincipalPaid(includinganyprivilegepayments)
ClosingPrincipalBalance
InterestPaid(duringstatementperiod)

$199,920.42
$0.00
$2,180.78
$197,739.64
$13,515.94

TaxAccountSummary
OpeningTaxBalance
TaxPaymentsReceived
TaxesPaidtoAuthority
ClosingTaxBalance

$493.13CR
$2,293.00
$2,307.15
$478.98CR

PleaseNote:DRisaDebit=Minustoyouraccount.CRisaCredit=Plustoyouraccount

Ifyouhaveanyquestions,pleasefeelfreetocontactour
CustomerServiceTollFreeNumberat18665551212

Ifanyofthebalances,interestratesorotherfinancialdataappear
incorrect,pleasecontactourauditorsdetailinganydiscrepancies:
Pricewatershed
rd
Suite1000,12353 Ave
Toronto,ON
Attention:JosephBlank
Tel:(416)5559900
Fax:(416)5559911

28
83

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Tax Bill
Ataxbillisadocum
mentprovide
edtoahomeo
ownerbytheemunicipaltaaxauthorityin
nthe
jurisdictioninwhicchtheproperrtyislocated.Amortgageeagentmusto
obtainacopyyofthis
docum
mentinaswitchorrefinan
ncetransactio
ontoensuretthattheprop
pertytaxesarreuptodate.
While
ethelawyercclosingthetraansactionwilllconfirmthissinformation,,itisimportaantforthe
mortggageagentto
oconfirmthisinformationassoonaspoossibletopreeventasituationwhereby
thebo
orrowerdoessnthaveenoughmoneyo
onclosingtoppayanybacktaxesowing.

Figure59SampleTa
axBill

CityofTToronto

TAX
XBILL

012FinalTaxBill
20

MortgaageCompany:SuperBankInc.
MortgaageNumber:1155667898
RollNo.
0001004700
00000
123400

Borrow
wer,John
123Kin
ngstonStreet,,Southwest,
Toronto
o,ON,M1M1
1M1

Asssessment
Tax
Class
RTEP

SubTottals

Value
365,468

Borrower,JJohn

123KingstoonStreet,Sou
uthwest,
Toronto,ON
N,M1M1M11
Pt.Lot2,
RP11R68166Part1
66.00FR1775.00D.20AC
C

Municipal
Ed
ducation

MunicipaalLevies TaxRate(%)
T
Amount
TaxRate((%)
Amou
unt
Reside
ential

2,237.72

0.264000
00

2,237.72
CV
VAPhaseIn

0.0
00

0.6109226

MunicipalLevy

Sp
pecialCharge
es/Credits

BillingD
Date
Sep
ptember1,20
012

Summ
mary
Municcipal+Educattion
SpeciaalCharges

2008TTaxCapAdj
Final22008Taxes
LessIn
nterimBilling

TotalA
AmountDue

964.8
84

964
4.84

3,197
7.56
0
0.00
0
0.00
3,197
7.56
1,598
8.78

1.598
8.78

284

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

ntotaxrates
2011CityofToron
Thefo
ollowingcharrtillustratesthetaxratesffortheCityoffTorontofortheyear201
11.Whiletax
ratesvaryfrommu
unicipalitytomunicipalitythisisasamppleofhowmunicipalratessare
calcullated.

Final2011ProperttyTaxRates
Descrription

City
C
TaxRate%
T

EduccationTaxRaate
%

Total
TaxRatte%

Reside
ential

0.5619218%
0

0.23310000%

0.7929218%

MultiResidential

1.8635584%
1

0.23310000%

2.0945584%

Comm
mercialGenerral

1.8257360%
1

1.54404080%

3.3661440%

Example:Estimate
edtaxesonaresidentialprropertywith anAssessedV
Valueof$427
7,177:
Estimatedpropertyytax=AssesssedValuexR
ResidentialTaxxRate=$4277,177x0.792
29218%=
$3,387.18

Con
ndominium
m Status Certifica
ate
AStattusCertificate
e,formerlykn
nownasanEsstoppelCertifficate,isado
ocumentprovvidedbya
condo
ominiumcorp
poration(theentitythatru
unsthecondoominium)tottheowneroffthe
condo
ominiumunitt.Thisdocum
mentisrequire
edbylendersstoconfirmtthatthecondominium
corpo
orationhassu
ufficientreserrvefundsforitscontinueddoperation;aandrevealsth
heamountof
theco
ondominiummaintenance
efee,andwhe
etherthereaareanylegalp
proceedingsaagainstthe
condo
ominiumcorp
poration,amo
ongotherinfo
ormation.Thhemortgageaagentshouldinformthe
appliccantthatthisdocumentisrequiredasssoonaspossi ble,sinceitm
maytakeseveeraldaysfor
theco
ondominiumcorporationttoprovide.TThereistypicaallyafeecharrgedtotheho
omeownerto
o
obtain
nthisdocume
ent,whichcaannotexceed$100asperttheCondominniumAct.

Sam
mple Stat us Certif icate
(Undersubsection76(1))oftheCondomiiniumActR.S.O.1
1998,asamendeed)

TORO
ONTOSTANDA
ARDCONDOM
MINIUMCORP
PORATIONNO
O.1234
TheC
Corporationherebycertifie
esthatasofthedatehere of:
1. Th
heowner(s)o
ofUnit(Suite#),Level(Floo
or#),Unit(Loocker#)Level(Floor#)and
dUnit
(Paarking#)Leve
el(ParkingLevvel#),ToronttoStandardCCondominium
mPlanNo.123
34,registered
d
intheLandTitle
esDivisionofftheTorontoRegistryOfficce(No.66),iss:
onelementexxpenses,penddingclearanccefromthebank.
[x]notindefaultofcommo
[ ]indefaulto
ofcommonelementexpen
nsesintheam
mountof($______)
2. Ap
paymentonaaccountofcommonexpen
nsesof($MonnthlyCondoFFees)inrespeectofthe
abovenotedun
nit(s)isdueon(Date)toco
overtheperioodfrom(DateeDate)
3. TheCorporationhastheamountof($___
___)inprepaiidexpensesffortheunit.
4. Therearenoam
mountsthatttheCondomin
niumAct,19998requiresto
obeaddedto
othecommon
expensespayab
blefortheunit.
5. Thecurrentbud
dgetisaccuraate,however,,theCorpora tioncannotaaccuratelydetermineat
thiistimewheth
herthebudge
etwillresultinasurplusorradeficitasiithasnoconttroloverany,,

Chapter12:ApplicationAnalysisBorrowerDocuments

285

asyet,unannouncedincreasesinutilityrates,increasedlabourandmaterialcosts,andany
othercostfactorswhicharebeyondthenormalbudgetarycontrolsoftheCorporation,
includinganycostswhichmightimpactonthebudget.
6. SincethedateofthebudgetoftheCorporation,forthecurrentfiscalyear,thecommon
expensesfortheunit:
[x]havenotbeenincreased,or
[_]havebeenincreasedby(%increase)andby(Amountindollars)permonthfortheunit
duetoincreasedutilityrates.
7. SincethedateofthebudgetoftheCorporationforthecurrentfiscalyear,theBoard:
[x]hasnotleviedanyadditionalassessmentsagainsttheunit,or
[_]hasleviedthefollowingassessment(s)againsttheunit,toincreasethecontributionto
thereservefundortheCorporationsoperatingfundorforanyotherpurpose.
8. TheCorporationhasnoknowledgeofanycircumstancesthatmayresultinanincreaseinthe
commonexpensesfortheaforesaidunit(s),saveandexceptforanyusualbudgetary
increases.

ReserveFund
9. TheCorporationsunauditedreservefundamountsto(Amountindollars)asat(Date)
10. Acomprehensivereservefundstudywillbeconducted(ExpectedDate)
11. Thebalanceofthereservefundatthebeginningofthecurrentfiscalyearwas(Amountin
dollars).InaccordancewiththebudgetoftheCorporationforthecurrentfiscalyear,the
annualcontributiontobemadetothereservefundisannual(Contributionindollars)and
anticipatedexpenditurestobemadefromthereservefundforthecurrentfiscalyear,are
(projectedfigureindollars).TheBoardofDirectorsanticipatesthatthereservefund:
[x]willbeadequate;
[_]willnotbeadequateinthecurrentfiscalyearfortheexpectedcostsofmajorrepairand
replacementofthecommonelementsandassetsoftheCorporation.
12. TherearenoplanstoincreasethereservefundunderaplanproposedbytheBoardunder
subsection94(8)oftheCondominiumAct,1998forthefuturefundingofthereservefund.

LegalProceedings,Claims
13. TherearenooutstandingjudgmentsagainsttheCorporation.
14. TheCorporationisnotapartytoanyproceedingsbeforeacourtoflaw,anarbitratororan
administrativetribunal.
15. TheCorporationhasnotreceivedanoticeof,ormadeanapplicationfor,anordertoamend
thedeclarationanddescriptionwherethecourthasnotmadetheorder,undersection109
oftheCondominiumAct,1998.
16. TheCorporationhasnooutstandingclaimforpaymentoutoftheguaranteefundunderthe
OntarioNewHomeWarrantiesPlanAct.
17. ThereisnotcurrentlyanorderoftheSuperiorCourtofJusticeineffectappointingan
inspectorundersection130oftheCondominiumAct,1998,oranAdministratorunder
section131oftheCondominiumAct,1998.

Alteration/indemnityAgreements
18. WithrespecttoAgreementswithownersrelatingtochanges,additionsorimprovementsto
thecommonelementsasperclause98(1)(b)oftheCondominiumAct,1998.
[x]TheunitisNOTsubjecttoanyAgreement;
[_]Theunitissubjecttooneormoreagreements.TothebestoftheCorporations
information,knowledgeandbelief,theagreementshavebeencompliedwithbytheparties.

286

Chapter12:ApplicationAnalysisBorrowerDocuments

LeasingofUnits
19. Withrespecttoleasedunits,duringthefiscalyearprecedingthedateofthisStatus
Certificateandaspersection83oftheCondominiumAct,theCorporation:
[_]HasnotreceivednoticethatanyunitwithinthisCorporationwasleased;
[x]Hasreceivednoticethat(numberofunits)unitswereleased.

Insurance
20. TheCorporationhassecuredallpoliciesofinsurancethatarerequiredunderthe
CondominiumAct,1998.

AdditionalInformation
21. Itisthepurchasersresponsibilitytoreviewthedeclarationanddescriptionpertainingto
theunit,includinganyexclusiveusecommonelementarea,todeterminewhetherornotthe
vendororanypreviousowneroroccupantoftheunithascarriedoutastructuralchangeto
theunitorhasmodifiedthecommonelementsincircumstanceswheretheBoardhasnot
givenitspriorwrittenconsent.If,followinganinspectionoftheunitbythepurchaser,there
isanyquestionastowhetherornotabreachofthedeclarationand/ortheruleshas/have
occurred,thepurchaserisadvisedtoaddressaspecificinquirytotheCorporationby
describingsuchchangeormodificationinwritingtotheCorporationatismailingaddress,
followingwhichtheCorporationwillcarryoutaninspectionoftheunitandrespond
appropriately.
Unitpurchasers(andtheirsolicitors)arerequiredtonotify,inwriting,thisCorporationatits
currentmailingaddressimmediatelyfollowingthecompletionofthetransferoftitleand
changeofownershiptotheUnit(s).Untilandunlesssuchnotificationisprovidedtothe
Corporation,itsrecordsshallremaininthenameofthepresentownerasprescribedunder
theCondominiumAct,1998,andthenewownermaynotreceivenoticesofanymeetings
andotherwrittencommunicationfromtheCorporation.

Substantialchangestothecommonelements,assetsorservices
22. Therehavebeennoadditions,alterationsorimprovementstothecommonelements,
changesintheassetsoftheCorporationorchangesinaserviceintheCorporation.

RightsofPersonRequestingCertificate
23. Thepersonrequestingthiscertificatehasthefollowingrightsundersubsections76(7)and
(8)oftheCondominiumAct,1998withrespecttotheagreementslistedontheattached
ScheduleAAttachments.
Uponreceivingwrittenrequestandreasonablenotice,theCorporationshallpermitaperson,
whohasrequestedaStatusCertificateandpaidthefeechargedbytheCorporationforthe
Certificate,oranagentofthepersondulyauthorizedinwriting,toexaminetheagreements
listedinScheduleAAttachments,hereto,atareasonabletimeandat(address).
TheCorporationshall,withinareasonabletime,providecopiesoftheagreementstoa
personexaminingthem,ifthepersonsorequestsandpaysareasonablefeetocompensate
totheCorporationforthelabourandcopyingcharges.
24. ThePropertyManagerofthisCorporationis:(PropertyManagementCompanyNameand
Address)
25. TheDirectorsandOfficersoftheCorporationare:(ListDirectorsnamesandpositions)
26. TheAddressofService,fortheDirectorsandOfficersis:(Addressandothercontactinfo
followedbysignatureofpresidentanddate.IhaveauthoritytobindtheCorporation.)

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

28
87

ollowingdocu
umentsareussuallyattache
edtothisStattusCertificateandformpartofit:
Thefo
1. CertificateofIn
nsurance
2. CurrentOperatingBudget
3. De
eclarationofttheCondomin
nium(towhicchSchedules A,B,C,D,E,andGare
atttached)
4. ByLawNo.1(G
General)
5. ByLawNo.2(SSharedFacilitiiesAgreemen
nt)
6. BylawNo.3(D
DrivewayEntranceAgreem
ment)
7. BylawNo.4(M
Mediation/Arb
bitrationProccedure)
8. BylawNo.5(SttandardUnit))
9. BylawNo.6(AmendedSharredFacilitiesAgreement)
10. Co
ondominiumManagemen
ntAgreementwith(ManaggementComp
panyName)

Certtificate o f Indepen
ndent Le gal Advicce (ILA)
Incerrtaincasesthe
elenderwillrrequirethatttheborrowerr(orGuaranto
or,asthecasemaybe)
meetwithhisorherownlawye
ertodiscusstthetermsanddconditionso
ofthepropossedmortgagee.
mayoccurinssituationswheretheindividualisactinggasaGuaran
ntorforafrien
ndorfamily
Thism
memb
ber,orwhere
ethementalsstateoftheb
borrowermayybeinquestion.Thelawyyeractingon
dingILA,and
behalfofthelende
erwillsendth
heclosingmo
ortgagedocum
mentstothelawyerprovid
thislaawyerwillme
eetwiththecclientandexp
plainthemorttgagetohimorher.Onceedone,this
lawye
erwillcomple
eteaCertificaateofIndepen
ndentLegalA
Advice,whichbasicallystattesthatthe
lawye
erhasmetwitththeclient,explainedthetermsandcconditionsofthemortgagge,andthat
theclientatteststhatheorshe
eisnottakinggthemortgaggeunderdureessorundueinfluence.

Sam
mple Certtificate off Indepen
ndent Leg
gal Advicce

CERTIFICA
ATEOFIND
DEPENDEN
NTLEGALA
ADVICE

TO:

SU
UPBERANKINC..

SU
UPERLAWINC.,theirsolicitorss
ANDTTO:

UPBANKINC.M
MORTGAGELO
OANTOMr.J.B
Borrower,123KingstonStreeet,Southwest,Toronto,ON,
RE:SU
M1M1M1
M

R,2012,Iwascconsultedby
Withrrespecttotheabovenotedtransaction,onthis23RDday ofNOVEMBER
Mr.J.Borrower,inh
hispresencealo
oneastothee
effectofhisex ecuting:

MortgageLoan
nCommitmenttissuedbySUP
PERBANKINC., inhiscapacityyasGuarantor;
1. AM
2. AM
Mortgage/CharrgeofLandinffavourofSUPEERBANKINC.o verthelandsm
municipallyknownas123
Kin
ngstonStreet,SSouthwest,Toronto,ON,M1
1M1M1(theM
Mortgage)inhiscapacityassGuarantor;
3. Authorizationtoinsertdatesan
ndotherincorrrectdata;
GeneralAssignmentofRentsandLeasesinfavourofSUP ERBANKINC.rrespectingthelands
4. AG
mu
unicipally123K
KingstonStreett,Southwest,TToronto,ON,M
M1M1M1
5. AcknowledgementofreceiptoffStandardChaargeTermsanddDirectionre:funds;
ofPersonalPro
opertySecurityyActFinancingStatements;
6. AcknowledgementofReceipto
onMergerAckn
nowledgementt.
7. No
8. ReDirectionoffu
unds;

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Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

9. CertainStatutoryyDeclarations,Warranties,D
DirectionsandU
Undertakingsiinconnectionw
withtheabovee
n;and
nottedtransaction
10. Anyotherdocum
mentsancillarytotheabove

(collecctivelythe"doccuments").

documentsanddadvisedhimfullyastotheliabilitywhich
IexplaainedtoMr.J.Borrowerthenatureofthed
hewo
ouldincurbyexxecutingthem..Ialsoadvised
dhimfullyastoothemanneriinwhichsuchlliabilitycould
beenfforced.Mr.J.B
Borrowerinformedme,andIIamsatisfiedtthathefullyun
nderstandstheenatureand
effectofexecutingthedocumentssandthatinexxecutingtheDoocumentsisacctingfreelyand
dvoluntarily
otunderanyundueinfluence
eexercisedbySUPERBANKIN
NC,oranyotherperson.
andno

orrowerashissolicitorandinnhisinteresto
onlyandwithoutregardto,o
or
IhavegiventhisadvvicetoMr.J.Bo
derationforthe
einterestofSU
UPERBANKINC
C.,oranyotherrperson.
consid

notactingonbe
ehalfofSUPER
RBANKINC.,or anyotherperrsoninconnecttionwiththism
matter.
Iamn

ofSolicitor:___
____________
________________
NameandAddresso

hestatementsmadeinthisCCertificatearettrueandthatM
Mr.Borrowerss
Iherebyacknowledggethatallofth
mehereinwasconsultedbym
measmypersoonalsolicitoraandinmyinterrestonly.
lawyer,inadvisingm

WITNESS:
)
)
_____________
____________
______
)____
)

Cre ditor Insu


urance A pplicatio n
ThisissadocumenttusedbyanInsuranceCom
mpanytodetterminetheeeligibilityofan
napplicantfo
or
credittorinsurance.Creditorinssurancehasb
becomearegularofferinginamortgagetransaction
n.
Usedtoensurethaatapplicantshaveprotectionagainstthheperilsasso
ociatedwithd
death,
disabilityorjoblosss,itisimporttanttoconsid
der.

Failurreofthemorttgageagenttoadequatelyyadvisetheppotentialborrrowerofhiso
orheroption
toobttaincreditorinsurancecan
nresultinthe
eagentbeinggsuedbythe borrowerifttheborrower
wasn
notadequatellyinsuredand
doneoftheccoveredperilssoccurred.TToprotectbo
oththe
borro
owerandtheagent,theaggentmustinfo
ormtheborrooweroftheaavailabilityoftheinsurancee
andhavetheborro
owereitherw
waivetheinsu
uranceorappplyforit.

Su
uccessTipAnswerhonestlyin
nthecrediitorinsura
anceappliccation
Be
esuretoadvisseyourappliccanttoanswe
eralloftheqquestionsinth
heapplication
nhonestly.Iff
yo
ourapplicantaanswersnotoanyofthe
ehealthquesstionstheapp
plicantmustp
provide
furrtherinformaationandexplanations.Oncetheinsurrancecompan
nyhasreview
wedthe
ap
pplicationitm
maythenrequ
uestadditionaalinformationnormedicaliinvestigation,,suchasa
do
octorsreport.
plication.
Thefo
ollowingdocu
umentisasam
mpleofatypicalcreditoriinsuranceapp

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Sam
m ple Cred
ditor Insu
urance Ap
pplication
n

28
89

290

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Thesearethethree
ehealth
question
ns.Theapplicantmust
answerth
hesequestion
nshonestly
toensurrethataclaim
mispaidin
thefutture.Ifnotan
nswered
honestlytheinsurerm
maydecline
to
opaytheclaiim!

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

29
91

292

Chapter12:ApplicationAnalysisBorrowerDocuments

12.5 Summary

UndertheMBLAAanditsRegulationsthebrokeragehasasignificantresponsibility,whichfalls
ontheshouldersoftheprincipalbroker,toensurethatitsbrokersandagentstakeall
reasonablestepstoprovidemortgagesthataresuitabletoitsborrowers,lendersandinvestors.
Thisrequiresthatbrokersandagentsbeabletoprovetheinformationprovidedtothemby
theirborrowerbyobtainingtheproperdocumentation.

InadditiontheMBLAArequiresthebrokeragetohavepoliciesandproceduresinplacethat
detectsandpreventsfraud,wheneverpossible,andensurestheaccuracyofinformationand
documentationgatheredbyitsbrokersandagents.

Thesuccessfulimplementationofthesepoliciesandproceduresrequiresthatthebrokerages
brokersandagentsunderstandwhatconstitutesfraudandarevigilantinwatchingforthe
warningsignstypicallyassociatedwithfraud.Itiscriticalthatabroker/agenttaketheproper
stepstoverifyaborrowersidentityandassessalloftheinformationanddocumentation
obtainedfromtheborrower.

Theproperemploymentofthesesafeguardswillensurethatthebrokerageremainscompliant
andthatitsborrowers,lendersandinvestorsareprotectedfrombeingexposedtopotentially
harmfultransactions.Thesestepswillalsoensurethatthebrokerage,itsbrokersandagentsare
adequatelyprotectedfrombeinginvolvedinpotentialcriminalwrongdoingandminimizethe
likelihoodofcivilprosecutionwhen,aswillundoubtedlyhappen,atransactionisdeemedtobe
fraudulentthroughnofaultofthebrokerage.

Chapter12:ApplicationAnalysisBorrowerDocuments

293

12.6 Key Terms and Definitions

AgreementofPurchaseandSale
AdocumentusedinthepurchaseofrealestateinOntario

CertificateofIndependentLegalAdvice(ILA)
Adocumentthatstatesthattheborrowerslawyerhasmetwiththeborrower,explainedthe
termsandconditionsofthemortgage,andthattheborroweratteststhatheorsheisnottaking
themortgageunderduressorundueinfluence

CreditorInsuranceApplication
Adocumentusedbyaninsurancecompanytodeterminetheeligibilityofanapplicantfor
creditorinsurance

EmploymentInsurance(EI)premiums
Premiumsdeductedfromanemployeesearningswhichgointoageneralfund;EIpremiums
areautomaticallydeductedfromwagesbutarenotpaidbyselfemployedworkers

EstoppelCertificate
SeeStatusCertificate

GiftLetter
Adocumentthatoutlinesthetermsofagifteddownpaymentinarealestatepurchase
transaction;inotherwords,thedownpaymentcamefromasourceotherthanthepurchaser.

JobLetter
Adocumentprovidedtoanindividualbyhisorheremployer.Thisdocumentisoftenrequired
byalender,inadditiontootherdocumentation,toverifyanapplicantsemploymentaswellas
income

MortgageStatement
Adocumentprovidedbyahomeownerscurrentmortgageprovidertothehomeownerwhich
outlinesthedetailsofthecurrentmortgage

MultipleListingService(MLS)
Oneormoredatabasesavailabletorealestateagents/brokerswhichallowrealestatebrokers
representingsellersunderalistingcontracttowidelyshareinformationaboutthesellers
propertywithotherrealestatebrokerswhomayrepresentpotentialbuyers.Insome,butnot
allcases,realestatelistingsinvolveMLSattheoutsetbecauseoftheclearmarketing
advantages.

NoticeofAssessment(NOA)
Aformthatthefederalgovernmentissueswhenapersonaltaxreturnhasbeencompletedand
filed.Thisdocumentprovidesabreakdownoftheyearsincomealongwiththebalanceowing
orrefund.

Paystub
Adocumentprovidedtoanindividualbyhisorheremployereachtimetheemployeeispaid(by
cheque,directdepositorother),andisoftenrequiredbyalenderinadditiontoajobletter

294

Chapter12:ApplicationAnalysisBorrowerDocuments

and/oranyotherdocumentusedtoverifytheemployeesincome

PropertyAssessment
AdocumentprovidedbytheMunicipalPropertyAssessmentCorporation(MPAC)to
homeownerstoillustratethevalueofahome,asassessedordeterminedbyMPAC,forthe
purposesofcalculatingpropertytaxes;althoughhomeownersmightargueaboutthevalueof
theirhome,itistheMPACPropertyAssessmentValuethatisusedtodeterminethepropertys
valuefortaxpurposes

Selfemployedcommissions
Commissionspaidtoanindependentagent,inotherwords,someoneworkingnotasan
employeebutonacontractorselfemployedbasis,whoearnscommissionbaseddirectlyon
production,suchassalesvolume.ThisamountwillbeshownonaT4A

StatusCertificate
FormerlyknownasanEstoppelCertificate,thisisadocumentprovidedbyacondominium
corporation(theentitythatrunsthecondominium)totheownerofthecondominiumunitto
indicatethecurrentstatusofthecorporation,amongotheritems

TBA
ToBeAdvised.Thisabbreviationistypicallyusedwheninformationiscurrentlyunavailablebut
willbeavailableatalaterdate.

T4
Adocumentprovidedtoanindividualbyhisorheremployer,typicallywhenthereis
employmentincome,suchassalariedorhourlyincome.Employersarerequiredbylawto
providetheT4sothatemployeesmayfiletheirincometaxreturns.TheT4indicates,among
otherthings,theamountofmoneytheemployeeearnedintheoneyearperiod,aswellasthe
deductionsfromearnings

T4A
Adocumentprovidedtoanindividualbyhisorheremployer,typicallywhenthereisself
employedcommissionincomeorotherincomenotlistedonaT4.Employersarerequiredby
lawtoissuetheT4Awhenapplicablesotheindividualmayfilehis/herincometaxreturn.The
T4Aindicates,amongotherthings,theamountofmoneytheindividualearnedinthismanner
intheoneyearperiod

TaxBill
Adocumentprovidedtoahomeownerbythemunicipaltaxauthorityinthejurisdictioninwhich
thepropertyislocated.Thetaxbillreflects,forthemortgageagent,theamountoftaxes
payablebythehomeowner

Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

29
95

12.7
7 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Briieflydescribe
ewhenamorttgageagentw
wouldbereq uiredtoobtaainthefollowing
do
ocumentsfrom
manapplican
nt.
a)T4
b)T4A
c)Joblette
er
d)Paystub
b
e)NOA
f)Agreeme
entofPurchaaseandSale
g)Giftletter
h)Propertyassessmentt
i)Propertyytaxbill
j)Mortgaggestatement
k)Statuscertificate

2. De
escribetheinfformationfou
undinanMLSSdocument.

3. Wh
hatisacertificateofindep
pendentlegalladviceanduunderwhatciircumstancesswoulditbe
req
quired?

4. Un
nderwhatcirccumstancesm
mustamortgaageagentcom
mpleteacred
ditorinsurancce
application?

5. Wh
hatinformationmustbein
najobletterforittobeaccceptabletoalender?

6. Thenextsectioncontainsblaankdocumen
ntsfoundint hischapter.TTestyourkno
owledgeof
the
esedocumen
ntsbywritingtheappropriateinformatiionindocumentsblankfieldswithout
refferringtothechapter.On
ncedone,refe
ertothechapptertoreview
wtheaccuraccyofyour
answers.

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Chapter12:Applicatio
onAnalysis BorrowerDo
ocuments

Chapter12:ApplicationAnalysisBorrowerDocuments

297

298

Chapter12:ApplicationAnalysisBorrowerDocuments

Chapter13:ApplicationAnalysisApplicationRatios

299

Chapter 13: Application Analysis Application


Ratios

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Performaloantovaluecalculationinagivenscenario
Calculatethemaximummortgageamountusingtheloantovalueratio
CalculatetheGDSandTDSratiosinagivenscenario
CalculatethemaximummortgageamountusingtheTDSratio
IndicatetheindustrystandardsregardingtheGDSandTDSratios

Introduction

Themortgageagenthasthreebasicratiosthatmustbeappliedtovirtuallyeverytransaction:
theloantovalue(LTV),thegrossdebtserviceratio(GDS)andthetotaldebtserviceratio(TDS).
TheLTVisusedtodeterminethemaximumloanpossiblebasedonthevalueoftheproperty,
whiletheGDSandTDSratiosdeterminethemaximumloanpossiblebasedontheborrowers
income.Thelenderwillthenusethelowestofthesethreeloanamountsasthemortgage
amount.

Whilethemajorityoflenderswilluseallthreeoftheseratios,theGDSisnottypicallyusedin
subprimetransactionsorbyprivatelenders.

Inthischapter,themortgageagentwillbeintroducedtothesethreeratiosandtaughthowto
applytheminamortgagetransaction.

13.1 Loan to Value Ratio (LTV)

TheLTVistheamountoftheloan,indollars,inrelationtothevalueoftheproperty,indollars,
expressedasapercentagethatistypicallyroundedofftotwodecimalplaces(unlessitisan
exactnumber).Forexample,iftheLTVisexactly90%thereisnoneedtoshowanydecimal
places.Lendersusethisratiotodeterminethemaximumloanamountforagivenproperty
basedonthespecifictypeofloanproductthatisofferedbythelender.

TherearetwocalculationswhenusingtheLTV.ThefirstiscalculatingtheLTVofamortgage.To
accomplishthiswedividetheamountoftheloanbythevalueoftheproperty.Forexample,if
wehada$200,000mortgageanda$400,000house,theequationwouldlooklikethis:

$200,000/$400,000
Loan
Valueofthe

Amount
house

Thesecondusefortheloantovalueistodetermineamaximummortgageamount.To
accomplishthiswemultiplytheloantovaluebythevalueofthehouse.Forexample,ifwehave
aloantovalueof90%anda$400,000house,theequationwouldlooklikethis:

300

Chapter13:ApplicattionAnalysis Application
nRatios
Loanto
Value

90%
%x$400,000

Valueofthe
house

Pa
auseforcla
arification
nThe/characterr
Th
hecalculationsinthischap
pterusethe//characterttorepresenttthedivisionssign.

ethesecalculationsletslo
ookatafeweexamples.
Tobetterillustrate

Calc
culating the
t
LTV of
o a 1 s t Mortgage
M

Example1
ountof$270, 000.Thepro
opertyheispurchasingis
Aclientwouldlikea1stmortgaggeintheamo
st
0.WhatistheLTVofthep
proposed1 mortgage?
valuedat$300,000

Solutiion

LTV=(Propos
L
sed1stmortgaageamount//Propertyvallue)x100

LTV=(270,0
000/300,0000)x100

LTV
V=.90x100

LTV=90%
L

Therefore,thelloantovalueofthepropoosed1stmortggageis90%.

Pa
auseforcllarification
nConverrtingdecim
malstoperrcentages
Whenyoucalc
W
culateaperceentagethede
ecimalnumbeermustbemultipliedby1
100toobtain
thepercentage
e.Forexample,10is10%of100.Weccancalculatethisbydividing10by100
(10/100).Thatt,however,eq
quals0.10.Theansweris not0.10perccent.Toconvvertthe
de
ecimaltoitsp
percentageyo
oumustmultiplyitby100 .Therefore,0.10multipliedby100
eq
quals10.Thiss(10)isthepercentage.

Example2
mountof$1885,000.Sheh
hastoldyou
Aclientwouldliketorefinanceher1stmortggageintheam
thath
herhomeisw
worth$222,00
00.Whatisth
heLTVofthissproposedm
mortgage?

Solutiion

LTV=(Propos
L
sed1stmortgaageamount//Propertyvallue)x100

LTV=(185,0
000/222,0000)x100

LTV=(8.33333333E1)x100

Chapter13:ApplicattionAnalysis Application
nRatios

30
01

LTV=.8
833333333x1100

LTV=83.33%

Thereforetheloaantovalueofftheproposeed1stmortgaggeis83.33%.

Pa
auseforcllarification
nEinyyourdispla
ay
Althoughthisw
wasdiscussed
dinchapter8,remembertthatifyouevvergetananssweronyour
caalculatorsdisplaythatlookkslikeourlasstexample,
8.3
33333333E1
thismeansthattyoumustm
movethedecim
malplaceoneeplacetotheeleft,orthen
numberof
placesindicatedbythenum
mberfollowinggtheE.Inth isexampleth
heactualansw
werwould
e.833333333
3
be

Calc
culating the
t
LTV of
o a 2nd Mortgage
e
TocalculatetheLTTVofa2ndmo
ortgagethem
mortgageagenntmustcomp
pletethesam
meprocessas
above
e;howeverhe
eorshemusttalsoincludethefirstmorrtgageinthecalculation.

Example1
Aclienthasa1stm
mortgageinth
heamountof$270,000,anndwouldlikeanadditionaal$15,000asa
2ndmortgagetoco
onsolidatecre
editcarddebtt.Theproperrtyisvaluedaat$300,000.Theloanto
valuewouldbecallculatedasfo
ollows:

Solutiion

LTV=[(1sts mortgageamount+Prop
posed2ndmoortgage)/Pro
opertyvalue]xx100

+15,000)/3000,000]x1000
LTV=[(270,000+

LTV=(285,0
000/300,0000)x100

LTV=0.95x100

LTV=95%
L

The
ereforethelo
oantovalueo
ofthepropossed2ndmortggageis95%.

Example2
Aclienthasa1stm
mortgageinth
heamountof$185,000an dwouldlikeaanadditionall$20,000asaa
2ndmortgagetore
enovateherhouse.Theprropertyisvaluuedat$222,0000.Theloan
ntovalue
would
dbecalculate
edasfollows:

Solutiion

LTV=[(1sts mortgageamount+Prop
posed2ndmoortgage)/Pro
opertyvalue]xx100

+20,000)/2222,000]x100
LTV=[(185,000+

302

Chapter13:ApplicattionAnalysis Application
nRatios
LTV=(205,0
000/222,0000)x100

LTV=9.23423423E1xx100

LTV=0.9
923423423x 100

LTV=92.34%

Therreforetheloaantovalueofftheproposeed2ndmortgageis92.34%..

Calc
culating the
t
LTV of
o Additio
onal Morttgages
Iftheapplicantisaapplyingforaa3rdmortgage
e(oranymorrtgageothertthana1stmo
ortgage)the
mortggageagentmustcomplete
ethesameprrocessasabovve;howeverheorshemu
ustalsoinclud
de
allmo
ortgagesthatrankbeforettheproposed
dmortgageinnthecalculatiion.

Example
Aclienthasa1stm
mortgageinth
heamountof$270,000,annda$15,0002ndmortgageeandwould
liketo
oborrowanaadditional$7,,500torepayyaloanthathhasbeenplaccedincollections.The
appliccantbelievesthatthisisth
hebestoption
nsincebothtthe1stand2nndmortgagesareclosedan
nd
canno
otberefinanccedbeforetheirrespective
erenewaldattes.Theprop
pertyisvaluedat$300,000
0.
Thelo
oantovaluew
wouldbecalcculatedasfolllows:

Solutiion

LTV=[(1stmortgage+2ndmortgage+Proposed3rd mortgage)/Propertyvalu
ue]x100

LTV=[(2
270,000+15,,000+7,500)/300,000]x100

LTV=(292,5
500/300,0000)x100

LTV=
=0.975x1000

LTTV=97.5%

ereforethelo
oantovalueo
oftheproposeed3rdmortgaageis97.5%.
The

Usin
ng the LT
TV to Cal culate a Maximum
m Mortga
age Amou
unt
When
nusingtheLTTVtocalculate
eamaximum
mmortgageam
mount,them
mortgageagen
ntneedsto
knowtheLTVthatisofferedbyythelenderaswellasthe valueofthep
property.Knowingthe
lende
ersLTVisstraaightforwardandinvolvesunderstandinngthelenderrsproducts.Knowingthe
valueofapropertyycanbedifficcultunlesstherehasbeennanappraisalperformedo
oritisa
hase(undernormalcircum
mstancesthevvalueofaproopertybeingp
purchasedisthepurchasee
purch
price)).

Chapter13:ApplicattionAnalysis Application
nRatios

30
03

ormulaforde
eterminingthemaximumm
mortgageam
mountusingth
heLTVcalculaationisas
Thefo
follow
ws:

MortgageAmo
ount=LTV/1100xProperttyValue
MaximumM

TheLTTVisdividedby100sinceitisapercentageandthecalculationrrequiresitbeconvertedto
o
itsdecimalequivallent.

Example
Aborrowerwishesstopurchaseanewhome
eandhasaskeedhismortgaageagenttoaadvisehow
muchofadownpaaymenthere
equires.Thep
purchasepricceis$400,0000.Themortggageagenthaas
determinedthatth
hisborrowerqualifieswith
halenderwhhooffersamaaximumloantovalueof
95%.Ournextstepistocalculaatethemortggageamount basedonthissloantovalu
ue.

Solutiion
Maximum
mMortgageA
Amount=95%
%/100x$4000,000

Maxim
mumMortgaggeAmount= .95x$400,0000

MaximumMortggageAmountt=$380,000

Thereforethemaxim
mummortgageamountbaasedontheLLTVis$380,00
00.

Toanswertheborrowersquestion,theborrrowerwould needa$20,0000downpayymentwhichis
thepu
urchaseprice
eminusthem
mortgage($40
00,000$3800,000=$20,0000).

13.2
2 Gross Debt
D
Serrvice (GDS
S) and To
otal Debtt Service (TDS)
Ratiios

TheG
GDSandTDSaaredebtserviceratiosthattaredesigneedtodeterminewhetheraamortgage
paymentcanbeafffordedbythe
epotentialbo
orrower.Ad ebtserviceraatioistherattioofdebtto
incom
meexpressedasapercentaage.Whileth
heseratioshaavenotchanggedinseveraldecades,
theyrremainthefu
undamentalcalculationsin
ndetermininggaffordabilityy.

Calc
culating the
t
Gross
s Debt Se
ervice Ra
atio (GDS
S)
IndusstryStandard32%
TheG
GDSisdesigne
edtodetermiineifthepote
entialborrow
wercanafford
dtheproposeedmortgage
paymentbasedon
nhisorherincome(oraco
ombinedincoome,ifthereiismorethanone
appliccant).TheGD
DScombinestthecoststhattapotential borrowerhassregardingsh
helterand
divide
esthatcostbyhisorhergrossincome((theincomebbeforetaxesaarededucted
d).

Them
maximumratiothatistypiccalinthemorrtgageindusttryis32%.Th
hismeansthaat32%ofa
poten
ntialborrowersgrossincomemaybeu
usedtoservic ehisorhersheltercosts.TheGDShass
onem
mainpurpose:todetermin
neiftheprop
posedmortga gepaymentiiswithinthelenders
maxim
mumGDSratio.TheGDSiiscalculatedu
usingthefolloowingequatiion:

GD
DS=[(PITH+CondoMaiintenancefeee)/GrossIncome]x100

304

Chapter13:ApplicattionAnalysis Application
nRatios

The Compon
nents of GDS
G
Tounderstandhow
wtocalculate
etheGDS,lettsbreakitdoownintoeach
hofitscompo
onents.

PITH
ThePITHrepresentsthePrincip
pal,Interest,PropertyTax es,andPropeertyHeat.Leetshavea
lookaatwhateachletterofPITH
Hrepresents.

nterest)
PI(PrincipalandIn
ThePrincipalandInterestconsiistoftheamo
ountofthem
mortgagepaym
mentnecessaarytorepay
thebllendedprincipalandintere
estforthepaaymentperiodd.

T(Pro
opertyTaxes)
Thepropertytaxessconsistofth
heactualamo
ountofpropeertytaxespayyableonthep
property.

H(Pro
opertyHeat)
CMHC
Cstatesthatm
mortgagepro
ofessionalsarreexpectedtooasktheprospectiveborrrowerwhat
them
monthlyheatin
ngcostsarefforthesubjecctpropertyanndusetheacttualheatcostrecords,if
provid
dedbytheprrospectiveborrower.Wherenohistoryisreadilyavaailable,theheeatcostsused
d
mustbeareasonableestimatetakingintoco
onsideration factorssuchaspropertyssize,location
and/o
ortypeofheaatingsystem.Suchestimattesaretobe basedonaso
oundrationalle,providing
anacccurateestimaatethatisrefflectiveofthe
echaracterist icsofthepro
opertybeingp
purchased.1

dardamountof$100per monthforheeatformostp
properties,
Mostlenderswillaacceptastand
whileahigheramo
ountmaybeusedforalarrgeproperty. Althoughheeatvariesfrom
mpropertyto
o
prope
erty,thisstandardamounttisappliedto
oalldebtservviceratiocalculationsunleessadvised
otherwisebythele
ender.

hepurposeso
ofthiscourse$100willbeassumedunl essotherwiseenoted.
Forth

Condo
ominiumMaintenanceFe
ee
Theco
ondomaintenancefeeistthefeethatacondominiu munitownerrpaystothecondominium
m
corpo
orationforthe
emaintenancceofthecom
mmonelemen ts.Commonelementsareethoseitemss
thataarecommonttoallunitownerssuchasupkeepoftheebuilding,lobby,hallwayss,pool,
gymnasium,etc.TTheGDSusesfiftypercentofthisexpennse.Naturallyy,ifthepropertybeing
mortggagedisnotaacondominium,thisparto
oftheformulaaisexcluded.

GrosssIncome
Thegrossincomeiisthepotentiialborrowersstotalincom ebeforepayiingincometaaxes.

Conve
ertingtoaPe
ercentage
Theentireamounttmustbemultipliedbyon
nehundredtooprovideapeercentage.

http:://www.cmhcschl.gc.ca/en/hoficlincl/molo
oin/mupr/muppr_015.cfm

Chapter13:ApplicattionAnalysis Application
nRatios

30
05

Example1
Mr.Borrowerwish
hestopurchaseahomevaaluedat$3500,000.Hehass$87,500asaadown
payment,leavingaarequiredmo
ortgageinthe
eamountof$$262,500.Yo
ouhavedeterrminedthat
hismonthlymortggagepaymenttwillbe$1,67
79.50.Thisissnotacondominiumandttherefore
thereisnomaintenancefee.M
Mr.Borrower hasanannuaalincomeof$$77,500andp
pays$3,100
perye
earinproperttytaxes.WhatisMr.BorrrowersGDS??

Annual
Solutiion
PropertyTaxes
GDS=[(PITH)
G
/GrossIncom
me]x100

DS=[(($1,679
9.50x12)+($
$100x12)+$$3,100)/$77,,500]x100
GD

GDS=[($
$20,154+$1,200+3,100))/$77,500]xx100
Monthlyheat
Monthly

x12=the
mortgage
GDS=($24,454/$77,5000)x100
annualheating
paymentx12

payment
=theannual
GDS=3.1
15535484E1x100
mortgage

payment
GDS=0.315535484xx100

DS=31.55%
GD

The
ereforeMr.Bo
orrowersGD
DSis31.55%.

InthisscaseMr.Bo
orrowersGDSSiswithinthe
eacceptableiindustrystandardof32%,meaningthaat
hisGD
DSwillqualifyywithmostle
enders.

Pa
auseforcllarification
nFrequen
ncyofpayymentsinG
GDS
Allfiguresinth
heGDScalcullationmustb
bebasedonthhesamefreq
quency.InExxample1the
mortgagepaym
mentismonth
hlyandthein
ncomeisannuually.Itistheereforenecesssaryto
an
nnualizeallfiggures,whichiswhythemo
ortgage paym
mentandheatismultiplied
dbytwelve.

Example2Condo
ominiumUniit
Ms.H
Houseownsacondominium
munitvalued
dat$200,0000thathasam
mortgagewith
han
outstaandingbalancceof$120,00
00.Shewould
dliketorefinnancethismo
ortgage,increasingitto
$145,000.Ms.Househasinformedyouthattthemonthlyycondominiu
ummaintenan
ncefeeis$35
50
andherpropertyttaxesare$1,9
900peryearw
whileshehassamonthlyin
ncomeof$5,0
000.Basedo
on
yourccalculationsyyouhavedete
erminedthathermonthly mortgagepaaymentbased
donthis
propo
osedmortgaggewillbe$927.72.WhatisherGDS?

ofthecondo

ncefee
maintenan
Solutiion

DS=[(PITH+CondoMaiintenancefeee)/GrossIncome]x100
GD

GDS=[(($927
G
7.72x12)+($
$100x12)+((.50x$350x12)+$1,900))/($5,000x1
12)]x100

306

Chapter13:ApplicattionAnalysis Application
nRatios
GD
DS=[($11,132.64+$1,200
0+$2,100+$$1,900)/$600,000]x100

GDS=($16,33
G
32.64/$60,0000)x100

GDS=2.7
72210667E1x100

GDS=0.272210667xx100

GD
DS=27.22%

Th
hereforeMs.HousesGDSSis27.22%.

ousesGDSiswithintheaccceptableinduustrystandarrdof32%,meeaningthat
InthisscaseMs.Ho
Ms.H
HousesGDSw
willqualifywithmostlende
ers.

Su
uccessTipIfGDSissaboveind
dustrystan
ndard
IftheGDSishiggherthanthe
eallowablein
ndustrystand arditwillbenecessarytoconsult
furtherwiththeclienttoeittherbringthe
eGDSwithin acceptablelim
mitsbydecreeasingthe
paaymentorsugggestalenderthatmayallowaGDSth atishigherth
hantheindusstrystandard.

GDS
S and Se cond Mo rtgages
Sincethedebtservviceratioincludesallcostssforshelter,w
whenyouareecalculatingttheGDSforaa
2ndmortgageappliication,youm
mustincludeiintheGDSthhe1stmortgaggepaymentaaswellasthe
propo
osed2ndmorttgagepaymen
nt.

Example2ndMorrtgage
Tedro
osisapplyingfora2ndmorrtgageintheaamountof$117,000.Youh
havedeterminedthatthe
mortggagepaymentforthismorrtgagewillbe
e$200.88perrmonth.Tedroshasinform
medyouthatt
helive
esinasinglefamilydetach
hedhomeandthathis1st mortgagepaymentis$25
55.92perweeek
andhispropertytaaxesare$2,400peryear.Tedrosearnss$6,350perm
month.WhattisTedros
nd
GDSu
underthispro
oposed2 mo
ortgage?

Solutiion

SinceTedroslivesinasinglefam
milydetached
dhomethereeisnocondom
miniummaintenancefee
nd
st
payab
beincludedin
ble.Sincethissisa2 morttgagethe1 mortgagepayymentmustb
nthis
calcullation.
GDS=[(PITH)
G
/GrossIncom
me]x100

GDS=[(($255.92x52)+($200.88x12)+($100x112)+2,400)//($6,350x12
2)]x100

1stmortgage
e
GDSS=[($13,307..84+$2,410.5
56+$1,200++$2,400)/$776,200]x100
payment

GDS=($19,31
G
18.40/$76,2200)x100
Prroposed

mortgaagepayment
GDS=2.5
5352231E1xx100

Chapter13:ApplicattionAnalysis Application
nRatios

30
07

GDS=0.25352231x 100

DS=25.35%
GD

ThereforeTe
edrosGDSis 25.35%.

InthisscaseTedrossGDSiswithiintheacceptableindustryystandardof32%,meanin
ngthathisGD
DS
willqualifywithmostlenders.

Calc
culating the
t
Total Debt Se
ervice Ra tio (TDS ): Pre-Qu
ualifying
IndusstryStandard40%
LiketheGDStheTDSisdesigne
edtodetermineiftheborrrowercanafffordthepoten
ntialmortgagge
payment,howeverrthiscalculattionalsoinclu
udesallotherrdebtsthatth
heborrowerhas.

TheTDShastwom
mainfunctions.Itcanbeu
usedto:
1. Pre
equalifytheborrowerbydeterminingthemaximum
mmortgagep
paymentthatttheborroweer
caanafford.
2. Ve
erifythatthep
paymentquaalifiesbydeterminingiftheepotentialm
mortgagepaym
mentfalls
withinthelend
w
dersTDSratio.

equalifyapo
otentialborro
oweritisnece
essarytodeteerminetheam
mountofam
mortgage
Topre
paymentthatheo
orshecanaffo
ordbasedontheTDScalcuulation,andtthenusethattpayment
amou
unttodeterm
minethemaxim
mummortgageamount.

Prequalifyingapo
otentialborro
owerbasedon
ntheTDSisccalculatedbyusingthefolllowing
equattion:
MaxximumMortgagePaymentt=(IncomexMaxTDS/1000)(ProperttyTaxes+Heeat+Condo
o
MaintenancceFee+Othe rDebts)

ncetheTDSR
Ratioisapercentage,itisn
necessarytocconvertittoiitsdecimaleq
quivalentby
Sin
divvidingthenum
mberby100.

nbedefinedaasotherobliggationsthat,iiftheborrow
werfailedtom
makea
Otherdebtscan
drequiremoniestobepaidtoanotherrparty.Foreexample,ifab
borrowerhad
d
payment,would
accarloanandffailedtomake
ehisorherm
monthlypaym
ments,thecarrwouldberep
possessedand
the
eborrowerw
wouldstillowe
ethebalance
eoftheloan. Iftheborrow
werfailedtomakehisor
hermonthlycarinsurancepayment,ontheotherhan d,theborrow
werwouldno
otoweany
furrthermoneyssincethecarinsurerwouldcanceltheiinsurancepolicy.

ExamplesofitemsincludedintheTDSratio:
Loans
Mo
ortgagepaym
ments
Cre
editcards
Childsupport
Alimony
nypaymentth
hat,ifdisconttinued,would
dresultinab alanceowingg.
An

Examplesofitemsnotincluded
dintheTDSraatio:

308

Chapter13:ApplicattionAnalysis Application
nRatios

RR
RSPcontributiions
Carinsurance
Pro
opertyinsuraance
Lifeinsurance
An
nypaymentth
hat,ifdisconttinued,would
dnotresultinnabalanceow
wing

Su
uccessTipOutstandingbalan
nceorcred
ditlimitintheTDS?
Lenderswilltyp
picallyuse3%
%oftheoutstaandingbalan ceonacredittscardsando
othertypeso
of
un
nsecuredrevo
olvingcreditaasthepaymen
ntamountw hencalculatin
ngtheTDS,althoughthis
canvaryfromle
endertolend
der.ForsecureddebtsCM
MHCsuggestslenderscalcu
ulatewhatthe
mo
onthlypayme
entwouldbeifthedebtw
wasamortizeddover25yearrs.Itisimporrtanttoknow
w
ho
owalendercaalculatestheTDSbeforesubmittingan applicationttothatlenderr.

Example1Condo
ominiumUniit
Ms.H
Houseownsacondominium
munitvalued
dat$200,0000thathasam
mortgagewith
han
outstaandingbalancceof$120,00
00.Shewould
dliketorefinnancethismo
ortgage,andw
wishesto
knowhowmuchsh
hequalifiesto
oborrow.Ms.Househas informedyou
uthatthemo
onthly
ominiummaintenancefee
eis$350andherproperty taxesare$1,,900peryearrwhileshehaas
condo
amon
nthlyincomeof$5,000.FurtherinvestigationshowssthatMs.Ho
ousehasacarrpaymentof
$310permonth,ccreditcardpaymentsof$1
145permonthhandaloanpaymentof$
$225per
month.Ms.House
ealsomakesweeklycontrributionsof$550toherRRSSP,spends$1
185permonth
forhe
ercarinsuran
nce,andhasaalifeinsuranccepolicythat costsher$300permonth.

Whatisthemaxim
mummonthlymortgagepaaymentforwhhichMs.Housequalifiesb
basedonaTD
DS
of40%
%?

Solutiion

Thefirststepistodeterminew
whichpaymentsareincludeedintheTDSScalculationaandwhicharee
not.TThecarpaym
ment,creditcaardpayment,andloanpayymentmustb
beincludedasotherdebtss,
whiletheweeklyR
RRSPcontribu
ution,carinsu
urance,andliffeinsurancepaymentsareenot.

These
econdstepistodetermine
ewhetherthe
ecalculation willbedonebasedonmo
onthlyor
annuaalnumbers.TThisexamplehasamixtureofmonthlyincome,mon
nthlypaymen
nts,andan
annuaalamountofpropertytaxe
es.Forthesaakeofsimpliccityinthisexaampletheannualpropertyy
taxeswillbedivide
edbytwelvettodetermine
ethemonthlyypaymentandallotherdeebtswillbe
monthly.Heaatisstandard
dizedat$100 permonth.
keptm

MaximumMo
M
ortgagePayme
ent(MMP)=Incomex(MA
AXTDS/1000)(PropertyTaxes+
Condomin
niumMainten
nanceFee+H
Heat+OtherD
Debts)

MM
MP=($5,000x40%/100)($1,900/12
2)(.50x$3550)$100(heeat)$310$
$145$225

MP=($5,000xx.40)$158.3
33$175$$100$310 $145$225
MM

MMP=$2,000$158.33$175$1000$310$1445$225

OtherDebts

Chapter13:ApplicationAnalysisApplicationRatios

309

MMP=$886.67

ThereforethemaximummortgagepaymentthatMs.Housequalifiesforis$886.67permonth.

Example2
Mr.Orangewouldliketoapplyforamortgagetopurchaseanewhomevaluedat$400,000.
Mr.Orangehasstatedthatthepropertytaxesare$2,900peryear.Hisincomeis$73,000per
year.FurtherinvestigationshowsthatMr.Orangehasacarpaymentof$275permonth,credit
cardpaymentsof$195permonthandaloanpaymentof$300permonth.

a)WhatisthemaximummonthlymortgagepaymentforwhichMr.Orangequalifiesbasedona
TDSof40%?

b)WhatisthemaximumloanamountforwhichMr.Orangequalifiesbasedonaninterestrate
of6%compoundedsemiannually,notinadvance,anda25yearamortization?

Solution

a)Forthesakeofsimplicityinthisexampletheannualpropertytaxesandannualincomewillbe
dividedbytwelvetodeterminethemonthlyamountandallotherdebtswillbekeptmonthly.
Heatisstandardizedat$100permonth.

MaximumMortgagePayment(MMP)=Incomex(MAXTDS/100)(PropertyTaxes+
CondominiumMaintenanceFee+OtherDebts)

MMP=[($73,000/12)x(40%/100)]($2,900/12)$100(heat)$275$195$300

MMP=($6,083.33x.40)$241.67$100$275$195$300

MMP=$2,433.33$241.67$100$275$195$300

MMP=$1,316.66

ThereforethemaximummonthlymortgagepaymentforwhichMr.Orangequalifiesis
$1,316.66.

b)Todeterminethemaximummortgageamount,basedonthepaymentthatwascalculated
above,itisnecessarytocompletethefollowingcalculation:

6SHIFTNOM%
2SHIFTP/YR
Thedifferencebetweenthis
SHIFTEFF%6.09
calculationandcalculatinga
12SHIFTP/YR
mortgagepaymentinchapter8is
SHIFTNOM%5.92634643744
simplythathereweenterthe
1,316.66+/PMT
paymentandsolvethePV
OFV
12X25N
PV205,790.304644

310

Chapter13:ApplicattionAnalysis Application
nRatios

eforethemaxximumloanamountbased
dontheseterrmsis$205,790.30
There

Calc
culating the
t
Total Debt Se
ervice Ra tio (TDS ): Verifyi ng
Ifthemortgageaggenthasalreaadydetermine
edthemortg agepaymenttthatthepotential
borro
owerrequires,itisthennecessarytode
etermineifth atpaymentm
meetstheind
dustry
standard40%TDSratioorwhattevertheratioisfortheleenderwevecchosenorareeconsidering..

Example1
MalikkandNancyB
Borrowerarepurchasingahousevalueddat$450,0000andhave$8
80,000asa
down
npayment,resultinginare
equiredmortgageof$3700,000.Youhaavereviewedtheir
appliccationandhavedetermine
edthatthele
enderbestforrthemiscurrrentlyofferinggarateof
4.75%
%witha25ye
earamortizattionandmonthlypaymentts.Youhavecalculatedth
hatthe
monthlymortgage
epaymentonthispropose
edmortgagew
willbe$2,0999.59.

Fromtheirapplicationyouknow
wthattheyhaveacombinnedmonthlyincomeof$8
8,355.They
havecarpaymentssof$175and
d$300permo
onth,creditc ardpaymentsof$190perrmonthandaa
stude
entloanpaym
mentof$100p
permonth.TTheproperty taxesforthisshomeareesstimatedtobe
$3,10
00peryear.B
BasedonthelendersTDSratioof40%,,willtheyquaalifyforthisp
proposed
mortggage?

Solutiion

Heatisstandardize
edat$100pe
ermonth.

TDS=
=[(PITH+Oth
herDebts)/I ncome]x1000

TDSS=[($2,099.5
59+$100(heaat)+$175+$
$300+$190++$100+($3,1100/12))/$8
8,355]x100

TDS=[($2,969.59
9+258.33)/$$8,355]x1000

TDS=($3,22
27.92/$8,35 5)x100

TDS=3.8
86345901E1xx100

TDS=.3
386345901x 100

TD
DS=38.63%

There
eforeMalikan
ndNancyquaalifyforthism
mortgagebaseedonthelendersTDSreq
quirement.

Su
uccessTipIfTDSisaboveind
dustrystan
ndard
IftheTDSishiggherthanthe
eallowableindustrystandaard,itwillbenecessaryto
oconsult
furtherwiththeclient,eithe
ertobringtheTDSwithin acceptablelimitsbyreduccingdebtor
de
ecreasingthepayment,ortosuggestalenderthatm
mayallowaTTDSthatishiggherthan
industrystandaard.

Chapter13:ApplicationAnalysisApplicationRatios

311

Example2
AnnaandRoninownahomeandwouldliketoobtaina$31,0002ndmortgagetoconsolidateall
oftheircurrentdebts.Theirpropertyisvaluedat$450,000andtheycurrentlyhavea1st
mortgagethathasmonthlypaymentsof$1,454.02.Youhavereviewedtheirapplicationand
havedeterminedthatthelenderbestforthemiscurrentlyofferingarateof12.75%witha15
yearamortizationandmonthlypayments.Youhavecalculatedthatthemonthlymortgage
paymentonthisproposedmortgagewillbe$380.55.

Fromtheirapplicationyouknowthattheyhaveacombinedmonthlyincomeof$7,400.They
havecarpaymentsof$175and$300permonth,creditcardpaymentsof$190permonthanda
studentloanpaymentof$100permonth.Thepropertytaxesforthishomeare$2,800per
year.BasedonthelendersTDSratioof40%,willtheyqualifyforthisproposedmortgage?

Solution

Itisnecessarytoincludethefirstmortgagepaymentinthiscalculation.Sincethisisadebt
consolidationandalloftheapplicantsdebtswillbepaidofffromtheproceedsofthisproposed
2ndmortgage,theymustnotbeincludedinthiscalculation.Heatisstandardizedat$100per
month.

TDS=[(PITH+OtherDebts)/Income]x100

TDS=[(($1,454.02+$380.55+$100+($2,800/12))/$7,400]x100

TDS=[($1,939.57+233.33)/$7,400]x100

TDS=($2,172.90/$7,400)x100

TDS=2.93635135E1x100

TDS=.293635135x100

TDS=29.36%

ThereforeAnnaandRoninqualifyforthismortgagebasedonthelendersTDSrequirement.

13.3 Calculating the Maximum Mortgage Amount

ThelenderwilluseeithertheLTVorGDS/TDScalculationwhendeterminingthemaximum
mortgageamount.Thelendersdecisionwillbebasedonthelowerofthetwo.Forexample,if
apropertyisvaluedat$400,000andalendersmaximumLTVis90%,themaximumloanbased
ontheLTVwouldbe$360,000(.90x$400,000).However,ifafterusingtheGDS/TDScalculation
themaximummortgageamountforwhichtheborrowerqualifieswas$340,000,thenthelender
wouldbasethemortgageonthelowestvalue,or$340,000.

312

Chapter13:ApplicationAnalysisApplicationRatios

13.4 LTV, GDS and TDS Quick Reference Guide

Loan to Value (LTV)


LTVofa1stmortgage

LTV=MortgageAmount/PropertyValue

LTVofa2ndmortgage

LTV=(1stMortgageAmount+2ndMortgageAmount)/Property
Value

LTVcalculatingthe
maximumloanamount

MaximumMortgageAmount=LTVxPropertyValue

GrossDebtServiceRatio(GDS)
GDS:verifyingthata
paymentmeetsthelenders
GDSratio

GDS=(PITH+CondoMtc.Fee)/Income

TotalDebtServiceRatio(TDS)
TDS:verifyingthata
paymentmeetsthelenders
TDSratio

TDS=(PITH+CondoMtc.Fee+OtherDebts)/Income

TDS:calculatingamaximum
mortgagepayment

MaximumMortgagePayment=(MAXTDSxIncome)Taxes
HeatOtherDebts

Chapter13:ApplicationAnalysisApplicationRatios

313

13.5 Key Terms and Definitions

GrossDebtServiceRatio(GDS)
Adebtserviceratiothatmeasurestheamountofshelter(housing)paymentsincomparisonto
theamountofgrossincome,expressedasapercentage.Theindustrystandardis32%.

IndustryStandard
Anamountthatthemortgageindustrywilltypicallyuseinacalculationorapractice

LoantoValue(LTV)
Theamountofaloantothevalueofthepropertyexpressedasapercentage.
LoantoValue(%)=Loan/PropertyValue

Percentage
Afractionorratiowith100understoodasthedenominator;forexample,0.98equalsa
percentageof98

PropertyValue
Thevalue,indollars,ofaproperty,usuallydeterminedbyindependentverificationsuchasan
appraisal

TotalDebtServiceRatio(TDS)
Adebtserviceratiothatmeasurestheamountofshelterpayments(PITHandcondo
maintenancefees,whenapplicable)andotherdebtpaymentsincomparisontotheamountof
grossincome,expressedasapercentage.Theindustrystandardis40%.Theformulais(PITH
[Principal+Interest+Taxes+Heating]+otherdebts+condomaintenancefee[when
applicable])/GrossIncome.

314

Chapter13:ApplicationAnalysisApplicationRatios

13.6 Review Questions


AnswerstotheReviewQuestionsarefoundatwww.REMIC.ca

1. Ahousehasbeenappraisedatavalueof$550,000.Theownerrequiresa1stmortgageinthe
amountof$255,000anda2ndmortgageintheamountof$70,000.
a)WhatistheLTVofthe1stmortgage?
b)WhatisthetotalLTVofthecombined1stand2ndmortgages?

2. Tedroshasbeenapprovedforamortgageintheamountof$262,500ona1stmortgage.The
propertyheisbuyingisworth$350,000.WhatistheLTVofthismortgage?

3. AdelaandCarlosareapplyingforamortgagethroughyou,theirlocalmortgageagent.They
haverequestedamortgageintheamountof$455,000withweeklypaymentsfora3year
termat5.95%compoundedsemiannuallywitha25yearamortization.Theyhavetoldyou
thattheyalsohaveacarpaymentof$385permonth,annualcarinsuranceof$2,712,a
weeklyloanpaymentof$45andtotalmonthlycreditcardpaymentsof$510.Theirproperty
taxesare$2,100peryear.Theircombinedincomeis$126,966peryearandheatonthis
houseis$100permonth.
a) Whatistheirmortgagepayment?
b) WhatistheirGDS?
c) WhatistheirTDS?

4. HisaandBotanareapplyingforamortgagethroughyou,theirlocalmortgageagent.They
haverequestedamortgageintheamountof$300,000withmonthlypaymentsfora5year
termat4.95%compoundedsemiannuallywitha25yearamortization.Theyhavetoldyou
thattheyalsohaveacarpaymentof$275permonth,annualcarinsuranceof$2,000,a
weeklyloanpaymentof$95andtotalmonthlycreditcardpaymentsof$300.Theirproperty
taxesare$2,100peryear.Theircombinedincomeis$95,000peryearandheatonthis
houseis$100permonth.
a) Whatistheirmortgagepayment?
b) WhatistheirGDS?
c) WhatistheirTDS?

5. JoeandMaryareapplyingforamortgagethroughyou,theirlocalmortgageagent.They
haverequestedamortgageintheamountof$640,000withbiweeklypaymentsfora5year
termat3.75%compoundedsemiannuallywitha25yearamortization.Theyhavetoldyou
thattheyalsohaveacarpaymentof$405permonth,annualcarinsuranceof$3,000,a
weeklyloanpaymentof$55andtotalmonthlycreditcardpaymentsof$400.Theirproperty
taxesare$2,100peryear.Theircombinedincomeis$145,000peryearandheatonthis
houseis$100permonth.
a) Whatistheirmortgagepayment?
b) WhatistheirGDS?
c) WhatistheirTDS?

6. LinandShenhavebeenapprovedforamortgagethroughyou,theirlocalmortgageagentin
theamountof$200,000withmonthlypaymentsfora1yeartermat8.25%compounded
semiannuallywitha25yearamortization.Theyhavetoldyouthattheyalsohaveacar
paymentof$405permonth,aLineofCreditpaymentof$180permonthandtotalmonthly

Chapter13:ApplicationAnalysisApplicationRatios

315

creditcardpaymentsof$400.Theirpropertytaxesare$2,100peryear.Theircombined
incomeis$75,000peryearandheatonthishouseis$100permonth.
a) Whatistheirmortgagepayment?
b) WhatistheirGDS?
c) WhatistheirTDS?

7. Dalilahasbeenapprovedfora$30,0002ndmortgagewithmonthlypayments,a1yearterm,
10yearamortizationat12.5%compoundedsemiannually.Shehasafirstmortgagewithan
outstandingbalanceof$220,000(downfrom$230,000whenshefirsttookoutthe
mortgage)withbiweeklypaymentsof$700.Thesecondmortgageisgoingtoconsolidate
hercreditcardsforwhichshecurrentlypays$390permonth.Shehasacarleaseof$360per
month,annualcarinsurancepaymentsof$2,300andmonthlyhomeinsurancepremiumsof
$150.Herpropertytaxesare$3,500peryearanditcosts$100permonthtoheatherhome,
whichhasbeenappraisedat$350,000.Dalilaearns$78,000peryearasamanager.
a) WhatistheLTVofthe1stmortgage?
b) WhatistheLTVofonlythe2ndmortgage(excludingthe1stmortgage)?
c) WhatisthetotalLTVofthe2ndmortgage?
d) Whatishermortgagepaymentforthe2ndmortgage?
e) WhatisherGDS?
f) WhatisherTDS?

8. Yourclients,AaravandAnikahaveappliedforamortgagewithyou.Theyarebuyingahigh
risecondoandneedamortgageintheamountof$320,000.Youvesuggestedthattheytake
amortgagewithmonthlypaymentsfora5yeartermat3.35%compoundedsemiannually
witha20yearamortization.Theyhavetoldyouthattheyalsohaveacarpaymentof$310
permonth,annualcarinsuranceof$2,000,aweeklyloanpaymentof$80andtotalmonthly
creditcardpaymentsof$275.Thepropertytaxesare$2,100peryearwhilethecondo
maintenancefeesare$418permonth.Theircombinedincomeis$117,000peryearand
heat,whichisnotincludedinthemaintenancefee,isestimatedat$100permonth.
a) Whatistheirmortgagepayment?
b) WhatistheirGDS?
a) WhatistheirTDS?

316

Chapter14:ApplicationAnalysisBorrowerCredit

Chapter 14: Application Analysis Borrower


Credit

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Differentiatebetweenthecreditreportaconsumerreceivesandthereportamortgage
agentreceives
ListthemaincreditbureausinCanada
Interpretandanalyzeacreditreport
Explainthecomponentsofacreditscore

Introduction

Lendersuseanapplicantscurrentandpastrepaymenthistorytodeterminethelikelihoodof
futurerepayment.Althoughthereisnowaytoperfectlypredictanapplicantsfuture
repaymentofdebt,reviewingtheapplicantscurrentandpastrepaymenthistoryprovidesa
fairlyaccurateindicatoroffuturerepaymenttrends.

Lendersrelyonacreditbureauorcreditagency,acompanythatcompilesinformationprovided
toitsmembers.Thecreditbureausmembersconsistofcreditgrantorssuchasbanks,trust
companies,financecompanies,loancompanies,andsoon.Thesemembersprovidethecredit
bureauwithinformationontheindividualstowhichcredithasbeengrantedorwhohave
appliedforcreditthroughthecreditgrantor.

Thisinformationiscompiledintotwodistinctreports.Onereportisavailabletoconsumers.
Thisreportisdesignedtobereadbyconsumersandisthereforecompiledinafashionthatis
easyfortheaverageconsumertounderstand.Theothertypeofreportistheoneprovidedto
thecreditbureausmembers.Thisreportismoredetailedandreliesheavilyoncodesthatare
typicallyonlyunderstoodbyitsmembers.

ThischapterwilldiscussthedifferentCanadiancreditbureausandtheimpactofcreditreports
onthemortgageapplication.

14.1 Credit Bureaus

TherearecurrentlytwocreditreportingagenciesoperatinginCanada:EquifaxandTransunion,
withEquifaxholdingthemajorityofthemarketshare.HeadquarteredinAtlanta,Georgia,
EquifaxInc.employsapproximately7,000peoplein15countriesthroughNorthAmerica,Latin
AmericaandEurope.ItsCanadianoperationsareheadquartedinToronto,Ontario.

EquifaxwasfoundedinAtlanta,Georgia,astheRetailCreditCompanyin1899andby1920had
officesthroughouttheUSandCanada.Bythe1960s,theRetailCreditCompanywasoneof
Americaslargestcreditbureaus,holdingfilesonmillionsofAmericanandCanadiancitizens.
Eventhoughtheystilldidcreditreportingthemajorityoftheirbusinesswasmakingreportsto

Chapte
er14:ApplicaationAnalysissBorrowerCredit

31
17

insuraancecompanieswhenindividualsappliedfornewinnsurancepoliccies,suchaslife,auto,firee
andm
medicalinsuraance.

70,whenthecompanymo
ovedtocomp
puterizeitsre cords,whichwouldleadtomuchwider
In197
availaabilityofthep
personalinformationitheld,theUniteddStatesCongressheldheearingsto
determineanypottentialconsum
merprotectio
onissues.Theesehearingslledtothecreeationofthe
FairC
CreditReportingActwhichgaveconsum
mersrightsre gardinginforrmationstoreedaboutthem
m
incorrporatedatab
banks.

Form
mostofitsexisstence,Equifaaxhasoperattedprimarily inthebusineesstobusinessssector,
sellinggconsumerccreditandinsu
urancereportsandrelateddanalyticsto
obusinessesinarangeof
industries.In1999
9,itbeganoffferingcreditffraudandideentitytheftprreventionpro
oductsto
consu
umers.Moreinformationcanbefound
donEquifaxbbyvisitingitsw
websiteatww
ww.equifax.cca

OperaatingoutofB
Burlington,On
ntario,Transu
unionCanadaaprovidestheesametypesofproducts
andse
ervicesasitsmaincompettitor,EquifaxCanada.Theeyalsomarkeettheircredittreports
directtlytoconsum
mers,inadditio
ontotheirco
orebusinessoofprovidingtthesereportstotheir
memb
bers.Morein
nformationcaanbefoundo
onTransunionnbyvisitingitswebsiteat
www.transunion.cca

14.2
2 CreditReports

Acred
ditreportisthedocumenttthatpresenttstheinformaationthattheecreditbureaauhas
comp
piledontheap
pplicantandccomesintwo
oforms.The firstisthecreeditreportprroducedfor
theco
onsumer,whiiletheotheriisthecreditrreportproduccedforthecrreditbureaussmembers.

Toillu
ustratethedifferencesbettweenacrediitreportprovvidedtothecconsumerand
done
provid
dedtoacreditbureaumember,bothaareillustrateddinthefollow
wingfigures.

Sam pleCredi tReportP


Provided toConsum
mers
ExampleofanEqu
uifaxCreditRe
eportprovide
edtoaconsuumer.

Figure601SampleCrreditReportPro
ovidedtoConsum
mers

CONSSUMERRELATTIONSP.O.BO
OX190STATIIONJEANTALLON
MON
NTREALQUEB
BECH1S2Z2

JANEEDOE
10PLLEASANTST.
TORO
ONTOONTAR
RIO
M2N1A2

CONFFIDENTIALINFORMATION
NOTTOBEUSEDFORCREDITP
PURPOSES

EquiffaxCanada

318

Chapter14:ApplicationAnalysisBorrowerCredit

RE:EQUIFAXUNIQUENUMBER:3140123054

DearJANEDOE,
Furthertoyourrequest,adisclosureofyourpersonalcreditfileasof03/27/01follows:
PERSONALIDENTIFICATIONINFORMATION:
Thefollowingpersonalidentificationinformationiscurrentlyshowingonyourcreditfile.
Yourdateofbirthandsocialinsurancenumberhavebeenpartiallymaskedtoprotectyour
personalinformation(i.e.:BirthDate/Age:01/xx/60,SocialInsuranceNumber:123xxx789).

DATEFILEOPENED:07/04/92
NAME:Doe,Jane
CURRENTADDRESS:10PLEASANTST.TORONTO,ON
DATEREPORTED:12/96
PREVIOUSADDRESS:2AVENUEST,TORONTO,ON
DATEREPORTED:12/93
PRIORADDRESS:3DUBOULEVARD,MONTREAL,PQ
DATEREPORTED:07/92
BIRTHDATE/AGE:10/XX/1968
SOCIALINSURANCENUMBER:123XXX789
OTHERREFERENCENAMES:
CURRENTEMPLOYMENT:EDITOR
PREVIOUSEMPLOYMENT:TRANSLATOR
PRIOREMPLOYMENT:CHEF
OTHERINCOME:

CREDITINQUIRIESONYOURFILE:
FollowingisalistofEquifaxmemberswhohavereceivedacopyofyourcreditfileforcredit
grantingorotherpermissiblepurposes.AddressesareavailablebycallingEquifaxat1800
4657166.

DATE
REQUESTORNAME
TELEPHONE
03/02/00
CANADATRUSTMTG
(416)3618518
02/22/00
TDBANK
(800)7877065
01/16/00
BQENATIONALE
(450)6779122

Thefollowinginquiriesareforyourinformationonlyandarenotdisplayedtoothers.They
includerequestsfromauthorizedpartiestoupdatetheirrecordsregardingyourexisting
accountwiththem.
DATE
REQUESTORNAME
TELEPHONE
03/23/00
SOCALCOOLS(notdisplayed)
(514)8736281
03/22/00
CANADATRUSTMTG(notdisplayed)
(416)3618518
02/16/00
CMHCSCHL(notdisplayed)
(888)4636454
01/16/00
AMERICANEXPRESS(notdisplayed)
(416)1234567

CONSUMERINTERVIEWSANDOTHERSERVICES:
Youcontactedourofficein12/98torequestareviewofyourcreditfile.

Chapte
er14:ApplicaationAnalysissBorrowerCredit

31
19

CRED
DITHISTORYA
AND/ORBANKINGINFORM
MATION:
Theffollowinginfo
ormationwasreportedtousbyorganizzationslistedbelow.
Informationisrecceivedevery3
30daysfrommostcreditggrantors.Allaaccountnumb
berswith
yourcreditorshavvebeenmaskkedtoprotecttyourpersonnalaccountin
nformationan
ndonlythe
willbedisplaye
ed(i.e.:xxx...123).
lasttthreedigitsw

AClastreporte
edtousin01
1/01ratingyo
ourinstallmenntaccountassI1,meaningpaidas
GMA
agree
edanduptodate.Therep
portedbalancceofyouracccountwas$10000.Youracccount
numb
ber:xxx...345
5.Theaccountisinthesub
bject'snameoonly.Dateacccountopened:04/99.
Creditlimitorhigh
hestamountofcreditadvanced:$44000.DATEOFLA
ASTACTIVITYmeaning
mments:
ortransaction
nmadeonth
hisaccountwaasin12/00.A
Additionalcom
thelaastpaymento
autoloan.Monthlypayments.

ADATRUSTM
MClastreporttedtousin01
1/01ratingyoourrevolvinggaccountasR
R1,meaning
CANA
paidasagreedanduptodate.Atthetimetthereported balanceofyo
ouraccountw
was$285.
mber:xxx...234.Dateaccou
untopened:006/99.Creditlimitorhigheestamount
Youraccountnum
ofcre
editadvanced
d$2000.DATTEOFLASTAC
CTIVITYmeanningthelastp
paymentortrransaction
made
eonthisacco
ountwasin12
2/00.
PREV
VIOUSPAYMEENTSTATUS:
30DA
AYS:1time(ss)accountpre
eviouslyR2m
meaningoneppaymentpasttdue

ON:
PUBLLICRECORDSANDOTHERINFORMATIO
Theffollowinginfo
ormationwasreportedtoyyourfileont hedateindiccated.
ACO
OLLECTIONwaasassignedin
n10/96toCom
mmercialCreeditbyTransaamericaFinan
ncialinthe
amou
untof:$2675
5.Datereporttedpaid:07/9
97.Collectionnstatus:PAID
D.DATEOFLA
AST
ACTIV
VITYwasin04/96.Collectionagencyre
eferencenum
mber:222222..
AJUD
DGEMENTwaasFILEDIN01
1/96inMinG
GovtServ.Plaiintiffand/orccasenumber:Chrysler
Canaada4444.Deffendant/otherinfo:jointw
withDossier.A
Amountrepo
orted:$7525.Status
reported:Satisfied
d.Datesatisfied:09/97.

ABANKRUPTCYw
wasFILEDIN0
08/97inSCNe
ewmarket.Caasenumberaand/ortrusteee:5555555
SYND
DIC&ASS.Liaabilities:$250
0000.Assets:$
$8900000.Item
mclassificatio
on:individual.
Informationreporrtedon:Thessubjectonly.Theitemisreeportedas:D
DISCHARGED.DATE
SETTLED:05/98.A
Additionalcom
mments:abso
olutedischarggefrombankkruptcy.

THEC
CONSUMERP
PROVIDEDAP
PERSONALSTTATEMENTtoousin12/98.Thestatementhasbeen
recorrdedasfollow
ws:
RE:B
BANKRUPTCY,,CONSUMERDECLAREDBANKRUPTCY DUETODIVO
ORCEThisstattementisto
bere
emovedfromthefilein:12
2/04.

Sam pleCredi tReportP


Provided toEquifaxxMembe rs
Thefo
ollowingfigurreisanexampleofanEqu
uifaxcreditre portprovided
dtoanEquifaaxmember.
Thisreportisfortrrainingpurpo
osesonly.The
ecodeinthe lefthandcolumnofthereeport
corresspondstothe
eEquifaxLege
endinnextfigure,whichffollowsthisreeport.

320

Chapter14:ApplicationAnalysisBorrowerCredit

Figure612SampleCreditReportProvidedtoCreditBureauMembers

EquifaxConsumerCreditReport(providedtocreditbureaumembers)

Thisreportshowsasampleofpotentialinformationfoundonacreditreport.Thisisnotanactualreport.

CONSUMERREPORT
[1]18004657166

[2]6/16/2004

[3]FileRequestedby:NTREM

Identification
Name:

TEST,FILE,P.
CurrentAddress:

110,SHEPPARDAVE,NORTHYORK,ON,M2N6S1
PreviousAddress:

60,BLOORSTW,TORONTO,ON,M4W3C1.
DateofBirth,SIN:

1942/02/16,999999998.
Reference:

NTREM

Employment
Employer,Occupation: OWNERTESTSHAIRSALON

[4]Subject1:Alert,Score,Identification,Inquiries,Employment,Summary,Public,
Trades,Banking,Declaration.

ConsumerAlert(Subject1)
[5]Warnings
InvalidSocialInsuranceNumber

[6]SAFESCAN
SF9PossibleTrueNameFraud

[7]ProductScore(Subject1)
RiskScore

509
Seriousdelinquencyandpublicrecordorcollectionfiled
Timesincedelinquencyistoorecentorunknown
Numberofaccountswithdelinquency
Lengthoftimerevolvingaccountshavebeenestablished

Bank.Nav.Index

230
Ageofderogatorypublicrecords.
Averageageofretailtrades.
Numberofrecentinquiries.
Averageageoftrades.

EquifaxCanada

Chapter14:ApplicationAnalysisBorrowerCredit

Identification(Subject1)
[8]UniqueNumber
3455234199
[10]DateFileOpened: 01/23/1975
[12]DOB/Age:
02/16/1942

[9]FileNumber

00000809500037
[11]DateofLastActivity:
06/03/2004
[13]SIN:
**ConsumerDeclaration**
TEST,FILE,EQUIFAX
110,SHEPPARD,TORONTO,ON,M2B6S1
01/2003
STSReported
1231,15THAVE,CALGARY,AB,T3C0X6
01/2003
TapeReported
2314,11THAVE1201,TORONTO,ON,M4W3C1
01/2003
VerballyReported
PRETEND,FILE,EQUIFAX

[14]Name:

[15]CurrentAddress:

[16]Since,R/O/B:

[17]Reported:

[18]FormerAddress:

Since,R/O/B:

Reported:

[19]2ndFormerAddress:
Since,R/O/B:

Reported:

[20]AlsoKnownAs:

Inquiries(Subject1)
[21]Subjectshows3inquiriessince03/17/2004
[22]MemberInquiries:

Date
MemberNo
MemberNameTelephone
06/03/2004
001BB05697
BANQUESCOTIA(222)3333333
05/08/2004
481FF00722
ASSOCIATESFINANCIAL(111)2222222
05/02/2004
057ON00374
PRESIDENTSCHOICEMC(333)7777777
10/13/2002
481BB99080
SCOTIABANK(444)5555555
[23]Totalnumberofinquiries:4
[24]ForeignBureauInquiries:

Date
MemberNo/City

ProvinceandDescription
06/02/2002
INTLUSA401BB17978
TD/GMVISA

Employment(Subject1)
EmploymentInformation:
[25]CurrentEmployer:

TESTSHAIRSALON
[26]Since,Left,Position,Salary:
,,OWNER,
[27]FormerEmployer:

HILTONHOTEL
Since,Left,Position,Salary:

,,HAIRSTYLIST,
[28]SecondFormerEmployer:
DISNEYCRUISELINE
City,Province:

TOR,ON
Since,Left,Position,Salary:
04/1999,02/2001,HAIRSTYLIST,1900
Verified,Status:

02/2001,

321

322

Chapter14:ApplicationAnalysisBorrowerCredit

[29]Summary(Subject1)
Pub/Other

TradeOldestNewest

Total

HighCredit

RatingforR/O/I/M/C

01/200106/2004
3
280028K
1One,1Two,1Other

[30]PublicRecords/OtherInformation(Subject1)

[31]InformationfromBankruptcySuperintendent:

Filed
Type CourtName
CourtNo
Liab
Asset
FiledBy
01/2000
Ind
MINOFATTORNEYGEN
472VF00022
28000 480
Subject
CaseNo/Trustee:

22855MORRISETAL
Disposition:

Discharged.10/2000
Description:

BankruptAbsoluteDischarge

[32]Collection:

Rptd

Type AmtDLA BalReason


LedgerNumber
NORDONCOLLECTION,481YC00036
04/2002

Unpaid482 01/2002482Unknown
1111111
VerifiedDate:
04/2002
Acct/Creditor:
55555SEARS
Description:
Subjectdisputesthisaccount

[33]SecuredLoan:

Filed

CourtName
CourtNo

Maturity
08/2002

CENTREGTOR
481VC00214
12/2004
Creditor/Amt:
SUPERIORCREDIT9ELLISAVTOR3600
Description:
SecurityDispositionUnknown

[34]Judgment:

Filed
Type CourtName CourtNo
Amt Status DateVrfd
05/2002
Jdgm

481VC00297 4800
Defendant: TestFile
CaseNo:
55555/02
Plaintiff:
TRANSCANADACREDIT
Description: DispositionUnknown

[35]TradeInformation(Subject1)
MemberTrades:

Bus/IDCode
Rptd
Opnd
HC Terms BAL PDA Rt 30/60/90 MR DLA

CIBC(999)9999999
*J007BB01351
06/2004 04/2001 28K 555
4200 555
I2 4/3/1
21
04/2004
PrevHiRates:I307/2002,I406/2002,I502/2002

323

Chapter14:ApplicationAnalysisBorrowerCredit
Account:
Description:

ZELLERS
*I650DV00014
Account:

Description:

8454545
PersonalLoan
SemiMonthlyPayments
01/2004 06/2001 2800 26
2555
845555555
AmountinH/CColumniscreditlimit
MonthlyPayments

R1

0/0/0

16

TDVISA(999)9999999
*650ON00044
06/2004

0/0/0

Status:
Lostorstolencard

[36]CreditUtilization:22%
30800
6755

[37]Banking(Subject1)

Checking/Saving:
Rptd

Opnd
Amount
AccountNoAccountType
BANQUESCOTIA,001BB05697,(999)9999999
06/2004

09/1999
L5F

Checking/Saving
NbNSF,Status:
4NSF2002,

[38]ConsumerDeclaration(Subject1)
Rptd,Purge:
06/2004,06/2005
Declaration:
*****WARNING*****CONFIRMEDTRUENAMEFRAUD/FRAUDULENT
CREDITAPPLICATIONSHAVEBEENSUBMITTEDUSINGTHISNAME/IFYOUACCESSTHISFILEAS
PARTOFACREDITCHECK,PLEASEVERIFYWITHTHECUSTOMERTHATITISLEGITIMATEBEFORE
EXTENDINGCREDIT/PHONE(123)4567890

EndOfReport

05/2004

324

Chapte
er14:ApplicaationAnalysissBorrowerCredit

Figure623EquifaxLe
egend

Equ ifax Cred


dit Reporrt Legend
d

ONSUMERREEFERRALTELEEPHONENUM
MBER:
[1]CO
Tellsccreditgrantorrwhereconsumersmaycaalliftheyare deniedcrediit.

[2]Daatefilewasacccessed(mm//dd/yy).

NQUIRYDATA
A:Showsinforrmationusedtoinquireonnthefile.
[3]IN

[4]Su
ubject1:Detaailssectionso
ofthefilethattarepopulateedanddisplaayed.

[5]CO
ONSUMERFILLEALERT:Info
ormationinputoninquiry
ydoesnotmaatch
fileorrisinvalid.

[6]SA
AFESCANWARNING:Fraud
dalertmessaagewarnsyouuofpotentiall
appliccationfraud.(AvailableonlytoSAFESCA
ANsubscribe rs.)

CORESANDR
REASONCODEES:Ariskscorreaccompaniiedbyuptoffourreasoncodesappearss
[7]SC
inthisssection.Reaasoncodesindicatethemaainreasonsfoorthescore.(Availableon
nlytorisk
scoresubscribers.))

IDENT
TIFICATIONSSECTION:
[8]Un
niqueNumbe
er:forEquifaxxinternaluse
eonly.

[9]FilleNumber:fo
orEquifaxintternaluseonly.

Datefilewase
established.
[10]D

[11]D
Dateoflastacctivityonfile..

[12]D
Dateofbirtho
orageofSubjject(mm/dd//yy).

[13]SSIN:SocialInssuranceNumb
ber(willonlydisplayhere ifprovidedo
oninputandm
matcheswith
h
inform
mationonfile
e).

[14]SSubjectname.

[15]C
Currentaddre
ess.

[16]SSince:Datead
ddresswasre
eportedandaaddedtothe EquifaxRepo
ort.R/O/B:Indicatesifthee
subjectRentsOwn
nsorBoardsttheircurrentaaddress.

EquiffaxCanada

Chapter14:ApplicationAnalysisBorrowerCredit

325

[17]Reported:Indicatestypeofcustomerthatreportedtheaddressinformation,STS=direct
linkcustomer,Tape=monthlytapereportingcustomer,DAT=Internetcustomerverbal
internalEquifaxperson.

[18]FormeraddressPreviousaddressofsubject.

[19]Secondformeraddress.

[20]AKAornamesubjectisalsoknownasthiscreditreportwillcontaintheinformationunder
boththenameinformationandthissection,therefore,noneedtomakeadditionalcreditreport
inquiriesunderthisname.

INQUIRIESSECTION:
[21]Alertmessageappearsiftherehavebeenthreeormoreinquirieswithinthepast90days.

[22]Date,membernumberandmembernameforinquiriesinthepast36months.Member
phonenumberwilldisplayforinquiriesinpast12months.

[23]TotalNumberofInquiries:Totalnumberofinquiriessincefilewasestablished.

[24]ForeignBureauInquiries:Date,MembernumberandnameofU.S.inquiringcustomers.

EMPLOYMENTSECTION:
[25]CurrentEmployer:Companynameofmostrecentreportedcurrentemployer.

[26]Since,Left,Position,Salary:Occupationofsubjectandwhenverifiedstartdate,leftdate
andsalary.

[27]FormerEmployer:Companynameofpreviousemployer.Since,Left,Position,Salary:
Occupationofsubjectandwhenverifiedstartdate,leftdateandsalary.

[28]SecondFormerEmployer:Companynameofsecondorpreviousemployer.Since,Left,
Position,Salary:Occupationofsubjectandwhenverifiedstartdate,leftdateandsalary.

[29]SUMMARYSECTION(providessynopsisoffileitems):
Pub/OtherNumberofPublicRecordorOtherinformationfoundinthePublicRecordsection.

TradeOldestNewest:Oldestopeningdateoftradeandmostrecentreportingdateoftrade.

TotalTotalnumberoftradesonthefile.

HighCreditHighcreditrangeoftradesonfile.

RatingforR/O/I/M/C:Ratingsofthetradesonfile.R=Revolvingaccount,I=Installment
accountO=Openaccount,M=MortgageaccountandC=LineofCredit

[30]PUBLICRECORDSOROTHERINFORMATION:InformationobtainedfromPublicSources.

326

Chapter14:ApplicationAnalysisBorrowerCredit

[31]Bankruptcies:Apersonlegallydeclaredtobeunabletopaydebts(datefiled,typeof
action,[INDforpersonal;BUSforbusiness],courtname,courtcode,liability,assets,filer
[subject,spouseorboth],casenumberandtrustee,dispositionofbankruptcyanddescriptionof
thebankruptcy).

[32]Thirdpartycollections:Adebtwhichacreditorisunabletocollectandhiresathirdparty
todoso(nameofthirdpartycollectionagency,collectionagencymembernumber,reported
date,typeofcollection[UPCLunpaidcollectionorPDpaidcollection],originalamountof
collection,dateoflastactivitywithcreditgrantor,balanceasofdatereported,reason,ledger
number,verifieddate,creditgrantorandaccountnumber,description).

[33]Securedloans:Achattelmortgage,registeredloan,orregisteredlienisaloanwherethe
debtorhasgivenpersonalpropertyascollateralandtheloanisregisteredwiththeprovincial
government.Thisisnotderogatoryinformation.(Securedloansarenotextendedinthe
provinceofQuebec.)[Datereported;nameofreportinggovernmentagency;membernumber
ofreportingagency,maturitydateoftheloan,nameandaddressofcreditor;amountofloan;
descriptionofloanstatus].

[34]Judgments:Acourtorderagainstadebtorforpaymentofmoniesowing(datejudgment
grantedordatefiled;judgmentstatus[STJDsatisfiedjudgment,JDGTjudgment];court
identificationnumber/nameofcourt;amountofjudgment;defendant;judgmentnumber;
plaintiff;statusofjudgment[satisfied,unsatisfiedordispositionunknown]and
date,whenapplicable).Otherpublicrecordinformationmayincludeforeclosures,credit
counselling,andorderlypaymentofdebt(OPD).

[35]TRADEINFORMATION
Bus/IDCode:Companynameand/ortelephonenumberand/orcustomernumber.

RPTDDateitemwasreportedtoEquifax.

OPNDDateaccountwasopenedwithcreditgrantor.

H/CHighcreditontheaccount;thehighestamountowedorcreditlimit.

TRMSMonthlyrepaymentamount.

BALBalanceowingasofdatereported.

PDAPastdueamountasofdatereported(shownifapplicable).

RTTypeofaccountandmannerofrepayment:seeTradeInformationDescriptionsandManner
ofPayment(NorthAmericanStandardratings)fordetailedratingdescriptions.

30/60/90Numberoftimessubjecthasbeen30,60or90dayspastduewiththisaccount.

MRMonthsReviewedthenumberoftimesormonthsthisaccounthasreported.

DLADateLastActivityDateoflastactivitywiththisaccount,couldbepurchasedate,last
paymentdateorinworstcase,writeoffdate.

Chapte
er14:ApplicaationAnalysissBorrowerCredit

32
27

ormationwassupdatedbyanaccounts receivabletape.
*Indicatestheinfo

PrevH
HiRatesrelaatestothe30
0/60/90section;provides ratingsandd
datesofthe3
3mostrecentt
delinq
quencies

DescrriptionProvidesadditionalinformationabouttheaaccount.

[36]C
CreditUtilizattion:Providessthepercenttagethatthe customerhassutilizedtheiircreditby
dividingbalancesb
byhighcreditt.Thetotaloffallopenhighhcreditamou
untsandallo
openaccount
balancesarealsod
displayed.

[37]B
BANKINGINFORMATIONSSECTION:
Typeofaccount,nameandtele
ephonenumb
berofinstituttion;dateitem
mwasreportedtoEquifaxx;
ofaccount;cu
ustomersme
embernumbe
er;dateaccouuntwasopen
nedwithcreditgrantor;
typeo
balanceofaccountt(approximatterange);add
ditionalinfor mationonacccount.

[38]C
CONSUMERSSTATEMENTSSECTION:Rptd,Purge:Dattereportedanddateinforrmationwillb
be
delete
edfromtheccreditreportDeclaration:Statementttheconsumerrorsubjectad
ddedtothe
fileto
oexplaindiscrrepanciesoro
othercomme
ents.

Trad
de Inform
mation De
escription
ns
When
nviewingatradelineitisiimportanttobeabletounnderstandwh
hatthecodinggistellingyou
u.
Thefo
ollowingisalistofthecod
desusedinratingatradel ine.

Figure634EquifaxTrradeInformatio
onDescriptions

Typessofaccounts::

O:
Openacco
ount(30dayssor90days). Thisindicateesthattheacccounthasjusstbeen
openedan
ndtheborrow
werhasnteve
enmadehisoorherfirstpaaymentyet,soitcannotbee
rated.
R:
Revolvingoroption(op
penendacco
ount).Anexaampleofthiswouldbeacreditcard
suchasaV
Visa,Mastercard,departm
mentstorecarrd,etc.Thew
wordrevolvingreferstoth
he
factthatastheborrowermakesapaayment,thatamountisaggainavailableeaspartofth
he
creditlimitt.Forexample,ifyouhaveacreditcarrdwitha$5,0000limitandyouowe
$4,000and
dyoumakeaapaymentof$4,000,thataamountisagainavailabletoyouto
borrow.
I:
nt(fixednum
mberofpayme
ents).Anexaampleofthiswouldbeaccarloan,
Installmen
personallo
oan,etc.Thisstypeofcred
dithasequalppaymentsthaatwilleventu
uallyfully
repaytheloan.Unlikeacreditcardwhentheboorrowermakeesapaymentthatamount
isnotavailabletobere
eborrowed.
LineofCre
C:
edit
M: Mortgage

EquiffaxCanada

328

er14:ApplicaationAnalysissBorrowerCredit
Chapte

Trad
de Inform
mation Ra
atings
Figure64TradeInformationRatingss

Mann
nerofpayment(NorthAm
mericanStand
dardaccount ratings):

0
orate;approvedbutnotu
used.
Toonewto

1
Pays(orpaaid)within30
0daysofpaym
mentduedatteornotoverronepaymen
ntpastdue.

2
Pays(orpaaid)inmoretthan30daysfrompaymenntduedate,b
butnotmorethan60dayss,
ornotmorrethantwop
paymentspasstdue.

3
Pays(orpaaid)inmoretthan60daysfrompaymenntduedate,b
butnotmorethan90dayss,
ornotmorrethanthree
epaymentspaastdue.

4
Pays(orpaaid)inmoretthan90daysfrompaymenntduedate,b
butnotmorethan120
days,orfo
ourpaymentspastdue.

5
Accountisatleast120daysoverdue
ebutisnotyeetrated9.

7
ntsunderaco
onsolidationoorderorsimilararrangement.
Makingreggularpaymen

8
Repossession(voluntarryorinvoluntaryreturnof merchandisee).

9
ollection;skip.
Baddebt;placedforco

Cre dit Rating


g Examp les
Letsssaythatyourborrowerhaasacreditcarrdthatiscurrrentlyuptodate.Theratingonthis
cardw
willbeanR1.Rrepresentsarevolvingtypeofdebt,,while1indiccatesthattheeaccountisu
up
todattewithnopastdueamoun
nts.If,howevver,thisborr owerisbehin
ndtwomonth
hs,whichis
twop
payments,the
eratingwillbeanR3.

Iftheborrowerhasaloan,such
hasacarloan
n,anditisup todateitwillberatedasanI1.I
representsaninstaallmenttypedebtwhichtyypicallyhasfiixedpaymentts,while1ind
dicatesthat
theacccountisupttodatewithn
nopastdueamounts.If,hhowever,thisborrowerisbehindfour
months,whichisfourpayments,theratingw
willbeanI5.

Ifthelenderdecidestoreposse
essthecarbe
ecauseofthessemissedpayyments,ithasstherightto
reposssess,ortakethesecurityaandsellit.In
nthiscasehisratingonthiscarloanwo
ouldbeanI8.
If,afte
erthecarwassoldtherew
wasstillanou
utstandingam
mountowingtothelenderr,andthe
lende
erdidntfeelitcouldgetth
hatmoneyfro
omthisborroower,itwould
dchangetheratingtoan
I9.Th
hismeansthaatthelenderdoesnotexpecttogetthi smoneyandhasthereforrewrittenoff
thisdebt.

Chapte
er14:ApplicaationAnalysissBorrowerCredit

32
29

Equ ifax Glos


ssary of Terms
T
Us
sed in a C
Credit Re
eport
Figure655EquifaxG
Glossary

Thefo
ollowingkeyw
wordsarespe
ecificabbreviiationsusedi nvarioussecctionsoftheccreditfile.Pleeaseuse
thislissttointerpre
ettheabbreviiationswhenyouseethem
m.Thehighligghtedtermsaaretypicallyttheones
thataamortgageaggentwillmostfrequentlye
encounter.

ASpou
usalaccount
ACCA
Accountnumbe
er
AGEA
Ageofsubject

EMPDatee
employed
ESEmploym
ment subject
E2Subjectsssecondformeer
Employmen
nt
FAFormeraaddress
FADFileacttivitydate
FBForeignb
bureau
FNFilenum
mberorformername
(depends
online)

AKAA
Alsoknownas
BBoth
h
BALBaalance
BDSBirthdateSubject
BKRPT
TBankruptcy
BRNC
Creditorsname
eand/or
addresss
BUSBusiness
BUSBusinessindustrycode
CACurrentaddress
CASEN
NO.Casenumber
CDCConsumerdebtcounseling
CFCosubjectsform
mer
emplo
oyment
CHKAC
CChequingacccount
CRCLD
DCourtconsoliidation
CRTUpdatebyinho
ouseoperator
DDivo
orced
DAPADebtorassistaancepool
account
DEFDefendant
DEPSDependents
DISDisputefollowingresolution
DLAD
Dateoflastactivity
DNDe
eathnotice
DVFDDivorcefiled
DVFLD
Divorcefinal
ECSpo
ousescurrentemployment
EFSpo
ousesformere
employment

EquiffaxCanada

NV
VNotVerified
OOwnoropenaccount
OP
PDOrderlypayymentofdebt
OP
PNDDateOpeened
PD
DDatepaid
P//DPastdueam
mount
PR
R/BKProposalunderbankruptcy

FORCLForeclosure

PR
R/OIPublicreccordsorother
information
RRevolvingacco
ount

FSDatefilewasestablisheed
GARNGarnishment
H/CHighCrredit
IInstallmen
nt(account/inddividual)
IDIdentificaationinformatiion
INDIndividu
ual

RP
PTDDatereported
RTTCurrentratin
ng(i.eR1,I1,ettc.)
SSSingle
SA
AVACSavingsaaccount
SEECLNSecuredloan
SINCEDatefilew
wasestablished

INQSInquirries
INVOLInvo
oluntary
INVERIndirectlyverified
JJoint
JUDGJudgm
ment

SP
PECLSpecialno
oticeitem
SSSCSocialinsuraance/spouse
SSSSSocialinsuraance/subject
STTJDSatisfiedju
udgment
STTSSystemtosystemcustomer

LEFTDatele
eftemploymennt
LIABLiabilitties(amount)
LWRLawyer
MMarried
MARMaritaalstatus
MATUREDaateofmaturityy
MRMonthssreviewed
N/RESNonresponsibility notice
NSFNonsufficientfunds

TR
RMSTerms(paaymentamoun
nt)
UUnknown
UN
NUniquefilen
number
UP
PCLUnpaidcollection
VEERDateverifieed
VLLDEPVoluntaryydeposit
VO
OLVoluntary
W
WWidow,widower
XX
XAutomaticco
ombine

330

Chapte
er14:ApplicaationAnalysissBorrowerCredit

Inte rpretingaaCreditR
Report
Inthe
efollowingsectionsthecre
editreportse
eenpreviouslyyinthischap
pterwillbeexxplainedina
detailled,sectionbysectionanaalysis.
Thefo
ollowingfigurre,section[1]]showsthecontactinform
mationwhichmaybeprovvidedtothe
appliccantifthereaareanyquesttionsorconce
ernsaboutth efile.Theap
pplicantcannotbegivena
copyo
ofthiscreditreportdoingsocontraven
nesthecontraactbetweenthebrokeraggeandthe
credittbureau.Secction[2]show
wsthedateth
hatthefilewaasaccessed.

Figure66Equifax:Co
ontactInformattion

CONSSUMERREPORT
[1]18
8004657166
6

[2]6//16/2004

Thefo
ollowingfigurreistheinforrmationthatw
wasusedtooobtainthecreeditreport,reeferredtoin
them
mortgageindu
ustryaspullin
ngthecreditreport.Thissinformation
nistypicallyeenteredinto
them
mortgageorigiinationsoftw
wareandthrou
ughtheuseoofthatsoftwaare,thecredittreportis
obtain
ned.

Figure67Equifax:In
nformationUsed
dtoObtainaCrreditReport

[3]FilleRequested
dby:NTREM

Identification
Name
e:

TEST,FILE,P.

Curre
entAddress:
110,SHEPPA
ARDAVE,NO
ORTHYORK,O
ON,M2N6S1

Previo
ousAddress:
60,BLOORSSTW,TORON
NTO,ON,M4W
W3C1.

DateofBirth,SIN:
1942/02/16
6,9999999998.

Referrence:

NTREM

Emplo
oyment
Emplo
oyer,Occupa
ation:OWNER
RTESTSHAIR
RSALON

Thefo
ollowingfigurreshowsthesectionsofth
hefilethatarrepopulatedanddisplayed
dintheresto
of
there
eport.

Figure68Equifax:Su
ubject1

[4]Su
ubject1:Alertt,Score,Identification,Inq
quiries,Emplooyment,Summary,Public,,Trades,
Banking,Declaratio
on.

Thefo
ollowingfigurreshowthem
messagethatyouwillreceeiveiftheinfo
ormationthattyouinputted
d
inyou
urapplication
ndoesnotmaatchthefilein
nformationo risinvalid.

Figure69Equifax:Co
onsumerFileAleert

Consu
umerAlert(SSubject1)
[5]W
Warnings
InvalidSocialInsurranceNumber

Chapter14:ApplicationAnalysisBorrowerCredit

331

Thefollowingfigureisafraudalertmessagethatiswarningyouofpotentialapplicationfraud.
ThisSafescanwarningisavailableonlytothosebrokeragesthataresubscribersofthe
Safescanservice.

Figure70Equifax:SafescanWarning

[6]SAFESCAN
SF9PossibleTrueNameFraud

ThefollowingfigureindicatestheRiskScore,referredtoastheBeaconScore(Equifaxscredit
score),followedbytheBankNavIndex,anotherscoringmodel,withalistofreasonsforthe
score.TheriskscoreandtheBankNavIndexareonlyavailabletosubscribersoftheseservices.

Figure71Equifax:BeaconScore

[7]ProductScore(Subject1)
RiskScore

509
Seriousdelinquencyandpublicrecordorcollectionfiled
Timesincedelinquencyistoorecentorunknown
Numberofaccountswithdelinquency
Lengthoftimerevolvingaccountshavebeenestablished

Bank.Nav.Index

230
Ageofderogatorypublicrecords.
Averageageofretailtrades.
Numberofrecentinquiries.
Averageageoftrades

IdentificationSections
ThefollowingfigureillustratestheIdentificationSectionofthereport.Ensurethatyoureview
theinformationinthissectionandmatchitwiththeinformationthatyouobtainedwhen
completingtheapplication,includinginformationfromdocumentationsuchastheapplicants
photoID.Discrepanciesmayindicatethatthereareerrorsinthereportthatmustbecorrected,
thattheapplicanthasmadeanerrorindisclosinginformationorthattheapplicantistryingto
misrepresenthimorherself.

Figure72Equifax:IdentificationSection

Identification(Subject1)
[8]UniqueNumber
3455234199 [9]FileNumber

00000809500
037
[10]DateFileOpened:01/23/1975 [11]DateofLastActivity:
06/03/2004
[12]DOB/Age:
02/16/1942 [13]SIN:
**ConsumerDeclaration**
[14]Name:

TEST,FILE,EQUIFAX
[15]CurrentAddress:

110,SHEPPARD,TORONTO,ON,M2B6S1
[16]Since,R/O/B:

01/2003
[17]Reported:

STSReported
[18]FormerAddress:

1231,15THAVE,CALGARY,AB,T3C0X6
Since,R/O/B:

01/2003

332

Chapte
er14:ApplicaationAnalysissBorrowerCredit

Reporrted:
[19]2
2ndFormerA
Address:

Since,,R/O/B:

Reporrted:

[20]A
AlsoKnownA
As:

TapeReported
2314,11THAVEE1201,TORONTO,ON,M4
4W3C1
01/2
2003
VerballyReporteed
PREETEND,FILE,EEQUIFAX

Su
uccessTipQuestion
ndiscrepa
ancies
En
nsurethatyou
umatchtheinformationthatyourcliennthasprovidedonhisorh
her
ap
pplicationwiththeinformaationcontainedinthecredditreport.Iftherearedisscrepancies
yo
oumustaskyourclienttoclarifythemaandupdatethheapplicatio n,ifnecessarry,orupdate
Eq
quifax.

InquirrySections
Thefo
ollowingfigurreisanalerttthatappearsiftherehave beenthreeo
ormoreinquiirieswithin
thelastninetydayys.Inthiscasetherehavebeenthreeinnquiries,resu
ultinginthealert.

Figure73Equifax:In
nquiryAlert

Inquirries(Subject1)
[21]SSubjectshows3inquiriessince03/17/2004

Thefo
ollowingfigurredisplaysthedateofinqu
uiriesoverthhepastthirtysixmonthsaswellasthe
credittbureaumem
mbersnameaandcontactinformationfoorinquirieso
overthepasttwelve
months.Thisishe
elpfulforalen
nderwhowishestocontacctapreviousinquirertodetermineif
credittwasadvance
edordeclined
d.

Figure74Equifax:In
nquiries

[22]M
MemberInqu
uiries:

Date
Mem
MemberNo
mberNameTTelephone
06/03
3/2004 00
01BB05697
BAN
NQUESCOTIA
A(222)33333333
05/08
8/2004 48
81FF00722
ASSOCIATESFINA
ANCIAL(111))2222222
PREESIDENTSCHO
05/02
2/2004 05
57ON00374
OICEMC(3333)7777777
10/13
3/2002 48
81BB99080
SCO
OTIABANK(4444)5555555

ollowingfigurredisplaysthenumberofinquiriessinccethefilehassbeenopeneedaswellasiff
Thefo
thereareanyinquiriesbyAmerricanmembers.Inthiscassewecanseeethattherew
wasaninquiryy
fromTD/GMVisao
on06/02/200
02

Figure75Equifax:To
otalInquiriesSin
nceFileOpened
dandForeignBuureau

[23]TTotalnumberofinquiries:4
[24]FForeignBureaauInquiries:

MemberNo/Ciity
Date
06/02
2/2002 INTLUSA401BB
B17978

ProvinceeandDescrip
ption
TD/GMV
VISA

Chapter14:ApplicationAnalysisBorrowerCredit

333

Thefollowingfiguredisplaysthesubjectscurrentemployerinsection25,andhisformer
employersinsections27and28.Ifinformationisrecordedontheposition,suchashowlong
thesubjecthasbeenathiscurrentemployer,whenheleft,thepositionstitle,salaryandwhen
itwasverified,itwillbeincludedasshownbelow.

Figure76Equifax:EmploymentSection

Employment(Subject1)
EmploymentInformation:

[25]CurrentEmployer:

TESTSHAIRSALON
[26]Since,Left,Position,Salary:
,,OWNER,
[27]FormerEmployer:

HILTONHOTEL
Since,Left,Position,Salary:
,,HAIRSTYLIST,
[28]SecondFormerEmployer:
DISNEYCRUISELINE
City,Province:

TOR,ON
Since,Left,Position,Salary:
04/1999,02/2001,HAIRSTYLIST,1900
Verified,Status:

02/2001,

SummarySection
Thefollowingfiguredisplaysasummaryofthesubjectscurrentcredit.Pub/Otherindicates
thatoursubjecthas3PublicRecords(Pub)orOtherInformation(Other)onhisfile.

01/2001indicatestheoldestopeningtradeline,ortheoldestopeningdateofcreditthat
appearsinthefollowingsection.06/2004indicatesthelatestreportingdateofcredit.

Total3indicatesthatthereareatotalof3tradelines(oritemsofcredit)onthefile,andthey
havebalances,asindicatedintheHighCreditcolumn,betweentwothousandeighthundred
dollarsandtwentyeightthousanddollars.1One,1Two,1OTHERindicatestheratingsthatour
subjectstradelineshave.

Figure77Equifax:CreditSummary

[29]Summary(Subject1)
Pub/Other

TradeOldestNewest

Total

HighCredit

RatingforR/O/I/M/C

01/200106/2004
3
280028K
1One,1Two,1Other

ThefollowingfigureliststhePublicRecordsorOtherInformationinoursubjectsfile.Notethat
thedatethatthissamplefilewasobtainedorpulledisin2004,sothedatesofcurrentandpast
activityarerelevanttothatdate.Inotherwords,somethingthathappenedintheyear2000
wasjust4yearsoldwhenthisreportwasobtained,soitwouldberelevantatthattime.

InthisexampleoursubjectwasbankruptinJanuary,2000andwasdischargedinOctober,2000.
Ifhedidntadviseyouofthisinformationwhentakinghisapplication,youmustverifyitwith
himnow.Obtaininganexplanationastowhyhewentbankruptmaybehelpfulinexplaining
thesituationtoyourlender.

Sincetherewereninemonthsbetweenoursubjectsfilingforbankruptcyandhisbeing
dischargeditissafetoassumethatthiswashisfirstbankruptcy.Anindividualsfirstbankruptcy

334

Chapte
er14:ApplicaationAnalysissBorrowerCredit

emonths;wh
hileasecond bankruptcyissdischargedaftertwelve
istypicallydischarggedafternine
monthsandathird
dbankruptcycantaketwo
oormoreyeaarsbeforead
dischargeisap
pproved.

Figure78Equifax:Pu
ublicRecords

[30]P
PublicRecord
ds/OtherInfo
ormation(Sub
bject1)

ptcySuperintendent:
[31]InformationfromBankrup

Filed
Tyype CourttName
CourtNo
Liab
Asset
01/20
472VF000022
000
In
nd
MINO
OFATTORNEYYGEN
28000
0 480
CaseNo/Trustee:

22855MOR
RRISETAL
osition:
Discharged.10/2000
Dispo

BankruptAb

Descrription:
bsoluteDischharge

Thefo
ollowingfigurredisplaysthatthereisan
naccountint hirdpartycollections.Thiisindicates
thato
oursubjectow
wesanoutstaandingbalancceof$482to Sears.Thed
descriptionind
dicatesthat
oursu
ubjectdisagre
eeswiththis,whichrequirresyoutoobttainasmuchinformationonthis
collecctionaccountaspossible,aandthenexplainittoyourrlender.

FiledBy
Subject

Figure79Equifax:Co
ollections

[32]C
Collection:

Rptd

Type A

AmtDLA BalReasson
NORD
DONCOLLECT
TION,481YC0
00036
Unpaid48
04/20
002

82 01/200 2482Unkknown
04/200
VerifiedDate:
02
55555SSEARS
Acct/Creditor:
Subjectdisp
Descrription:

putesthisaccount

LeedgerNumbeer
11
111111

Su
uccessTipCollectio
ons
Ifyouseeacollectiononyo
ourclientsfile
e,ensurethattyouaskhim
morherifithasbeenpaid
an
nd,ifso,ifheorshehasprroof.Ifithasbeenpaid,thhecreditbureaumustbenotifiedto
haavethissectio
onreflectthatpaymentan
ndazerooutsstandingbalaance.

Thefo
ollowingfigurreindicatesth
hatoursubje
ecthasasecu redloanwith
hSuperiorCreedit,whenit
wasfiiled(firstope
ened)andwhenitwastom
mature.This isnotderogaatorycredit.

Figure80Equifax:Se
ecuredLoan

[33]SSecuredLoan:

Filed

08/20
002

Credittor/Amt:
Descrription:

Name
o
CourtN
CourtNo
Maturity
CENTR
REGTOR 481VC00214
12/20004
SUPERIIORCREDIT9ELLISAVTOR
R3600
SecurityDispositionUnknown

Chapte
er14:ApplicaationAnalysissBorrowerCredit

33
35

ollowingfigurreshowsthereaderthato
oursubjecthaasajudgmentagainsthim
m.Thisalso
Thefo
requirresthatthem
mortgageagentasktheclie
entforclarifi cation.

Figure81Equifax:Ju
udgment

[34]Judgment:

Filed
Tyype CourtN
Name Cou
urtNo
A
Amt
05/20
002
Jdggm

481VC00297 44800
Defen
ndant: Te
estFile
CaseNo:
55
5555/02
Plainttiff:
TR
RANSCANADA
ACREDIT
Descrription: DispositionUnkknown

Statu
us DateVrfd
d

Su
uccessTipNotes
AllexplanationsfromthecliientregardingghisorhercreditmustbeeincludedinttheNotes
se
ectionoftheaapplicationbe
eforesubmisssiontoalendder.Thelend
dersunderwrriterwill
no
oticenegative
einformation
nonthecreditreportand willaskforan
nexplanation
n.By
prrovidingitwitththesubmisssionyouwillsavetimeanndpreventco
onfusion.

Thefo
ollowingfigurreisacomple
etebreakdow
wnoftheclienntscurrentcreditintotrad
delines.As
wasseenintheSummarysectio
on,oursubjecthas3tradeelines.HehaasaCIBCloan
n(wecantell
eratingI2,w
wheretheIstandsforIInstallmentaaswellastheefactthatthee
thisbecauseofthe
descriptiondescrib
besthisasaP
PersonalLoan
n).HealsohaasaZellersacccount,andaTDVisathat
isreportedasLostorstolenintthestatus.

Foreaachtradeline
eitisindicate
edwhentheaaccountwasl astreportedbythecredittgrantor
(RPTD
D),whenitwaasoriginallyo
openedorcre
eated(OPND)),thehighestcreditthatth
heindividual
hashaadonthattraadeline(H/C)),themonthlypaymentsoorterms(TRM
MS),thecurreent
outstaandingbalancce(BAL),anypastdueamounts(PDA), thecurrentrrating(RT),ho
owmany
timesifanythatth
heaccounthaasbeendelinq
quentthirty, sixtyandninetydays(30//60/90),the
MR)andfinallythelastdaatethattheree
numb
berofmonthssthatthisacccounthasbee
enreported(M
wasaanyactivityon
nthisaccountt(DLA).

There
efore,inlookingatoursub
bjectsZellersaccount,itcaanbeseenth
hatitwasorigginallyopeneed
onJun
neof2001,eightmonthsaafterhewasdischargedfrromhisbankrruptcy.Thelaastpayment
thath
hemadeonth
hisaccountw
wasinMayof2004andheiscurrentlyu
uptodate.W
Wecansee
thath
hehasneverb
beenlateinh
hispaymentswithhisZelleersaccount,w
whilehisCIBC
Caccounthass
beenlateseveralttimes,andheiscurrentlyb
behindonhisspaymentsbyyonemonth..

336

Chapte
er14:ApplicaationAnalysissBorrowerCredit

Figure82Equifax:TrradeLines

[35]T
TradeInforma
ation(Subjecct1)
MemberTrades:

Bus/IDCode
Rptd
HC
H
Terms
BAL PDA Rt 30
0/60/90 MR
DLA
Opnd

CIBC(999)9999999
*J007
06/2004 04/2001 28K
4200 5555 I2
4/3/1
21
7BB01351
2
555
1 04/2004
I307/2
PrevH
HiRates:
2002,I406/20
002,I502/20002
Accou
unt:

845454
45
Descrription:
PersonalLoan
SemiM
MonthlyPaym
ments
ZELLEERS
280
00
2555
*I650DV00014
01/2004 06/2001
0
26
0/0/0
16
6 05/2004
R1
unt:

845555
5555
Accou
Descrription:
Amoun
ntinH/CColumniscreditllimit
MonthlyPayments

TDVISA(999)9999999

*650O

ON00044

0
0/0/0
06/2004
Lo
Status:
ostorstolenccard

Su
uccessTipQuestion
ningcredittissues
Whatquestion
W
sshouldyouaskoursubje
ectabouthis creditprobleems?Thequeestionthat
sh
houldbeaskedis,Whatcausedyoutomissyourpaaymentsonyo
ourCIBCloan
n?The
an
nswermustbeincludedintheNotesse
ectionoftheaapplication.

Thefo
ollowingfigurreprovidesth
hepercentage
eoftheavailaablecreditth
hatoursubjeccthasused.
Thisisscalculatedb
bydividinghissbalancesbyhishighcreddit,whicharetypicallythecreditlimits..

Figure83Equifax:CrreditUtilization

[36]C
CreditUtilizattion:22%
30800
6755

ollowingfigurreillustratesw
whattheban
nkingsection appearslike.Thisisnotnormallyfound
Thefo
onmo
ostcreditrep
ports.

Figure84Equifax:Ba
ankingInformattion

[37]B
Banking(Subjject1)

Checkking/Saving:
Rptd
Amo
ount

Opnd
BANQ
QUESCOTIA,001BB05697,,(999)99999
999
06/20
004

09/199
99
L5F
NbNSSF,Status:
4NSF2
2002,

AccountNo
oAccoun
ntType
Checkking/Saving

Chapte
er14:ApplicaationAnalysissBorrowerCredit

33
37

ollowingfigurrewillindicattethatthereiisastatemenntthattheconsumerhasaaddedtohiso
or
Thefo
herfilleandwillpro
ovidethatstaatement.Thisisnotnorm
mallyseenonmostcreditreports,
howe
everitisvitaltthatyouchecckifthereisaadeclaration included.Inthisexampleeitisclearthaat
oursu
ubjecthasbeenthevictim
moffraudand
dthereforeal linformation
nmustbeverified.

Figure85Equifax:Narrative

[38]C
ConsumerDeclaration(Subject1)
06/200
Rptd,Purge:
04,06/2005
Decla
aration:
*****W
WARNING***
***CONFIRMEEDTRUENAM
MEFRAUD/FR
RAUDULENT
CREDITAPPLICATIO
ONSHAVEBEEENSUBMITTTEDUSINGTH
HISNAME/IFYOUACCESSTHISFILEAS
PARTOFACREDIT CHECK,PLEA
ASEVERIFYW
WITHTHECUSTTOMERTHATTITISLEGITIM
MATEBEFOREE
EXTEN
NDINGCREDIT/PHONE(12
23)4567890

ollowingfigurreindicatesth
hatthereporrtiscompleteeandthattheerewasnomore
Thefo
inform
mationavailableonthisco
onsumer.

Figure86Equifax:En
ndofReport

EndO
OfReport

3 Credit Scores
S
and Analy
ysis
14.3

Acred
ditreportcon
ntainsinformationthatiskkeptonaninddividualsfileeforacertain
nperiodof
time.Thiscandiffferfromprovincetoprovin
nce,butinOnntariothefollowingchartillustrates
howlongbothEqu
uifaxandTran
nsunionkeepspecificinforrmation.

Figure87Compariso
onbetweenEquiifaxandTransun
nion:Yearskepttonfile

Item

Creditttransactionss,fromthedaateoflastacttivity
Judgm
ments,fromthereportingdate
Collecctions,fromtthefirstdateofdelinquenccy
SecurredLoans,fro
omthedateo
opened
Bankrruptcy,fromtthedateofdiischarge
Consu
umerProposaal,fromthed
datesatisfied
CredittCounseling,fromthedattepaid

onfile
Yearskepto
Eq
quifax
Transunion
6
6
6
7
6
6
6
5
6
7
3
3
3
2

Und erstandin
ngaCredi tScore
Thecreditscoreisanumericalrepresentatio
onofthesubjjectscurrenttandpastcreeditandcan
range
ebetween300
0(thelowesttscorerepressentingthew
worstcredit)and900(theh
highestscore
representingtheb
bestcredit).TThecreditsco
oringmodeluusedbyEquiffaxandTranssunionis
based
dontheFICO(FairIsaacCo
ompany)mod
delintheUniitedStates.

Equifaaxscreditsco
oreiscalledtheBeaconSccorewhileTraansUnionsiscalledEmpirricaScore.Fo
or
thele
ender,thecre
editscoreplayysasignifican
ntfactorinthhedecisionto
olend,andindetermining
thete
ermsandconditionsofthaatloan.Theffollowingfiguureillustrateswhythisisth
hecase,
provid
dingatabulattionoftheratesofdelinqu
uenciesbaseddonanindiviidualscreditscore.

338

Chapte
er14:ApplicaationAnalysissBorrowerCredit

Figure88CanadianD
DelinquencyRattesbyBeaconScore

Canadian Delinquency Rates by B


Beacon Sc
core
source: Equifa
ax Canada, 2015

60%

55%

50%
40%

33%

30%
21%
20%
11%
1
10%
0%

5%
300 to 499

500 to 549

550
5 to 599

600
0 to 649

650 tto 699

2%
%
700 to 749

1%

1%

750 to 79
99 800 and ove
er

There
eareseveralm
majoritemstthataffectanindividualsccreditscore,aasisillustrateedbythe
follow
wingfigure.

Figure89Breakdown
nofaCreditSco
ore

Chapte
er14:ApplicaationAnalysissBorrowerCredit

33
39

Item
msthatafffectaCre
editScore
Paym
mentHistory
Missin
ngorlatepayymentswillhaaveanegativveeffectonacreditscore.Itisimportaanttoensure
thataallpaymentsaaremadeonorbeforethe
eirduedates,,andintheco
orrectamoun
nt.Any
judgm
ments,bankru
uptcies,collecctionsandoth
herpublicreccordsarecon
nsideredquiteeseriousand
haveasignificantd
detrimentalim
mpactonacrreditscore.

Amou
untsOwed
Agoo
odruleofthumbistokeep
pbalancesbelowthirtypeercentoftheaavailablecred
ditlimit.
Balancesoverthisamountmayyloweracred
ditscore.Havvingseveralaaccountswithhighbalancees
inrelaationtotheaavailablecreditmayindicatethattheinndividualisreelyingheavilyoncreditto
meethisorherdailylivingneed
ds.

LengtthofCreditH
History
Thelo
ongeratradelinehasbeen
nestablished,thehighertthecreditsco
ore.Thereforreifan
individualisconsid
deringclosingganaccounth
heorsheshoouldconsiderclosingthem
mostrecently
opene
edaccount.

NewC
CreditandInquiries
Multipleinquiriescanloweraccreditscore.TTheprogramcandetermin
nethatanind
dividualisa
credittseeker.How
wever,ifanin
ndividualisse
eekingmortgaageorautofiinancing,theprogram
allowsforathirtydaybuffer.FForexample,ifanindividu alappliesforramortgageonNovember
wsthreepreviousinquiriessinNovembeer,theprograamwillignoree
30th,aandthecredittreportshow
those
ethreeinquiriiessincetheyytookplacew
withinthethirrtydaybufferzone.

Inadd
dition,iftheindividualhassmortgageorrautoinquirieesonhisorh
hercreditreportoutsideof
thatthirtydayperriod,theproggramwillonlyycountthem asoneinquirryprovidedth
hattheyweree
ewithinafourteendayperiod.
made

Howe
ever,multiple
eapplicationsforothertyp
pesofcreditssuchasperso
onalloansand
dcreditcardss
willlo
oweranindividualscreditscore.Thep
programalso takesintoacccountthelen
ngthoftime
sincethelastnewaccountwasopened.

TypessofCredit
Thebestmixofcre
editisacomb
binationofasstorecreditccardandamaajorcreditcarrdsuchasa
Visao
orMasterCard
d.Itisimporttantnottohaavetoomanyy,however,asthenumberroftradeson
n
afilecannegativellyimpactacrreditscore.

Numb
berofTradessonFile
Toom
manycreditcaardsandloan
nsmayalsolo
oweranindiviidualscreditscore.Byhaavingonlya
fewtrradelines,an
nindividualsccreditscorem
maybeimprooved.

CredittInactivity
Usinggcreditresponsiblyisoneo
ofthefastesttwaystoincrreaseacreditscore.Unfortunately
those
ewhoonlyusecashtomakkepurchasescanhavealoowercreditsccorethantho
osewho
regulaarlyusecredit.Thefollow
wingfigurepro
ovidesanexaampleastohowacreditsscoremightbe
calcullated.Althou
ughthisisonlypartofthemodelthatF airIsaacusess,thefollowin
ngwas
disclo
osedbyFairIssaacwhenitp
presentedtotheFederalTTradeCommissioninWash
hington,D.C.

340

Chapter14:ApplicationAnalysisBorrowerCredit

onJuly22.1999.Sincethecreditscoringmodelsusedbythecreditbureausareproprietary,
andalthoughthefollowingchartmaybemodeledonthem,thisisonlyforillustrationpurposes
anddoesnotinsinuatenorpurporttobehowEquifax,Transunion,oranyothercreditbureau
determinesacreditscore.

Figure90CalculatingaCreditScore

Own/Rent
Yearsat
Address
Occupation

Own
25

Rent
15

Other
10

<.5

.52.49

2.56.49

12

10

15

Professional SemiProf Manager

6.5
10.49
19
Office

>10.49
23

No
Info
13

Blue
Retired Other
Collar
25
31
22

No
Info
27

44

<.5

.51.49

19

25

30

39

43

No
Info
20

None

DeptSt

MajCC

Both

No
answer

No
Info

11

16

27

10

12

Checking

Savings

Other

NoInfo

10

Check&
Sav
20

11

<15

1525

2635

3649

50+

22

15

12

No
Info
13

59

11

20

No
Record
0

YearsinFile

<.5
0

12
5

34
15

57
30

8+
40

Numberof
RevolvingTrades

0
5

12
12

35
8

6+
4

%ofLimitUsed

015%
15

1630%
5

3140%
3

4150%
10

>50%
18

DepartmentStore
(DS)/
MajorCreditCards
(MCC)
Bank
Reference
DebtRatios

NumberofInquiries

WorstCredit

NoRecord
0

Any
Derog
29

28

50

Yearsonjob

31

NoInfo
17

1.52.49 2.55.49 5.512.49 12.5

AnySlow
14

1Satisf
Lines
17

2Satisf 3Satisf
Lines Lines
24
29

Retired

Chapter14:ApplicationAnalysisBorrowerCredit

341

14.4 Key Terms and Definitions

Bankruptcy
Alegallydeclaredinabilityofanindividualororganizationtopaytheircreditors

BeaconScore
AnumericalrepresentationofanindividualscreditprovidedbyEquifax

Collections
Adebtthathasbeenplacedwithacollectionagencywhichisacompanyassignedtocollecta
debtonbehalfofathirdparty

ConsumerProposal
AproposalmadebyaconsumerdebtortohisorhercreditorsunderDivisionIIofPartIIIofthe
BankruptcyandInsolvencyAct(BIA),withtheintentionbeingtorestructurethedebt.Atypical
proposalwillresultinthedebtorrepayinglessthanthefulldebtbutmorethanmightoccurina
bankruptcy

Credit
Thegrantingofamoneybyonepartytoanotherwithanarrangementtomakeperiodic
paymentstothecreditgrantortoretirethedebt

CreditBureau
Anagencythatcollectsinformationonindividualsandprovidesthatinformationtoitsmembers

CreditCounseling
Creditcounselinginvolvesnegotiatingwithcreditorstoestablisharepaymentplanthatwill
repaytheborrowersdebtwithmorefavourabletermsfortheborrowerthanarecurrentlyin
place.

CreditReport
Areportonanindividualscredit.Twotypesexist:onewhichismadeavailabletotheconsumer
andonewhichisprovidedtoamemberofacreditbureau

CreditScore
Anumericalrepresentationofanindividualscredit

EmpiricaScore
AnumericalrepresentationofanindividualscreditprovidedbyTransunion

Equifax
ACanadiancreditbureau

FairIsaacCompany(FICO)
FairIsaac,foundedin1956,isacompanythatprovidessoftwareandconsultingservices.Its
softwareisusedbycreditbureaustocalculatecreditscores

Judgment
Afinalcourtrulingresolvingthekeyquestionsinalawsuitanddeterminingtherightsand

342

Chapter14:ApplicationAnalysisBorrowerCredit

obligationsoftheopposingparties,suchastheawardingofmoniestoaninjuredparty

PublicRecords
InformationthatisavailabletotheCanadianpublic.Creditbureausincludepubliclyavailable
informationsuchasbankruptcies,judgments,etc.intheircreditreports

SecuredLoan
Aloaninwhichaborrowerpledgesanassetsuchasacarthatmaybesoldiftheborroweris
unabletorepaytheloan.ThisistypicallyregisteredunderthePersonalPropertySecurityAct
(PPSA)

TradeLine
Informationonadebt,foundinacreditreport,thatcontainsthedatethatthecreditwas
granted,thebalance,termsandrepaymenthistory

Transunion
ACanadiancreditbureau

Chapte
er14:ApplicaationAnalysissBorrowerCredit

34
43

14.5
5 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1.

2.

3.

4.

5.

6.

7.

De
efinetheterm
mtradeline.
Disscusstheitem
msthatareinvolvedincalcculatingacreeditscore.
Wh
hatcananind
dividualdoto
oincreasehisorhercredittscore?
Ifaanindividualhasajudgme
entfiledagain
nsthimorherr,inwhatsecctionofacred
ditreport
wo
ouldthisinforrmationbefo
ound?
Ifaanindividualhasanaccountratedasan
nR3onhisorrhercreditreeport,whattypeofcredit
istthisratingrefferringtoand
dhowmanym
monthsinarr earsisthisacccount?
Wh
hatistherelaationshipbetw
weenacredittscoreandthhedelinquenccyratesofCaanadians?
Ho
owlongdoesabankruptcyyremainonanindividualsscreditreporrtprovidedbyy:
a) Eq
quifax?
b) Transunion?

owlongdoescreditcounse
ellingremainonanindividdualscreditrreportprovideedby:
8. Ho
a) Eq
quifax?
b) Transunion?

9. Ifaanindividualdisputesanitteminhisorhercreditrepport,whatcaanheorshed
do?

10. Canamortgaggeagentprovideacopyofaclientscreeditreporttotheclient?

344

Chap
pter15:ApplicationAnalyssisTheProp
perty

Ch
hapter 15:
1 App
plicatio
on Anaalysis The Propertyy
Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Describetheppurposeofanapprovedrealestateapp raisal
DiscussAutom
matedValuatio
onModels(A
AVMs)andris kassessmentttoolsandtheirimpact
onvaluingproperties
Explainthethrreemainwayysofdeterminningthevalueeofaproperty
Discusstheth
D
reemaintype
esofappraisaalreportsanddthescopeo
ofeach

Intro
oduction

Areallestateappraaisalisakeyccomponentin
nalendersd ecisiontolen
nd.Thereareeseveral
purpo
osesforcomp
pletingarealestateappraiisal,includinggtodetermin
ne:
Thecosttorebu
uildthehome
eincaseofdamage,such asbyfire(inssurablevaluee)
Avvaluesothatamunicipalittycanapplyittspropertytaaxrate(taxationpurposess)
Thepricethataarealestateinvestorwouldpayforap ropertybased
donhisorheerpreferred
ratteofreturn(iinvestmentvaalue)
Theamountthaatthepropertycanobtain
nifsold(sellinngprice)
Thefuturevalueofaproperrtyunderconstruction(futtureprice)
Thevalueofap
propertybeingexpropriate
edbytheCroown(expropriiationvalue)
Themarketvalu
ueofaprope
ertyforalend
dertodecide onanapprop
priateloanam
mountfor
ortgagefinancing.
mo

Theprocessindeterminingvalu
ueforeachre
easondiffers,,sincethevalluewilldifferrbasedonthee
appraaisalspurpose.Thischaptterwillfocusontheappra isalprocesso
onlyasitrelattesto
mortggagefinancing.

15.1
1 Apprais
sal Basic
cs

Alend
derrequiresaanappraisalttobecomplettedonaproppertytodeterrminethemaarketvalueoff
thatp
property.Inaaddition,anaappraisalcanprovideseveralotherpieccesofvitalinfformation
requirredtomakeaaninformedd
decisiontolend.Sincelennderswilllend
dbasedonaLTV,the
lende
errequiresanexactestimaationofvaluetodetermineetheexactm
mortgageamo
ountavailablee.

The Apprais er
Theappraiseristheaccreditedindividualwh
hocompletesstheappraisaalreport.Alth
hougha
licenssetoconductappraisalsisnotrequiredinOntario,nnolenderwou
ulduseanon
naccredited
appraaisersincethe
edecisiontolendwilltypiccallyinvolvesseveralhundredthousand
ddollars.Thee
lende
ermustbecon
nfidentthatttheappraisalcompanyem
mploysappraisserswhoareeducatedin
performingappraisals,havepro
oventrackreccordsoraressupervisedbyyseniorappraaisers,follow
w
ethicaalstandardsaassetforthbyytheindustryyandaregennerallyknown
ntoproduceq
quality
reporrts.

Chap
pter15:ApplicationAnalyssisTheProp
perty

34
45

ownlistofapprovedappraaisalcompanies.Thesearrecompanies
Severrallenderswillhavetheiro
thattheyhavedeaaltwithinthe
epastorwhohavebeenthhroughanap
pprovalprocessbythe
lende
erthattypicallyinvolvesasssessingtheaappraisalcom
mpanytoensu
urethatitmeetsthe
lende
ersstandardss.

Acc reditation
ns
Appra
aisalInstitute
eofCanada(A
AIC)www.aaicanada.ca
InOnttario,thereareseveralaccreditationsp
providedbypprofessionalaassociations,eeachgrantingg
itsow
wndesignation.Themostwidelyknown
nandaccepteeddesignatio
onsareoffereedbythe
AppraaisalInstituteofCanada(A
AIC),aprofesssionalappraissalassociatio
on.TheAICprovidestwo
design
nations,theA
AACIandtheCRA.Bothde
esignationshhaveeducatio
onalrequirem
mentssuchasa
universitydegreeaaswellasexp
perienceandcontinuingedducationrequ
uirements.

AcccreditedApp
praiserCanad
dianInstitute,,ProfessionaalAppraiser(AACI,P.App))
Thisdesignation
nisthehighe
estdesignatio
onprovidedb ytheAIC.Th
hisdesignatio
oncertifies
thaattheholderisqualifiedto
ooffervaluattionandconssultingserviceesonalltypesof
pro
operties,inclu
udingresiden
ntial,industriaal,commerciaal,andrural.Thedesigneeholdsan
undergraduatedegreefromarecognized
duniversityanndhascomplletedtheAAC
CIprogramoff
stu
udiesandhassfulfilledallo
oftheprofessionalrequire mentsoftheAIC.
CanadianResid
dentialAppraaiser(CRA)
Thedesigneeho
oldsanundergraduatedegreefromarrecognizedun
niversityandhas
completedtheA
AACIprogram
mofstudiesaandhasfulfilleedallofthep
professionalrrequirementss
oftheAIC.TheCRAisqualiffiedtooffervvaluationandconsultingseervicesandexxpertisefor
ind
dividual,unde
evelopedresidentialdwelllingsitesanddwellingscontainingnotmorethan
fou
urselfcontainedfamilyho
ousingunits.

TheC
CanadianNatiionalAssociaationofRealEEstateAppraaisers(CNAREEA)www.cnarea.ca
DA
AR(Designate
edAppraiserResidential)
Thisdesignation
nidentifiesamemberwho
oisqualified toperformappraisalandconsultation
asssignmentsofresidentialtyypepropertie
esconsistingoofnomoreth
hanfourhoussingunitsand
d
no
oncomplexco
ommercialpropertieshavingaresidenttialcomponent.Requirem
mentsforthis
designationincludethreethousandhoursoffulltime appraisalexp
perienceandthesuccessfu
ul
completionofttherequiredC
CanadianNattionalAssociaationofRealEEstateAppraiisers
educationalpro
ogramoritse
equivalent.

DA
AC(Designate
edAppraiserCommercial))
Thisdesignation
nidentifiesamemberwho
oisqualified toperformappraisalandconsultation
asssignmentsofalltypesofre
ealpropertyiincludingcom
mmercial,industrial,andin
nvestment.To
o
atttainthisdesiggnationanind
dividualmustthavetheDA
ARdesignatio n,fiveyearso
offulltime
appraisalexperience,andco
ompletetherequiredCanaadianNationaalAssociation
nofReal
EsttateAppraise
erseducationalprogramoritsequivale nt.

AC(withaSpe
ecialtyinAgrricultural)
DA
Thisdesignation
nidentifiesamemberwho
oisqualified toperformappraisalandconsultation
asssignmentsofalltypesofre
ealproperty.Therequirem
mentsforthissspecialtyinccludetheDAC
C
designationand
dthecomplettionoftherequiredCanaddianNationalAssociationo
ofRealEstatee
Ap
ppraiserseduccationalprogramoritsequivalent.

346

pter15:ApplicationAnalyssisTheProp
perty
Chap

CM
MAR(CertifiedMortgageA
AppraisalRevviewer)
Thisdesignation
nidentifiesamemberwho
oisqualified toperformp
professionalreeviewsofanyy
whichmightb
beusedform
mortgagepurp
poses.Toattaainthis
ressidentialapprraisalreportw
designationanindividualmu
usthaveaminimumof2yyearsexperien
nceinthemo
ortgage
financingprofesssionandcom
ofRealEstatee
mpletethere
equiredCanaddianNationalAssociationo
Ap
ppraiserseduccationprograam.

CA
AR(CertifiedA
AppraisalRevviewer)
Thisdesignation
nidentifiesamemberwho
oisqualified toperformp
professionalreeviewsofanyy
appraisalreportt.Toattainth
hisdesignatio
onanindividuualmusthaveetheDARdessignationand
completethere
equiredCanadianNationalAssociation ofRealEstateAppraiserseducational
pro
ogram;or,be
earegisteredmortgagebrroker,holdthheAMPdesignationofCAA
AMP,have5
yearsmortgage
efinancingexperience,and
dcompletethherequiredC
CNAREAeducation
pro
ogram.

OntarioRealEEstateAssociationwww.orea.com
TheO
Ma
arketValueA
AppraiserResidentialDe
esignation(M
MVA)
AsofJuly31,20
007thisdesiggnationisnolongerbeing offered.How
wevercurrenttholdersof
the
edesignation
nmaycontinu
uetouseitprrovidedtheym
meetcertificaationandedu
ucational
req
quirements.

TheR
RealEstateInstituteofCan
nadawww.rreic.ca
FellowoftheRealEstateInsstitute(FRI)
nationfortherealestates alesprofessio
onal,FRIexem
mplifiesthe
Canada'smostsseniordesign
mo
osteducatedandexperien
ncedrealestaatesalespersoon.

The Apprais al
Anap
ppraisalisare
eportproduce
edbyadesign
natedappraisserthatdeterminesthem
marketvalueo
of
anintterestinlandusingacceptedvaluationtechniquesbbasedonthep
purposeofth
heappraisal
forasspecificclientt.

Theclientinmostcasesofmorttgagefinancingisthelendder,althoughtheapplicanttypically
paysffortheappraisalreport.Ittisanimporttantdistinctioontomaketh
hattheclientispayingfor
these
erviceoftheaappraisalbein
ngcompleted
d,whiletheleenderownsth
hereport.

eportwillbassethemarkettvalueonthe
elendersspeecificcriteriaaandincluded
detailsabout
There
theprropertythattthelendermaayrequire.In
ncertaincircuumstances,leenderswillrequirea
differentemphasissonpropertyycharacteristiics,resulting intheappraisalreportbeingacceptablle
toone
elenderwhileunacceptab
bletoanother.

ntsrequestfo
orfinancingaandtheappliccantwishesttoprovidethee
Ifalenderdeclinesstheapplican
appraaisaltoanotherlender,the
eappraiserm
mustreaddre sstheappraisaltothenew
wlenderand
thene
ewlendermu
ustbewillingtoacceptit.Thisdoesnootalwaysoccu
ursincedifferrentlenders
havedifferentrequirements.

pter15:ApplicationAnalyssisTheProp
perty
Chap

34
47

The Value off a Prope


erty
Itisim
mportanttod
distinguishbe
etweenmarke
etvalueandpprice.Priceisswhatmaybepaidfora
prope
erty;howeverrtherearemanyreasonstthatthepriceepaidforaprropertymayb
behigheror
lowerrthanwhatso
omeoneelsemaypayforit.Forexampple,ifapurch
haserisbuyingahouse
fromafamilymem
mbertheprice
epaidmaybe
elowerthantthepricewou
uldbeifsoldtoanon
familyymember.In
naddition,arrealestateinvvestormayp aymoreforaapropertythaatheorshe
believveswillprovid
deahighretu
urnonhisorh
herinvestmeent.

MarketValue
Alend
derisinteresttedinknowin
ngwhatthem
marketwillpaayforapropeertyunderno
ormal
circum
mstances.Th
herefore,therealestateap
ppraisermusttappraisetheemarketvalu
ue.The
marke
etvaluecanb
bedefinedas:

Theamount,inCan
nadianfunds,,forwhichapropertyshouuldexchangeeonthedateofvaluation
betweeenawillingb
buyerandaw
willingselleriinanarmslenngthtransacttionafterpro
oper
markeeting,wherethebuyerand
dsellerhaveeachactedknnowledgeablyy,prudently,andwithout
pressu
ure.

15.2
2 Calcula
ating the Market Value
V
of a Property
y

There
earethreeap
pproachesthaatappraisersusetocalculaatethevalueofapropertyy:
InccomeApproach

Co
ostApproach
DirrectComparissonApproach
h

TheIn
ncomeAppro
oach
TheIn
ncomeAppro
oachofappraiisalcalculatessthevalueoffincomeprod
ducingproperties,suchass
apartmentbuildinggsandothercommercialp
properties.TThismethodtakesthenetoperating
incom
methatisgeneratedbythe
epropertyan
ndappliesacaapitalizationrate(arateo
ofreturn
typicaalfortheareaa)tothatinco
ome.Theressultisthepro pertysmarketvalue.Wh
hilethis
proce
essisidealforrincomeprod
ducingproperrties,itholdsnovalueind
determiningtthemarket
valueofaresidenttialpropertyfformortgagefinancing.

TheC
CostApproach
h
TheC
CostApproach
hofappraisalcalculatesth
hevalueofappropertybaseedonthecosstofreplacingg
it.Thismethodtakesthecosto
ofrebuildingthestructuree,lessdepreciation,plusth
hecostofthee
land,resultinginafinalvalue.TThevaluepro
oducedbythiismethodisiidealfordeteerminingthe
costo
ofreplacingabuildingforiinsurancepurrposesbuthooldslittlevalu
ueindeterminingthe
marke
etvalueofarresidentialprropertyformortgagefinanncing.

Thism
methodisinclludedinatyp
picalresidentialappraisalttoillustrateth
placingthe
hecostofrep
prope
ertyandassistindetermin
ningthemarketvalue;how
weveritisnottheavilyrelieeduponin
makin
ngthefinalvaaluationofmarketvalue.

DirectComparisonApproaach
TheD
Thisaapproachindeterminingth
hemarketvalueofapropeertyisthemo
ostappropriaatefor
mortggagefinancingandisthere
eforereliedheavilyuponi ntheappraissalreport.Th
hismethod
usesttheprincipleofsubstitutio
onasitsbasis.Theconcepptisthatifan
nappraiserkn
nowsthepricee

348

Chapter15:ApplicationAnalysisTheProperty

thatwaspaidforacomparableproperty(anappraisaltypicallyusesthreecomparables)thatis
similartothesubjectpropertyandhasrecentlysoldinthesameneighbourhoodasthesubject
property,thesubjectpropertyshouldhaveamarketvalueequaltothatcomparableproperty.

Thismethodwouldbesimpleifnotforthefactthatpropertiesareheterogeneousorunique.
Whiletwohousesmaybelocatednexttoeachotheronthesamestreeteachwillhave
differences,fromitssizetosuchcharacteristicsasafinishedbasement,thenumberof
bedroomsandwashrooms,thetypeofheating,appliances,andsoon.

Becauseofthesedifferences,theappraisermustmakeadjustmentstothesalespriceofthe
comparableproperty.Thefollowingexampleillustratesthispoint.

Example
A2bedroom,2storeyhomewasrecentlysoldfor$400,000.Anappraiserisbeingaskedto
appraisethehousenexttoitformortgagefinancing.Thehomeownerfeelsthat,asthe
propertynextdoorsoldfor$400,000,hishomeshouldbeworthmoresincehehasalargerback
yard.Theappraiser,whileusingtherecentlysoldhousenextdoorasacomparableproperty,
mustalsousetwootherpropertiesthataresimilartothesubjectandhaverecentlysold.

Inthiscasetheappraiserwilldeterminethecharacteristicsofthecomparablepropertyand
comparethemtothesubjectpropertyandadjustthevalueofthecomparablepropertytomake
itmorelikethesubjectproperty.Oncethishasbeencompletedtheadjustedvalueofthe
comparablepropertyshouldbeapproximatelyequaltothemarketvalueofthesubject
property.Thefollowingchartprovidesanexampleastohowthiscalculationiscompleted.In
theleftcolumnarethecharacteristicsoftheproperties.Inthecolumntotherightisthe
descriptionofthesubjectproperty.Thefarcolumndescribesthecomparablepropertyandlists
theadjustmentstothevaluenecessarytomakethecomparablepropertymorelikethesubject
property.
Ifthecomparablecharacteristicissuperiortothesubject,subtractfromthecomparable
propertysvalue
Ifthecomparablecharacteristicisinferiortothesubject,addtothecomparablepropertys
value

Notethattocomparecharacteristicstheappraisermustobtaininformationfromseveral
sourcesonboththesubjectandcomparableproperties.

Incalculatingtheadjustedvaluetheappraiserwilladdthetotaladjustmentsandeitheraddor
subtractthemfromthesalepriceofthecomparableproperty.Inthisexampletheadjustments
equal$15,000($5,000$20,000+$5,000$5,000)andthatamountisthereforesubtracted
fromthesalepriceof$400,000,resultinginanadjustedvalueof$385,000.

Therefore,basedonthissimplifiedexample,themarketvalueofthesubjectpropertyshouldbe
$385,000.

Inanactualappraisal,theappraiserwillusethreecomparablepropertiesandwilleitheraverage
theadjustedvaluesorrelymoreheavilyonthemostsimilarpropertytodeterminethemarket
value.

Chap
pter15:ApplicationAnalyssisTheProp
perty
m
Item
Addrress

SubjectPro
operty
123MarkettStreet

#ofdaysonthem
market

N/A

Date
eofSale

N/A

SalePrice

N/A

SiteSizeinsquare
efeet

40x100

SizeLiveableFloo
orArea
(L.F.A
A)
Age//Condition

1,200

Build
dingTypeand
dStyle

2storydetached

Room
ms/Bedrooms/Baths

7/3/2

Base
ement

Finished

Garaage/Parking

2cargaragge/privatedrivve

Othe
er

TotaalAdjustmentts
Adju
ustedValue

35+/years

34
49

Com
mparablePro
operty1
1255MarketStreeet

45

Deccember18,20
007

$4000,000

35xx100
+$5,000

Sim
milar

15++/years
$20,000

Sim
milar

7/22/2
+$5,000

Finiished

Sim
milar

Cen
ntralVac
$5,000

$15,000

$385,000

Pau
useforcla
arification
Thenum
mberofcom
mparabless
Thre
eecomparablesareusediinanappraisaal.Intheexa mpleaboveo
onlyoneissh
hown,butin
anaactualappraissalthreesimilarpropertiessthathavereecentlysoldw
willbecompaaredtothe
subjjectpropertytoprovideth
heappraiserw
withenough datatomakeeaninformed
destimateof
valu
ue.

Autom
matedValuattionModels((AVMs)
Autom
matedValuationModelsarecomputerprogramsthaattypicallyussepublicreco
orddataon
reside
entialproperttiestocalculaatethemarke
etvalueofapproperty.Theesemodelshavebeen
gainin
nginpopulariitythroughou
uttheworldaandarecurre ntlymostofttenusedbyleendersand
mortggagedefaultiinsurers,asw
wellasmunicipalitiesfordeeterminingvaaluesforprop
pertytax
purpo
oses.AVMsccanalsobeoffsignificantbe
enefittorealestateappraaisersinsupportingvaluess
calcullatedinanap
ppraisal.

TheM
MunicipalPropertyAssessm
mentCorporaations(MPACC)AVMandTTeranetsreaavsAVMaree
currentlythetwoA
AVMsavailab
bleinOntario.

The
subject
property
is
superior

The
subject
property
isinferior

350

Chap
pter15:ApplicationAnalyssisTheProp
perty

eAVMscanprovidequick,basicproperrtyvalues,theeyarenotappraisalsandd
donotinvolvee
While
aphysicalinspectio
onoftheproperty.There
efore,theydoonotreplacetherealestatteappraisero
or
arealestateappraaisal.Theyarrepronetoprroducingvaluuesthatmayo
ormaynotacctuallybe
representativeoftthesubjectprropertysinceanAVMcannnotmakeadjjustmentsforrthephysical
conditionoftheprroperty.Ifalenderrelieso
onanAVMfoordeterminin
ngthevaluefformortgage
financcing,thelend
dermayopenitselfupforaabuse.Thereeareseveralexamplesofp
propertyfrau
ud
where
etheproperttywasmortgaagedbasedonanAVMva luewhentheepropertywaasinsignifican
nt
disrep
pairandthere
eforenotworrthwhattheAVMindicateed.Thiscanaallowafraudstertoobtain
n
financcingonaprop
pertyinexcesssofitsvalue
e,thendefaulltonthemorrtgagewhilekkeepingthe
fundss.Moreinformationonpropertyandm
mortgagefrauudcanbefoundinthechapter,
MortggageFraud.

While
etheriskofabuseispresent,theuseoffAVMsbylenndersisincreasing,partlyduetothe
comp
petitivenature
eofthemorttgageindustryy.Lendersarremakingdeccisionsfasterthanever
beforetomaintain
ntheirmarkettshare.Asth
hisprocesscoontinues,incrreasedcaresh
houldbe
takenwhenrelyinggonAVMsfo
ormortgagele
ending.

RiskA
AssessmentT
Tools
Althoughnotavaluationmodel,bothCMHC
CandGenworrthuseautom
matedunderw
writing
system
msthathaveacomponentofAVMsinthem.CMHCCsemiliand
dGenworthsexcelare
autom
matedprogramsthatwillu
underwritean
napplication fromalendeerandmakeaadecisionto
appro
oveordecline
emortgagede
efaultinsuran
nce.Partofttheseprogram
msdetermineeswhetherth
he
prope
ertyvalue,asdisclosedintthemortgage
eapplication, isappropriattefortheareeainwhichthe
prope
ertyresides.SSincethereissnophysicalinspectionoffthepropertyy,thesameriisksinherent
inAVMsareappliccabletothese
eriskassessm
menttools.

15.3
3 The Typ
ypes of Ap
ppraisals
s

There
earethreebaasictypesofaappraisalrepo
orts,rangingiinscopefrom
mbasictohighlydetailed.

Des
sktop App
praisal (a
also refe rred to a s a Saless Data R eport)
TheD
DesktopAppraaisalistypicallyusedwhen
nanAVMisuunavailablean
ndthepropertyislocated
inam
marketablearea.Thisrepo
ortreliesonM
MLSreports,iincludingdataaonrecentsaalesanddataa
onreccentlistings.Itdoesnotp
providedetailedinformatioononthepro
opertynoristtherea
physiccalinspection
noftheprope
erty,whichraaisesthesam eissuesasarreapplicabletoAVMs.

Driv
ve-by App
praisal
Thistypeofappraiisalisbasedo
onthesameinformationaastheDesktopAppraisal;h
howeverit
alsoin
ncludesaninspectionofth
heexterioroffthepropertyy.WhileAVM
MsandDesktopAppraisalss
canno
otprovidedettailsonwhethertheprope
ertyisactualllyinaphysicaalconditionn
normalforthee
neighbourhood,aDrivebyApp
praisalcanatleastindicateethatthepro
opertysexterrioristypical
orcon
nformstothe
eneighbourho
ood.InaddittiontheDriveebyAppraisalallowstheaappraiserto
viewaandprovided
detailsonthe
eneighbourho
ood,whichisakeyelemen
ntinassessin
ngthe
marke
etabilityofth
hesubjectpro
operty.There
eporttypicalllycontainsexxteriorphotographsofthee
prope
ertyaswellasstheimmediaateneighbourhood.

Chap
pter15:ApplicationAnalyssisTheProp
perty

35
51

praisalresultssinthedeterm
minationthatttheproperttyappearstobeina
IftheDrivebyApp
conditionthatisno
ottypicalofttheneighbourhood,aFull Appraisalsho
ouldbecomp
pleted.

Full Appraisa
al
AFullAppraisalexpandsonthe
einformationandtechniquuesusedinth
heSalesDataAppraisaland
theDrivebyAppraaisalbyhavingafullinspecctionofthessubjectpropeertycompleteed.This
inspectionallowsttheappraisertodocumenttthecharacteeristicsoftheesubjectprop
perty,
includ
dinganyupgrradesordefecctsinthehom
me.Therepoorttypicallyco
ontainsinteriiorand
exteriiorphotograp
phsofthepro
opertyaswellastheimmeediateneighb
bourhood.Co
onsideredto
offerthemostinfo
ormationandthereforethehighestleveelofprotectionforthelen
nder,theFull
Appraaisalistheappraisalofcho
oiceforlende
erswhorelyhheavilyontheepropertyassecurityand
lesso
onthepersonalcovenanto
oftheborrow
wer.Virtually everysubprrimeandprivaatelenderwiill
insistonaFullApp
praisal.

Thefo
ollowingfigurresareexamp
plesofaDrive
ebyAppraisaalreportand aFullAppraisalreport.
Theyillustratethedifferencesinthelevelso
ofdetailcontaainedinthettwotypesofrreports.

352

Chapter15:ApplicationAnalysisTheProperty

Figure91DriveByAppraisalReport

DrivebyAppraisalReport

RESIDENTIALAPPRAISALREPORT
"DRIVEBY"FORM
ClientRef.#:.................................................
File#:.............................................................
Client:.......................................................... AddressofProperty:................................................... Appraiser:.......................................................
Attention:.................................................... ..................................................................................... Company:.......................................................
Address:....................................................... ..................................................................................... Address:.........................................................

.............................................................. ..................................................................................... ........................................................................


Email:.......................................................... ..................................................................................... Email:............................................................
Phone:.......................................................... Province:..................................................................... Phone:............................................................
Fax:..........................................PostalCode: ..............................................................................Fax:
ApplicantName:..................................................................................................................................................................................................................
PROPERTY&NEIGHBOURHOODDATA
LEGALDESCRIPTION:..........................................................................................................................................................................................................
MUNICIPALITYANDDISTRICT:...........................................................................................................................................................................................
ASSESSMENT:LAND$............................. IMP$................... TOTAL$.......................... year................. TAXES$................ year..............
PURPOSEOFAPPRAISAL:
ToestimatemarketvalueorOther(describe)....................................................................................................
INTENDEDUSEOFAPPRAISAL:...........................................................................................................................................................................................
PROPERTYRIGHTSAPPRAISED:
FeeSimple
Leasehold
Condominium
Cooperative
Other.......................
Isthesubjectafractionalinterest,physicalsegmentorpartialholding?
No
Yes(Ifyes,seecommentselsewhereinthisreport)
OCCUPIEDBY:
Owner
Tenant
Vacant
HIGHESTANDBESTUSE:
Asimprovedor
Other(describe)................................................................................
Note:IfHighestandBestUseisnotthecurrentuse,ornottheusereflectedinthereport,seecommentsattached.
NATUREOFDISTRICT
TRENDOFDISTRICT
CONFORMITYOFSUBJECT
SUPPLY
Residential
Improving
AGE:
SIZE:
GoodFairPoor
Rural
Stable
Newer
Larger

Commercial/Industrial
Transition
Older
Smaller
DEMAND
Mixed
Deteriorating
GoodFairPoor
Similar
Similar
Other
Other
AVERAGEPROPERTYAGE:
DISTANCETO:
PRICERANGEOFPROPERTIES:
DISTRICT
Elem.School.............. Jr.Secondary............... INGENERALDISTRICT

................to Years
HighSchool............... Downtown.................. $ ................to$
IMMEDIATEAREA
PublicTrans............... ShoppingFac............... INIMMEDIATEAREA

................to Years
Other................................................................ $ ................to$
SUMMARY:Includesmarketappeal,apparentadverseinfluencesinarea,ifany(e.g.railroadtracks,unkemptproperties,majortrafficarteries,hydro
facilities,anticipatedpublicorprivateimprovements,commercial/industrialsites,landfillsites,etc.)
SUBJECTPROPERTYDESCRIPTION
ZONINGDES'N: ............SIZEDIMS: ................................SITEAREA: ..........................TOPOGRAPHY:
PRESENTUSE:........................................................................................... DOESITCONFORM?
YesNo(seecomments)
ESTIMATEDAGEOFSUBJECT:......................Years
PARKING:
Garage
Carport
Driveway
CURBAPPEAL:GoodAverageFairPoor
EXTERIORCONDITION:GoodAverageFairPoor
EXTERIORFINISH:
ROOFINGMATERIAL:
BrickVeneer
SolidBrick
Insulbrick
AsphaltShingleWoodShingleTar&Gravel
StoneVeneer
SolidStone
Stucco
Slate
Metal
Other
WoodSiding
AluminumSiding
VinylSiding
.....................................................................................................................
Other..............................................................................................................................................................................................................................
COMMENTS:.......................................................................................................................................................................................................................

COMPARABLESALESDATA
ITEM
SUBJECTPROPERTY
NO.1
NO.2
NO.3
Address

MLSListing#/(ifapplicable)

DaysonMarket

DateofSale

SalePrice

SiteSize

SizeL.F.A.

Age/Condition
/
/
/
/
BuildingType&Style

Rooms/Bedrooms/Baths

/
/

/
/

/
/

/
/
Basement

Garage/Parking

Other

Reconciliation/Conclusions:................................................................................................................................................................................................

Chapter15:ApplicationAnalysisTheProperty

353

HistoryandanalysisofknowncurrentAgreementsforSale,priorsales,options,listingsormarketingoftheSubjectinthepastyear.

IndicatedExposureTimeofSimilarPropertiesintheArea:Under3months36monthsOver6months
Thisappraisalreportrepresentsthefollowingvalue(ifnotcurrent,seecomments):CurrentRetrospectiveProspective
Updateofreportcompleted

RESIDENTIALAPPRAISALREPORT
"DRIVEBY"FORM(Cont'd)
PURPOSE,SCOPE,DISCLOSURES&DEFINITIONS
PURPOSEOFTHEAPPRAISAL:
This"driveby"reporthasbeenpreparedformortgagelendingpurposesfortheexclusiveuseoftheclientandotherintendedusersnamed.Theclientisawarethat,asthe
degreeofdeparturefromafullappraisalreportincreases,thereisacorrespondingdecreaseinthelevelofreliabilityofthereport,resultinginahigherlevelofriskfortheuser
ofthereport.Duetothelimitationsofthisreportingmethod,itisnotintendedforusebythirdpartiesandliabilitytoanyunintendedusersisexpresslydenied.Theappraiser
assumesdiligencebyallintendedusers.
SCOPEOFTHEREPORT
1. Theclienthasspecificallyrequesteda"driveby"appraisaltobereportedinanabbreviatedreportformat.TheAppraiserhasbeenrequestedtoperformanexterior
inspectionandnottodisturbtheoccupantsbyenteringthebuilding.BoththeclientandtheappraiserunderstandsthatNEITHERAPYSICALINSPECTIONOFTHEINTERIOROF
THESUBJECTPROPERTYNORASTREETINSPECTIONOFTHECOMPARIABLESHASBEENPERFORMED(unlessstatedherein).
2. Itisacknowledgedbybothpartiesthatasubsequentphysicalinspectionofthesubjectpropertyand/oramoreindepthinvestigationcouldresultinadifferentconclusion.
3. Thephysicalcharacteristicsusedtodevelopthisappraisalarebasedondocuments,records,etc.describedbelowandonotherinformationprovidedbysourcesidentified
below.Thesubjectpropertywasobservedonlyfromthepublicstreetanditisassumedthattheinformationprovidedbythesourcesisaccurate.Comments(ontheefforts
takentoobtain,andthesourceof,interiorandexteriorinspectioninformation):...........................................................................................................................................................
4. Salesandlistinginformationofphysicallysimilarpropertieshasbeenobtainedfromsourcesassumedtobereliableandaccurate,and/oroninformationfromthe
appraiser'sfiles.
5. NeithertheIncomenortheCostApproachestovalueareappropriatemethodsofvaluationforthisassignment,consideringthelimitedscopeofthetypeofappraisal
requestedbytheclient,andthereforehavenotbeencompleted.
6. Salesinformationonphysicallysimilarpropertieshasbeengatheredandanalyzedontheassumptionthatboththeinteriorandexteriorconditionofthesubjectproperty
areinaverageortypicalconditionforitsageandthattherearenophysicalorfunctionalconditionsassociatedwiththepropertythatwouldadverselyaffecttheconclusions
containedinthisreport,unlessotherwisestipulated.Itisassumedthatthesubjectpropertyisin100%completeconditionunlessotherwisestatedandthevaluerange
containedhereinisbasedonthisassumption.
OTHERDISCLOSURES,COMMENTS,ETC.:..........................................................................................................................................................................................................................
DEFINITIONOFMARKETVALUE
Themostprobablepricethatapropertyshouldbringinacompetitiveandopenmarketunderallconditionsrequisitetoafairsale,thebuyerandsellereachactingprudently
andknowledgeablyandassumingthepriceisnotaffectedbyunduestimulus.Note:Ifotherthanmarketvalueisbeingappraised,seecommentsattached.
DEFINITIONOFHIGHESTANDBESTUSE
Thereasonablyprobableandlegaluseoftheproperty,thatisphysicallypossible,appropriatelysupported,andfinanciallyfeasible,andthatresultsinthehighestvalue.
ASSUMPTIONSANDLIMITINGCONDITIONS
Thecertificationthatappearsinthe"driveby"residentialappraisalreportissubjecttothefollowingconditions:
1. Theappraiserwillnotberesponsibleformattersofalegalnaturethataffecteitherthepropertybeingappraisedorthetitletoit.Noregistryofficesearchhasbeen
performedandtheappraiserassumesthetitleisgoodandmarketableandfreeandclearofallencumbrances,includingleases,unlessotherwisenotedinthisreport.The
propertyisappraisedonthebasisofitbeingunderresponsibleownership.
2. Becausemarketconditionschangerapidlyand,onoccasion,withoutwarning,theestimatedmarketvaluerangeexpressedasofthedateofthisappraisalcannotberelied
uponasofanyotherdateexceptwithfurtheradvicefromtheappraiserconfirmedinwriting.
3. Thesubjectpropertyispresumedtocomplywithgovernmentregulationsincludingzoning,buildingcodesandhealthregulationsand,ifitdoesn'tcomply,itsnon
compliancemayaffectmarketvalue.
4. Theappraiserwillnotgivetestimonyorappearincourtconcerningthisappraisalunlessrequiredtodosobydueprocessoflaw.
5. Theappraiserhasnotedinthisreportanyreadilyapparentadverseconditionsthatwereobservedduringthestreetinspectionofthesubjectpropertyorthatheorshe
becameawareofduringthenormalresearchinvolvedinperformingthistypeofappraisal.
6. Unlessotherwisestatedinthisreport,theappraiserhasnoknowledgeofanyhiddenorunapparentconditionsofthepropertyoradverseenvironmentalconditionsthat
wouldmakethepropertymoreorlessvaluableandhasassumedthattherearenosuchconditionsandmakesnoguaranteesorwarranties,expressorimplied,regardingthe
conditionoftheproperty.Theappraiserwillnotberesponsibleforanysuchconditionsthatdoexistorforanyengineeringortestingthatmightberequiredtodiscoverwhether
suchconditionsexist.Becausetheappraiserisnotanexpertinthefieldofenvironmentalhazards,thisdrivebyappraisalreportmustnotbeconsideredasanenvironmental
assessmentoftheproperty.Thebearingcapacityofthesoilisassumedtobeadequate.
7. Theappraiserobtainedinformation,estimatesandopinionsthatwereusedinthisreportfromsourcesconsideredtobereliableandaccurateandbelievesthemtobetrue
andcorrect.Theappraiserdoesnotassumeresponsibilityfortheaccuracyofitemsthatwerefurnishedbyotherparties.
8. TheappraiserwillnotdisclosethecontentsofthisreportexceptasprovidedforbytheprovisionsoftheCanadianUniformStandardsofProfessionalAppraisalPractice
("theStandards").
9. Theappraiserhasagreedtoenterintotheassignmentasrequestedbytheclientnamedinthereportfortheusespecifiedbytheclient,whichisstatedinthereport,which
callsforthingsthataredifferentfromtheworkthatwouldotherwiseberequiredbytheStandards.Asthisisa"driveby"appraisal,onlylimitedinspectionshavebeen
undertaken(ExtraordinaryLimitingCondition).Theclienthasagreedthattheperformanceofthislimitedscopeappraisalandthe"driveby"reportformatareappropriatefor
theintendeduse.
10. Writtenconsentfromtheauthorandsupervisoryappraiser,ifapplicable,mustbeobtainedbeforeanypartoftheappraisalreportcanbeusedforanypurposebyanyone
excepttheclientandotherintendedusersidentifiedinthereportand,wheretheclientisthemortgagee,itsinsurerandtheborrower,ifheorshepaidtheappraisalfee.
Writtenconsentandapprovalmustalsobeobtainedbeforeanypartoftheappraisalcanbealteredorconveyedtootherparties,includingmortgagesotherthantheclientand
thepublicthroughprospectus,offeringmemoranda,advertising,publicrelations,news,salesorothermedia.
11. Other(includinganyotherExtraordinaryAssumptionsandLimitingConditionsinvolvedinthisappraisal):

CERTIFICATION
Icertifythat,tothebestofmyknowledgeandbelief:
1. Thestatementsoffactcontainedinthisreportaretrueandcorrect.
2. Thereportedanalyses,optionsandconclusionsarelimitedonlybythereportedassumptionsandlimitingconditionsandaremypersonal,impartialandunbiased
professionalanalyses,opinionsandconclusions.
3. Ihavenopast,presentorprospectiveinterestinthepropertythatisthesubjectofthisreportandIhavenopersonalinterestorbiaswithrespecttothepartiesinvolved.
4. Mycompensationisnotcontingentupondevelopingorreportingapredeterminedresult,valuerangeordirectioninvaluerangethatfavoursthecauseoftheclient,the
amountoftheestimatedvaluerange,theattainmentofastipulatedresultortheoccurrenceofasubsequentevent.
5. Myanalyses,opinionsandconclusionsweredevelopedandthisreporthasbeenprepared,inconformitywiththeCanadianUniformStandardsofProfessionalAppraisal
Practice.PleasenotetheExtraordinaryLimitingConditionabove,indicatingthepropertywasnotinspected.
6. Ihavetheknowledgeandexperiencetocompletethisassignmentcompetently.Exceptashereindisclosed,nootherpersonhasprovidedmewithsignificantprofessional
assistanceinthecompletionofthisappraisalassignment.
7. TheAppraisalInstituteofCanadahasamandatoryRecertificationProgramfordesignatedmembers.Asatthedateofthisreport,therequirementsofthisprogramhave
beenfulfilled.
SUPERVISORYAPPRAISER'SCERTIFICATION:
Ifasupervisoryappraiserhassignedthisappraisalreport,heorshecertifiesandagreesthat"Idirectlysupervisedtheappraiserwhopreparedthisappraisalreportand,having
reviewedthereport,agreewiththestatementsandconclusionsoftheappraiser,agreetobeboundbytheappraiser'scertificationandamtakingfullresponsibilityforthe
appraisalandtheappraisalreport.PROPERTYIDENTIFICATION:

Address:...................................................................... City:..................................... Province:.................................. PostalCode:.....................


LegalDescription:...............................................................................................................................................................................................................
ASARESULTOFMYAPPRAISALANDANALYSISOFALLAPPLICABLEDATAANDRELEVANTFACTORSTHERETO,ITISMYOPINIONTHATTHESUBJECTPROPERTYISESTIMATED
TOHAVEAVALUERANGEOF

354

Chapter15:ApplicationAnalysisTheProperty

From$
Asat

......................................................................................................

To$.....................................................................................................................................

(EffectiveDateoftheAppraisal)

APPRAISER:
Signature:......................................................................................................
Name: ......................................................................................................
Designation:..................................................................................................
Datesigned:..................................................................................................
LicenseInfo(whereapplicable):...................................................................
NOTE:Forthisappraisaltobevalid,anoriginalorEDIsignatureisrequired.

SUPERVISORYAPPRAISER:(ifapplicable)
Signature:...........................................................................................................................
Name:.................................................................................................................................
Designation:.......................................................................................................................
Datesigned:.......................................................................................................................
LicenseInfo(whereapplicable):.........................................................................................

Chapter15:ApplicationAnalysisTheProperty

355

Figure92FullAppraisalReport

FullAppraisalReport

RESIDENTIALAPPRAISALREPORT
"FULL"FORM
ClientRef.#:.............................................................. ...................................................................................................... File#:............................................................................
Client:........................................................................ AddressofProperty:................................................................... Appraiser:......................................................................
Attention:.................................................................. ...................................................................................................... Company:.....................................................................
Address:..................................................................... ...................................................................................................... Address:........................................................................

........................................................................... ...................................................................................................... .......................................................................................


Email:....................................................................... ...................................................................................................... Email:..........................................................................
Phone:....................................................................... Province:..................................................................................... Phone:..........................................................................
Fax: ......................................................PostalCode: ...............................................................................................Fax:
ApplicantName:.................................................................................................................................................................................................................................................................

Thesesections
arethesameas
theDriveby
appraisal

PROPERTY&NEIGHBOURHOODDATA
LEGALDESCRIPTION:.........................................................................................................................................................................................................................................................

MUNICIPALITYANDDISTRICT:..........................................................................................................................................................................................................................................
ASSESSMENT:LAND$......................................... IMP$......................... TOTAL$................................. year...................... TAXES$...................... year...................

year...................................................................

PURPOSEOFAPPRAISAL:
ToestimatemarketvalueorOther(describe)......................................................................................................................................
INTENDEDUSEOFAPPRAISAL:FinancingorOther(describe).............................................................................................................................................................................
PROPERTYRIGHTSAPPRAISED:
FeeSimple
Leasehold
Condominium
Cooperative
Other(describe)...............................
Isthesubjectafractionalinterest,physicalsegmentorpartialholding?
No
Yes(Ifyes,seecommentselsewhereinthisreport)
OCCUPIEDBY:
Owner
Tenant
Vacant
HIGHESTANDBESTUSE:
Asimprovedor
Other(describe).......................................................................................................
Note:IfHighestandBestUseisnotthecurrentuse,ornottheusereflectedinthereport,seecommentsattached.
NATUREOFDISTRICT
TRENDOFDISTRICT
CONFORMITYOFSUBJECT
ESTIMATEDAGEOFSUBJECT
AVERAGEPROPERTYAGE
Residential
Improving
AGE:

Years

Rural
Stable
NewerOlderSimilar

DISTRICT:
Commercial/Industrial
Transition
CONDITION:
SUPPLY
to.years
Mixed
Deteriorating
NewerOlderSimilar
GoodFairPoor

SIZE:

IMMEDIATEAREA:
Comments..............................
Other

LargerSmallerSimilar
DEMAND
to.years
GoodFairPoor

AREABUILTUP
Comments:...........................................
.%

DISTANCETO:
PRICERANGEOFPROPERTIES:
ElementarySchool........................................
Jr.Secondary....................................................
INGENERALDISTRICT
HighSchool....................................................
Downtown........................................................
$ .....................to$
PublicTransportation....................................
ShoppingFacilities............................................
INIMMEDIATEAREA
Other.............................................................
$ .....................to$
SUMMARY:Includesmarketappeal,apparentadverseinfluencesinarea,ifany(e.g.railroadtracks,unkemptproperties,majortrafficarteries,hydrofacilities,anticipatedpublic
orprivateimprovements,commercial/industrialsites,landfillsites,etc.)........................................................................................................................................................................

SITEDESCRIPTION
SITEDIMENSIONS:............................................................................ SITEAREA:..................................................... CONFIGURATION:..............................................................
TOPOGRAPHY:..................................................................................
FEATURES:
UTILITIES:
DRIVEWAY:
PavedRoad
GravelRoad
Telephone
CommunalWell
Private
Concrete
Sidewalk
Curbs
NaturalGas
SanitarySewer
Mutual
Stone
StreetLights
Cablevision
Propane
SepticSystem
Single
Asphalt
Comments:..........................

MunicipalWater
StormSewer
Double
Gravel

PrivateWell
OpenDitch
None

Other........................

Comments:....................

PARKING:

ELECTRICAL:

LANDSCAPING:

Garage
Carport
Underground
Overhead
Excellent
Good
Driveway
None
Other........................

Average
Fair
Other
Poor
None
CURBAPPEAL:
EASEMENTS:

Excellent
Good
Average
Utility
Access

Fair
Poor
Other........................................................................

ZONING:.............................................................................................................................................................................................................................................................................
PRESENTUSE:...............................................................................................
DOESITCONFORMTOCURRENTZONING? YesNo(seecomments)
COMMENTS:(Includesanypositiveandnegativefeaturessuchasconformitywithzoning,effectsofknowneasements,knownrestrictionsontitle,suchasjudgmentsorliens,
effectsofassemblage,anyknowndocumentationofenvironmentalcontamination,etc.)

DESCRIPTIONOFIMPROVEMENTSEXTERIOR
YearBuilt(est'd):...................................................................
EffectiveAge:..........................................
RemainingEconomicLife(est'd):.............................................
ConstructionComplete:........................................................
PercentageComplete:............................................................................................................................................
HoldbackRecommended:YesNo............Comments:............................................................................................................................................................................................
FLOORAREA:
BASEMENT:
DESIGN:
EXTERIORFINISH:
Source..................................................
Full
OneStorey111/2Storey
BrickVeneer
Main.....................................................
Partial
SplitLevel2Storey
SolidBrick
Second..................................................
CrawlSpace

StoneVeneer
Third.....................................................
TotalArea:.............................................
Other:.....................................................
SolidStone
Total.....................................................
Sq.M.....Sq.Ft...............................

Stucco
Sq.M....Sq.Ft...............................

ROOFING:
Woodsiding

TYPEOFBUILDING:
AsphaltShingle
AluminumSiding
CONSTRUCTION:
Detached
WoodShingle
VinylSiding
WoodFrame
Semidetached
Tar&Gravel
Insulbrick
Brick
Row/Townhouse
Metal
Other.....................................................
Stone
Apartment
Other.......................................................

Concrete
Other.....................................................
Approx.Age............................................

Other....................................................

Source:....................................................

Thesesections
aremuchmore
detailedthanthe
Driveby
appraisal

356

Chapter15:ApplicationAnalysisTheProperty

WINDOWSASH/GLAZING:
UFFIAPPARENT:
OVERALLEXTERIORCONDITION:

No
Good
Average

Yes
................................................
BelowAverage
Poor
Comments:.........................................................................................................................................................................................................................................................................

RESIDENTIALAPPRAISALREPORT
"FULL"FORM(Cont'd)
DESCRIPTIONOFIMPROVEMENTSINTERIOR
WALLS:
FINISH:
CEILINGS:
OVERALLINTERIORCOND:
Drywall

.........................................................

Good
Fair
Plaster

Average
Poor

Paneling

Other...................................................

BATHROOMS(#):

FOUNDATIONWALLS:

HEATING:
PouredConcrete
.2pc.
Good
BUILTINS&EXTRAFEATURES:
.3pc.
Average
ForcedAir
ConcreteBlock
Baseboard
GarbageDisposal
.4pc.
Poor
Oven
ConcreteSlab
HotWater
Brick/Stone
.5pc.
Custom
Other........................................................
Dishwasher

Stove

FuelType.................................................
INSULATION:

WATERHEATER:
CentralAir
FLOORING:
Ceiling
Basement
Gas
AirCleaner
Walls
Crawlspace
WWCarpet
SheetVinyl
Electric
Vacuum
VinylTile
Other........................................................
Whirlpool
Other........................................................ Softwood
PLUMBINGLINES:
Hardwood
Ceramic

SwimmingPool
Copper
PVC/Plastic
Linoleum
BEDROOMS(#):
Sauna
Other.......................................................
Galvanized
ABS
.Large
.Small
Solarium

.Average
Skylights

CLOSETS:
Fireplace(s)
FLOORPLAN:
ELECTRICAL:
GarageOpener
Good
Fair
Good
Fair
Fuses
Breakers
SecuritySystem
Average
Poor
Poor
Comments:............................................... Average
Other........................................................

Ratedcapacityofmainpanel:

Amps

BASEMENTFINISHES,UTILITY:..........................................................................................................................................................................................................................................

GARAGES/CARPORTS:.......................................................................................................................................................................................................................................................
DECKS,PATIOS,OTHERIMPROVEMENTS:........................................................................................................................................................................................................................

....................................................................................................................................................................................................................................................................................
COMMENTS(Building,appearance,quality,condition,services,extras,anticipatedpublicorprivateimprovements,etc.):........................................................................................

ROOMALLOCATION

COSTAPPROACH

MAIN
SECOND
THIRD
BASEMENT
SourceofCostData:
ManualContractorOther
TotalRooms

LandValue...................

$
Entrance
Building........................
CostNew:
DepreciatedCost:

Living
Cost
.
@$

Dining
Garage.........................
$

Kitchen
BasementFinish..........
$
$

FullBath

$
$

PartBath
OtherExtras.................
$
$

Bedroom

$
$

Family
TotalReplacementCost
$
$

Laundry

$
$

Others
Less:AccruedDep..%
$
$ .............................

IndicatedValue............

VALUEBYCOSTAPPROACH(rounded)
$

NOTE:Theconstructioncostestimatescontainedhereinwerenotpreparedforinsurancepurposesandareinvalidforthatuse.TheCostApproachisnotapplicablewhen
appraisingstratatypedwellingunits.

DIRECTCOMPARISONAPPROACH
ITEM
SUBJECTPROPERTY
NO.1
NO.2
NO.3
Desc.Adjmt.
Desc.Adjmt.
Desc.Adjmt.
Address

MLSListing#(ifapplicable)

#ofDaysonMarket

DateofSale

SalePrice

/
SiteSize

SizeL.F.A.

Age/Condition
/
/

BuildingType&Style

Rooms/Bedrooms/Baths

/
/
//

//

//

Basement

Garage/Parking

Other

AdjustedValues

Reconciliation/Conclusions:...............................................................................................................................................................................................................................................

VALUEBYTHEDIRECTCOMPARISONAPPROACH(rounded):$.......................................................................................................................................................................................
FINALESTIMATEOFVALUE/COMMENTONREASONABLEEXPOSURETIME:................................................................................................................................................................

Thesesections
providemuch
moredetailthan
theDriveby
appraisal

Thecost
approachis
included

Chapter15:ApplicationAnalysisTheProperty

357

HistoryandanalysisofknowncurrentAgreementsforSale,priorsales,options,listingsormarketingoftheSubjectinthepastyear:
(Includingsourcesofthedataandinformation):................................................................................................................................................................

Thisappraisalreportrepresentsthefollowingvalue(ifnotcurrent,seecomments):
CurrentRetrospectiveProspective
Updateofreportcompleted...........................................................................................................................................................................................

RESIDENTIALAPPRAISALREPORT
"FULL"FORM(Cont'd)
SCOPEOFTHEREPORT,DISCLOSURES&DEFINITIONS
SCOPEOFTHEREPORT:
Thescopeoftheappraisalencompassestheduediligenceundertakenbytheappraiser(consistentwiththetermsofreferencefromtheclient,thepurposeandintendeduseof
thereport)andthenecessaryresearchandanalysistoprepareareportinaccordancewiththeCanadianUniformStandardsofProfessionalAppraisalPracticeoftheAppraisal
InstituteofCanada.Thefollowingcommentsdescribetheextentoftheprocessofcollecting,confirmingandreportingdataanditsanalysis,describerelevantproceduresand
reasoningdetailssupportingtheanalysis,andprovidethereasonfortheexclusionofanyusualvaluationprocedures.

DEFINITIONOFMARKETVALUE
Themostprobablepricethatapropertyshouldbringinacompetitiveandopenmarketunderallconditionsrequisitetoafairsale,thebuyerandsellereachactingprudently
andknowledgeablyandassumingthepriceisnotaffectedbyunduestimulus.
Note:Ifotherthanmarketvalueisbeingappraised,seecommentsattached.

DEFINITIONOFHIGHESTANDBESTUSE
Thereasonablyprobableandlegaluseoftheproperty,thatisphysicallypossible,appropriatelysupported,andfinanciallyfeasible,andthatresultsinthehighestvalue.

ASSUMPTIONSANDLIMITINGCONDITIONS

Thecertificationthatappearsintheappraisalreportissubjecttothefollowingconditions:

ORDINARYASSUMPTIONS&LIMITINGCONDITIONS
1. Thereportispreparedattherequestoftheclientandforthespecificusereferredtoherein.Itisnotreasonableforanyotherpartytorelyonthisappraisalwithoutfirst
obtainingwrittenauthorizationfromtheclient,theauthororanysupervisoryappraiser,subjecttothequalificationinparagraph10below.Liabilitytoanypersonotherthanthe
client,designatedintendedusersandthosewhoobtainwrittenconsentisexpresslydeniedand,accordingly,noresponsibilityisacceptedforanydamagesufferedbyanysuch
personasaresultofdecisionmadeoractionsbasedonthisreport.Diligencebyallintendedusersisassumed.

2. Becausemarketcondition,includingeconomic,socialandpoliticalfactors,changerapidlyand,onoccasion,withoutwarning,themarketvalueestimateexpressedasof
thedateofthisappraisalcannotberelieduponasofanyotherdateexceptwithfurtheradvicefromtheappraiserconfirmedinwriting.

3. Theappraiserwillnotberesponsibleformattersofalegalnaturethataffecteitherthepropertybeingappraisedorthetitletoit.Noregistryofficesearchhasbeen
performedandtheappraiserassumesthetitleisgoodandmarketableandfreeandclearofallencumbrances,includingleases,unlessotherwisenotedinthisreport.The
propertyisappraisedonthebasisofitbeingunderresponsibleownership.

4. Thesubjectpropertyispresumedtocomplywithgovernmentregulationsincludingzoning,buildingcodesandhealthregulationsand,ifitdoesn'tcomply,itsnon
compliancemayaffectmarketvalue.

5. Nosurveyofthepropertyhasbeenmade.Anysketchintheappraisalreportshowsapproximatedimensionsandisincludedonlytoassistthereaderofthereportin
visualizingtheproperty.

6. Thisreportiscompletedonthebasisthattestimonyorappearanceincourtconcerningthisappraisalisnotrequiredunlessspecificarrangementstodosohavebeenmade
beforehand.Sucharrangementswillinclude,butnotnecessarilybelimitedto,adequatetimetoreviewtheappraisalreportanddatarelatedtheretoandtheprovisionof
appropriatecomparisons.

7. Unlessotherwisestatedinthisreport,theappraiserhasnoknowledgeofanyhiddenorunapparentconditionsoftheproperty(includingbutnotlimitedto,itssoils,
physicalstructure,mechanicalorotheroperatingsystems,itsfoundation,etc.)oradverseenvironmentalconditions(onitoraneighbouringproperty,includingthepresenceof
hazardouswastes,toxicsubstances,etc.)thatwouldmakethepropertymoreorlessvaluable.Ithasbeenassumedthattherearenosuchconditionsunlesstheywereobserved
atthetimeofinspectionorbecameapparentduringthenormalresearchinvolvedincompletingtheappraisal.Thisreportshouldnotbeconstruedasanenvironmentalauditor
detailedpropertyconditionreport,assuchreportingisbeyondthescopeofthisreportand/orthequalificationsoftheappraiser.Theauthormakesnoguaranteesor
warranties,expressorimplied,regardingtheconditionofthepropertyandwillnotberesponsibleforanysuchconditionsthatdoexistorforanyengineeringortestingthat
mightberequiredtodiscoverwhethersuchconditionsexist.

8. Theappraiserobtainedinformation,estimatesandopinionsthatwereusedinthisreportfromsourcesconsideredtobereliableandaccurateandbelievesthemtobetrue
andcorrect.Theappraiserdoesnotassumeresponsibilityfortheaccuracyofitemsthatwerefurnishedbyotherparties.

9. Theopinionsofvalueandotherconclusionscontainedhereinassumesatisfactorycompletionofanyworkremainingtobecompletedinagoodandworkmanlikemanner.
Furtherinspectionmayberequiredtoconfirmcompletionofsuchwork.

10. ThecontentofthisreportareconfidentialandwillnotbedisclosedbytheauthortoanypartyexceptasprovidedforbytheprovisionsoftheCanadianUniformStandards
ofProfessionalAppraisalPractice("theStandards")and/orwhenproperlyenteredintoevidenceofadulyqualifiedjudicialorquasijudicialbody.

11. Theappraiserhasagreedtoenterintotheassignmentasrequestedbytheclientnamedinthereportfortheusespecifiedbytheclient,whichisstatedinthereport.The
clienthasagreedthattheperformanceofthisappraisalandthereportformatareappropriatefortheintendeduse.

12. Writtenconsentfromtheauthorandsupervisoryappraiser,ifapplicable,mustbeobtainedbeforeanypartoftheappraisalreportcanbeusedforanypurposebyanyone
excepttheclientandotherintendedusersidentifiedinthereportand,wheretheclientisthemortgagee,itsinsurerandtheborrower,ifheorshepaidtheappraisalfee.
Writtenconsentandapprovalmustalsobeobtainedbeforetheappraisal(oranypartofit)canbealteredorconveyedtootherparties,includingmortgagesotherthanthe
clientandthepublicthroughprospectus,offeringmemoranda,advertising,publicrelations,news,salesorothermedia.

13. Other(includinganyotherExtraordinaryAssumptionsandLimitingConditionsinvolvedinthisappraisal):

358

Chapter15:ApplicationAnalysisTheProperty

RESIDENTIALAPPRAISALREPORT
"FULL"FORM(Cont'd)
EXTRAORDINARYASSUMPTIONS&LIMITINGCONDITIONS:
Anextraordinaryassumptionisahypothesiseithersupposedorunconfirmed,which,ifnottrue,couldaltertheappraiser'sopinionsandconclusions(e.g.anabsenceof
contaminationwheresuchcontaminationispossible,thepresenceofamunicipalsanitarysewerwhereunknownoruncertain).Anextraordinarylimitingconditionisa
necessarymodificationorexclusionofaStandardRule,whichmustbeexplained,justifiedbytheappraiser(e.g.exclusionofarelevantvaluationapproach).Theappraisermust
concludebeforeacceptingtheassignmentwhichinvolvesinvokinganExtraordinaryLimitingConditionthatthescopeoftheworkappliedwillresultinopinionsandconclusions
whicharecredible.Bothmustaccompanystatementsofeachopinion/conclusionsoaffected.

HYPOTHETICALCONDITIONS:
Hypotheticalconditionsmaybeusedwhentheyarerequiredforlegalpurpose,forpurposesofreasonableanalysisorforpurposesofcomparison.Commonhypothetical
conditionsincludeproposedimprovementsandprospectiveappraisals.ForeveryHypotheticalCondition,anExtraordinaryAssumptionisrequired(seeabove).Ananalysisbased
onahypotheticalconditionmustnotresultinanappraisalreportthatismisleadingorthatreliesonactionsoreventsthatwouldbeillegalorimprobablewithinthecontextof
theassignment.Followingisadescriptionofeachhypotheticalconditionappliedtothisreport,therationaleforitsuseanditseffectontheresultoftheassignment.

JURISDICTIONALEXCEPTION:
TheJurisdictionalExceptionpermitstheappraisertodisregardapartorpartsoftheStandardsdeterminedtobecontrarytolaworpublicpolicyinagivenjurisdictionandonly
thatpartshallbevoidandofnoforceoreffectinthatjurisdiction.Thefollowingcommentsidentifythepartorpartsdisregarded,ifany,andthelegalauthorityjustifyingthese
actions.

CERTIFICATION
Icertifythat,tothebestofmyknowledgeandbelief:
1. Thestatementsoffactcontainedinthisreportaretrueandcorrect.

2. Thereportedanalyses,opinionsandconclusionsarelimitedonlybythereportedassumptionsandlimitingconditionsandaremypersonal,impartialandunbiased
professionalanalyses,opinionsandconclusions.

3. Ihavenopast,presentorprospectiveinterestinthepropertythatisthesubjectofthisreportandIhavenopersonalinterestorbiaswithrespecttothepartiesinvolved
withthisassignment,exceptasspecifiedherein.

4. Myengagementinthisassignmentisnotcontingentupondevelopingorreportingapredeterminedresult,upontheamountofvalueestimate,uponadirectioninvalue
thatfavoursthecauseoftheclient,upontheattainmentofastipulatedresultortheoccurrenceofasubsequentevent.

5. Myanalyses,opinionsandconclusionsweredevelopedandthisreporthasbeenprepared,inconformitywiththeCanadianUniformStandardsofProfessionalAppraisal
Practice.

6. Ihavetheknowledgeandexperiencetocompletethisassignmentcompetently.Exceptashereindisclosed,nootherpersonhasprovidedmewithsignificantprofessional
assistanceinthecompletionofthisappraisalassignment.

7. TheAppraisalInstituteofCanadahasamandatoryRecertificationProgramfordesignatedmembers.Asatthedateofthisreport,therequirementsofthisprogramhave
beenfulfilled.

SUPERVISORYAPPRAISER'SCERTIFICATION:
Ifasupervisoryappraiserhassignedthisappraisalreport,heorshecertifiesandagreesthat"Idirectlysupervisedtheappraiserwhopreparedthisappraisalreportand,having
reviewedthereport,agreewiththestatementsandconclusionsoftheappraiser,agreetobeboundbytheappraiser'scertificationandamtakingfullresponsibilityforthe
appraisalandtheappraisalreport.

PROPERTYINDENTIFICATION:

Address:...................................................................... City:..................................... Province:.................................. PostalCode:.....................


LegalDescription:...............................................................................................................................................................................................................

ASARESULTOFMYAPPRAISALANDANALYSISOFALLAPPLICABLEDATAANDRELEVANTFACTORSTHERETO,ITISMYCONCLUSIONTHATTHEMARKETVALUEOFTHE
INTERESTINTHESUBJECTPROPERTYDESCRIBEDIS:
$ ....................................................................................................................................................................................................................................................................................
At

(EffectiveDateoftheAppraisal)

APPRAISER:
SUPERVISORYAPPRAISER:(ifapplicable)
Signature:......................................................................................................
Signature:...........................................................................................................................
Name: ......................................................................................................
Name:.................................................................................................................................
Designation:..................................................................................................
Designation:.......................................................................................................................
Datesigned:..................................................................................................
Datesigned:.......................................................................................................................
LicenseInfo(whereapplicable):...................................................................
LicenseInfo(whereapplicable):.........................................................................................

NOTE:Forthisappraisaltobevalid,anoriginalorEDIsignatureisrequired.

ATTACHMENTS:
AdditionalSales
SketchAddendum
NarrativeAddendum

PhotoAddendum MapAddendum
Assumptions/LimitingConditions

Other
...............................................Other
.....................................................Other

Chapter15:ApplicationAnalysisTheProperty

359

SUBJECTPHOTOPAGE

LENDER/CLIENT:................................................

ADDRESS:..........................................................

TEL:().........................................................

ADDRESSOFPROPERTY

APPRAISER:........................................................

ADDRESS:..........................................................

TEL:()........................................................

PHOTO

PHOTO

PHOTO

SubjectFront

SalePrice:......................................................................................
LivableFloorArea:........................................................................
TotalRooms:................................................................................
TotalBedrooms:...........................................................................
TotalBathrooms:..........................................................................
Site:..............................................................................................
Age:..............................................................................................

SubjectRear

SubjectStreet

360

Chapter15:ApplicationAnalysisTheProperty

15.4 Key Terms and Definitions

AccreditedAppraiserCanadianInstitute,ProfessionalAppraiser(AACI,P.App)
ThehighestdesignationawardedtoanappraiseroftheAppraisalInstituteofCanada

AdjustedValue
Thevalueofacomparablepropertyaftertheappraiserhasmadeadjustmentsbycomparingthe
comparablepropertytothesubjectproperty

Adjustments
Theamount,indollars,ofcharacteristicswhichdifferentiatebetweenacomparableproperty
andasubjectproperty

Appraisal
Areportproducedbyadesignatedappraiserthatdeterminesthemarketvalueofaninterestin
landusingacceptedvaluationtechniquesbasedonthepurposeoftheappraisalforaspecific
client

AppraisalInstituteofCanada(AIC)
Anationalprofessionalorganizationthatdesignatesandrepresentsprofessionalrealestate
appraisersandvaluationconsultantsnationwide

Appraiser
Theaccreditedindividualwhocompletestheappraisalreport.Onlyreportsfromaccredited
appraisersareacceptableinthemortgageindustry.

AutomatedValuationModel(AVM)
Acomputerprogramthattypicallyusespublicrecorddataonresidentialpropertiestocalculate
themarketvalueofaproperty

CanadianNationalAssociationofRealEstateAppraisers(CNAREA)
Anational,notforprofit,independentassociationthatcertifiesandregulatesrealproperty
appraisersinCanada

CanadianRealEstateAssociation(CREA)
OneofCanada'slargestsingleindustrytradeassociations,representingmorethan92,000real
estatebrokers/agentsandagentsworkingthroughmorethan100realestateBoardsand
Associations

CanadianResidentialAppraiser(CRA)
AdesignationawardedtoanappraiserbytheAppraisalInstituteofCanada

CostApproach
Anapproachtocalculatingthevalueofapropertybydeterminingthereplacementcostofa
building,lessdepreciationplusthecostoftheland

DesktopAppraisal(alsoreferredtoasaSalesDataReport)
AtypeofappraisalreportthatdeterminesavalueforthesubjectpropertybasedonMLS
reports,includingdataonrecentsalesanddataonrecentlistings

Chapter15:ApplicationAnalysisTheProperty

361

DirectComparisonApproach
Anapproachtocalculatingthevalueofapropertybycomparingittosimilarpropertiesthat
haverecentlysold

DrivebyAppraisal
AtypeofappraisalreportthatcombinesMLSdataaswellasaninspectionoftheexteriorofthe
subjectproperty

emili
CMHCsautomatedunderwritingsystem

excel
GenworthFinancialsautomatedunderwritingsystem

FullAppraisal
AtypeofappraisalreportthatcombinesMLSdatawithafullinteriorandexteriorinspectionof
thesubjectproperty

IncomeApproach
Anapproachtocalculatingthevalueofanincomeproducingpropertythroughtheusageofthe
netoperatingincomeandcapitalizationratetypicalforthattypeofpropertyandtheareain
whichitislocated

MarketValue
Theamount,inCanadianfunds,forwhichapropertyshouldexchangeonthedateofvaluation
betweenawillingbuyerandawillingsellerinanarmslengthtransactionafterproper
marketing,wherethebuyerandsellerhaveeachactedknowledgably,prudently,andwithout
pressure

RealEstateInstituteofCanada(REIC)
Anassociationofprofessionalsthathasbeenprovidingadvancedrealestateeducationand
certifyingspecialistsinrealestatesince1955

RiskAssessmentTool
Anautomatedunderwritingprogram

362

Chap
pter15:ApplicationAnalyssisTheProp
perty

15.5
5 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1.

2.

3.

4.

5.

6.

7.

8.

9.

Lisstthedifferen
ntpurposesfo
orwhichanaappraisalmighhtberequired.
Wh
hatistherole
eoftheappraaiserintheap
ppraisalproceess?
Wh
hatorganizattionsawarddesignationstoappraisers??
Wh
hatarethediifferentdesiggnationsthatanappraiser mayhave?
owdoesmarkketvaluediffe
erfromthepriceforwhichhapropertym
maybesold?
Ho
Disscussthethre
eeapproache
estocalculatingthemarkeetvalueofap
propertyanddescribethe
mo
ostrelevantaapproachformortgagefinaancing.
emadeinthe
edirectcompparisonappro
oach.
Explainhowadjjustmentsare
DisscussthepositivesandneggativesofAV
VMs.
Wh
hatisthemostdetailedtyypeofappraissalreportanddhowdoesittdifferfromttheothertwo
o
typ
pesofappraissalreports?

Chapter16:ChoosingaLender

363

Chapter 16: Choosing a Lender

LearningOutcomes
Successfulunderstandingoftheconceptspresentedinthischapterwillenablethelearnerto:
Differentiatebetweenprime,subprimeandprivatelenders
Interpretalendersproductandratesheet
Understandthefactorsthatmustbeconsideredwhenchoosingalender

Introduction

Oncethemortgageagenthasdecidedonthebestproducttypeforhisorherclient,itisnow
necessarytochoosealender.Therearedozensoflendersinthemortgagemarketandchoosing
onespecificlendertosubmitaclientsapplicationtocanbetimeconsumingandconfusingif
themortgageagentisnotknowledgeableonlendersproducts,servicesandrates.

Inthischapter,thedifferenttypesoflenderswillbeexploredaswellasvaryinglenders
guidelines.Sincelendershavedifferentmethodsandstylesofpromotingtheirproductsa
sampleofalendersproductsheetwillbereviewed.However,forthemortgageagenttobe
fullyawareoflendersproducts,servicesandrates,itisnecessaryforhimorhertodevelop
relationshipswiththoselenders.

Forthemortgageagentwhoisjoininganestablishedmortgagebrokerage,thoserelationships
aretypicallyalreadyinplace.Inthiscircumstancethemortgageagentneedstoensurethathis
orhercontactinformationhasbeenprovidedtothelenderswithwhomthebrokeragedeals.
Themortgageagentneedstoreviewallofthecurrentinformationthatthebrokeragehason
thoselenders.

Itisalsoimportanttonotethat,whilemostlenderswillhaverelationshipswithallmortgage
brokerages,somewillnot.Certainlenderswillonlydealwithspecificmortgagebrokerages.
Beforejoiningamortgagebrokerage,themortgageagentshouldsatisfyhimselforherselfthat
themortgagebrokeragewhichheorsheisjoininghasrelationshipswithasufficientnumberof
lenderstobecompetitiveinthemarket.Forthenewmortgageagent,thiscanonlybe
accomplishedbyinterviewingwithseveraldifferentmortgagebrokeragestodeterminethebest
companywithwhichtobeaffiliated.

16.1 Types of Lenders

TheOntariomortgageindustry,thelargestinCanada,hasdozensoflendersfromwhichthe
mortgageagentmaychoose.Itisimportantforthemortgageagenttoknowwhothoselenders
areandtheproducts,servicesandratesofferedbyeachtodeterminethebestlenderforhisor
herclient.

ManylendershaveadedicatedmortgageagentsalesforcecomprisedofBusinessDevelopment
Managers(BDMs)orBusinessDevelopmentOfficers(BDOs).Thereareothertitlesthatsome
lendersprovidetotheirsalesforcebutthetermsBDMandBDOaremostcommon.These
individualsaretaskedwithobtainingbusinessfrommortgagebrokeragesandarenormallya

364

Chapter1
16:Choosing aLender

dersproductss,servicesandrates.Inad
ddition,aBDM
M
valuablesourceofinformationontheirlend
canofftenassistam
mortgageage
enttohavean
napplication approvedbyyliaisingbetw
weenthe
mortggageagentan
ndtheunderw
writer.

Lende
ersaretypicallycategorize
edbythetype
eofbusiness inwhichtheyyspecialize,eeitherprime
mortggagelendingorsubprimemortgagelen
nding.

Prim
me Mortg age Lend
ding
Prime
emortgagele
endingisdefin
nedaslendinggtoclientsw
whoareconsid
deredtobep
prime
borro
owers.Aprim
meborroweristypicallyanindividualw hohasexcellentcredit,prrovable
incom
meandstableemploymentt.Thistypeo
oflendingisooftenreferred
dtoas,Alen
ndingor
Prim
melending.

Them
majorityofCanadiansfallin
ntothiscateggory,asiseviddencedbythhevolumesoffmortgage
transaactionscomp
pletedbyprim
melenders.Typicalprime lendersincludethosewho
odealdirectlyy
withtthepublicsucchasChartere
edBanks,Tru
ustCompanieesandCreditUnions.Therrearealso
severallenderswh
hodealwithtthepubliconlythroughmoortgagebrokeeragesandth
hese
institu
utionsarenormallyreferre
edtoasnondeposittakinnginstitutionss.

Some
eprimelendersalsodealw
withborrowerrswho,altho ughnotaprimeborrowerr,arenota
subp
primeborrowereither.Theseborrowerrsaretypicalllyreferredto
oasAltAborrrowers.An
AltAborrowerisn
normallyanin
ndividualwho
osecreditmaaybegoodaltthoughnotexxcellent,and
whom
maynotbeab
bletoproveh
hisorherinco
omebutisstiillconsidered
dagoodriskb
bytheprime
lende
er.

Sub
b-Prime Mortgage
M
Lending (also refferred to as Self--Insured
Len ding)
Thesu
ubprimemortgagemarke
ethasdevelopedinCanad aoverthepaastseveralyeearsin
respo
onsetoCanad
dianswithspe
ecificmortgaggefinancingnneeds,andwhoarenotseervicedbythee
lende
ersintheprim
memortgagemarket.

ncreasingsub
bprimemortggagemarketp
providestheabilityforbo
orrowerswhohavebeenor
Thein
whow
wouldbedeclinedbyprim
melenderstoobtainfinanccing,eitherto
opurchaseah
homeor
refinaancetheirexistingmortgagge.Thismarkkethaseffecttivelyincreasedthenumberofpotentiaal
home
ebuyersbyprrovidingfinan
ncingthatwo
ouldotherwiseebeunavailaable.Althougghthisis
viewe
edasapositivvedevelopme
entinthemo
ortgagemarkeet,ithasalsoresultedinb
borrowers
beingapprovedwh
hoperhapssh
houldnotbe..

Thetyypicalsubprimeborrowerrisanindividualwhomayyhaveacomb
binationofthefollowing
characteristics:
beingbehindinhisorher paymentson
noneormoreecreditcardss,
Currentpoorcrreditsuchasb
loaansorotherd
debts
Lesssthantwoyyearsathisorrhercurrentjjob
Selfemployed
Haasapreviousbankruptcy
Haaspreviouspo
oorcreditwitthnoreestab
blishedcreditt
Re
equireshighLTVfinancing.

Chapter1
16:Choosing aLender

36
65

enosinglecharacteristicfrromtheabovvelistmaybeenoughforaaprimelendeertodecline
While
anapplicantsapplicationforfin
nancing,acombinationoffthosecharaccteristicstypicallywill
resulttinbeingdeclinedbyapriimelender.Itthastherefo rebecomeneecessarytop
provide
poten
ntialborrowerswithaltern
nativefinancin
ng,whichisoofferedbysub
bprimelendeers.These
lende
ersnormallycchargeahighe
errateofinte
erestthantheeirprimecounterpartsand
dmaychargee
thebo
orroweralen
ndersfee.Alendersfeeiisafeecharg edbythelen
nder,normallyypaidon
closin
ngbytheborrrowerfromth
hemortgageproceeds,asabonusforp
providingthefinancing.

elendersofte
enrefertothe
eirlendersfe
eeasaselfinnsurancefeee,andmanyw
willcall
These
themsselvesselfin
nsuredlende
ers.Thissimp
plyreferstotthefactthatttheydonoto
offerdefault
insure
edmortgagess,rathertheychargealendersfeethattisdesignedtooffsettheriskofdefaullt
byab
borrower.Maanyofthesellenderscharggefeessimila rtothatofth
hedefaultinssurers,butitiis
imporrtanttonotethattheterm
mselfinsure
edissimplyuusedasawayyofexplaininggtheir
lende
ersfees,asth
heselendersd
donotusean
nytypeofdeffaultinsurancce.

The Private Mortgage


e Market
Privattelendersare
eclassifiedassindividualso
orgroupsofinndividualswh
hoprovidemortgage
financcing.Thesein
ndividualshavemoneytoinvestandhaavedecidedtthatmortgageefinancing
offerssaprofitablerateofreturn
n.Thetypicaalprivatelendderwilldealw
withmortgageagentsor
broke
eragesandusethoseindividuals/firmsttolocatepoteentialclients..

Aclientrequiringaaprivatemorrtgagewillgen
nerallynotquualifythrough
haprimeorssubprime
lende
er.Thisclientwillnormallyyhaveequityinhisorher propertyand
dbeabletoo
obtain
financcingtoamaximumof85%
%LTV,depend
dingonthearreainwhichtthepropertyislocated.

nterestthanpprimeandsubprimelendersandwill
Privattelenderswilllchargeahiggherrateofin
normallychargealendersfee.Theprofileo
ofatypicalprrivatemortgaageisaninterrestonly
mortggagewithmo
onthlypaymentsandaone
eyearterm.

Su
uccessTipSubprim
melenderss
Mostsuccessfu
ulmortgageaagentswillhavvebetweenttwoandfourprimeandtw
woandfour
su
ubprimelend
derswithwho
omtheynorm
mallydeal.Byychoosingah
handfuloflen
nderswith
whomtowork,,youwillbecomefamiliarwiththeirguuidelinesanddeveloprelattionshipswith
theirBDMsand
dunderwriterrs.Itis,howe
ever,alsoimpportanttoknowtheotherrlenders
gu
uidelinesincaaseyournorm
mallenderscaannotfunda specifictranssaction.

16.2
2 Unders
standing Lender Guidelines
G
s

Lende
ers,withthee
exceptionofprivatelende
ers,providem
mortgageagen
ntswithsummariesof
theirproducts,serrvicesandrates.Thesedo
ocumentsare oftenreferreedtoasratessheetsand
produ
uctsheetsand
darenormalllycommunicaatedtomortggageagentsvviathelenderrsBDMs,by
emailorareprovid
dedonthelenderswebsitte(ausernam
meandpassw
wordmayberrequiredto
accessthisinformaationonline).Somelende
ershavepackaagesthatdesscribetheirprroductsin
detaillwhileotherssprovidebasiicsummaries.

366

Chapter1
16:Choosing aLender

Prod
duct She ets
Aproductsheetisdesignedtoiinformthemortgageagenntoftheterm
msandconditionsthatmusst
beme
etforapproval,aswellasthefeaturesofthemortgaagebeingdesscribed,inclu
udingthe
maxim
mumLTV,the
eamortization
nandsoon.Whiletheforrmatofprodu
uctsheetsdifffersfrom
lende
ertolender,thefollowingffigureisasam
mpleofaprooductsheetth
hatcontainsttypical
inform
mation.

Figure93SamplePro
oductSheet

ABCLenderInc.ProducttSheet
Purpose
Termss
MortggageAmounts
RateH
Hold/RateDro
op
Amorttization
PrepayymentOptionss
PayoutOptions
LendersFees
PropertyRequireme
ents

Location
Appraisal
GDS/TTDS
Creditt
BeaconScore
Incom
me/Employmen
nt

Meaanstheborrow
wercan
provvidealetterstatingtheir
incomewithoutp
provingit

Downpayment
Payme
entfrequency
PropertyTaxes
Portab
ble
Assum
mable

Meansth
heborrowerccan

provided
documentatio
onto
prove/ve
erifytheirinco
ome

95%
%Purchase
90%
%Refinance
3an
nd5yearfixed
Minimum$50,000
0
00($700,000innGTA)
Maxximum$600,00
45d
days,onetimeratedrop7daayspriortoclosing
25,3
30and 35yearrs
Uptto20%prepaym
mentannuallyy+20%increasseinpaymentssonceperyearr
3mo
onthsinterestortheInteresttRateDifferen
ntial,whicheveerisgreater
2%aaddedtothem
mortgage
Own
nerOccupiedo
only
Singglefamilyupto
oafourplex
High
hrisecondominiums
Hobbyfarmsandrruralpropertieesonexception
nbasis
With
hin25kmradiu
usofpopulatioonof25k
With
hin30kmradiu
usofpopulatioonof30k
Requiredonallapplications.Brookermayorder usingABCsaapprovedlisto
of
Appraisalcostttobepaidbyb
borrower
apprraisersonly.A
NoG
GDS,TDS50%
Goodcredit,minim
mum2yearsh istory,nomajo
orderogatories,bankruptcy
wedover2yeaarsdischarged
allow
80%
%LTVorless:58
85 649
80.1
1to95%LTV:6
650+
StatedIncome:MustmeetTDSrratio.
nesslicense,orr
SelfEmployed:MustproveselfemploymentvviaNOA,busin
ArticclesofIncorpo
oration,etc.In comewillnotbeverified.
Emp
ployed:Lettero
ofemploymen t,excludingsaalary

FullDoc
dbymost
Selfemployed:Basedonlast2yyearsaverageincomeverified
rece
entfinancialstaatementsand mostrecentN
NOAs
Emp
ployed:Mustprovidefullincoomeverificatio
onbymeansoffjobletter,T4s,
NOA
As,etcforpast2years.
Verificationrequirred.Mustshow
w1.5%ofpurcchasepriceforclosingcostsiin
bankkaccountnolaaterthan7bussinessdaysbefforeclosing
Mon
nthly,weekly,b
biweekly
Inclu
udedinmortgaagepayment
Yes
Yes
withapprovaal

36
67

Chapter1
16:Choosing aLender

Rate
e Sheets
Arate
esheetisdesignedtoinformthemortggageagentofftheratechargedonapro
oduct,based
onsuchfactorsastheLTVandttheBeaconorcreditscoree.Whilethefformatofratesheets
differsfromlenderrtolender,th
hefollowingffigureisasam
mpleofarateesheetthatcontains
typicaalinformation
n.

Figure94SampleRa
ateSheet

ABCLenderInc.SampleR
RateSheet

SalariedandBusinessForSelf(B
BFS)RateShe
eet:asofOctoober,2012

SFD
DisaSingleFFamily
ABCLENDEERINC.RATE SHEET
Dwelling
680+
6

650
0
679
9

620
649

600
619

580
599

5405
579

LTV
90.0
0195%
85.0
0190%
75.0
0185%
60.1
175%
06
60%

Rate
R
5.9%
5
5.8%
5
5.7%
5
5.6%
5
5.5%
5

Ratte
7.4
4%
7.3
3%
7.2
2%
7.1
1%
7%
%

Ratee
7.6%
%
7.5%
%
7.4%
%
7.3%
%
7.2%
%

Rate
N/A
8.1%
%
8%
7.9%
%
7.8%
%

Rate
N/A
N/A
8.8%
8.7%
8.6%

Rate
N/A
N/A
N/A
9.1%
8.9%

LTV
90.0
0195%
SFD
85.0
0190%
FullDo
oc
0185%
Salarie
ed/BFS 75.0
5YearTerm 60.1
175%
06
60%

BFSisB
Businessfor

Self,me
eaningself

employed

Rate
R
5.3%
5
5.2%
5
5.1%
5
5.0%
5
4.9%
4

Ratte
6.4
4%
6.3
3%
6.2
2%
6.1
1%
6%
%

Ratee
6.6%
%
6.5%
%
6.4%
%
6.3%
%
6.2%
%

Rate
N/A
7.1%
%
7%
6.9%
%
6.8%
%

Rate
N/A
N/A
7.8%
7.6%
7.6%

Rate
N/A
N/A
N/A
8.1%
7.9%

CreditScore

SFD
Stated
Income
e
Salarie
ed/BFS
5YearTerm

Su
uccessTipIfyoureeunsure...
Ifyouareunsu
urewhetheralenderwillapproveyour clientsapplicationorifyo
ouareunsuree
offtherate,eve
enafterreviewingtheprod
ductandrateesheets,don
notguess!Co
ontacteither
thelendersBD
DMorunderw
writeranddiscusstheclienntwithhimorher.Thiscaansavetime
an
ndeffortandultimatelyyo
ourclient!

368

Chapter1
16:Choosing aLender

16.3
3 Choosiing a Len
nder

Ifthemortgageaggentdetermin
nesthebestp
productforhiisorherclien
ntandonlyon
nelenderin
thein
ndustryofferssthatproductt,thechoiceiisclear.How
wever,thisisn
notalwaysthecase.Inall
circum
mstancesitisbesttorelyo
ontheadvice
eofthebrokeerageforwhicchthemortgaageagent
workss;howeverifthebrokeraggedoesnotsp
pecificallyreccommendaleender,thenth
hemortgage
agenttshouldusethefollowingpointsindeterminingthebestlenderttochoose.
LoantoValue:Whichlender(s)offertheLTVthatthe clientrequirees?
heclientproviidethe
InccomeVerificaation:Whatincomeverificcationisrequuired?Canth
appropriatedoccument(s)?
opertyType:Doestheclie
entspropertyytypemeetthhelendersreequirements??I.e.,ifthe
Pro
clie
enthasarenttalproperty,doesthelend
derhaveare ntalproduct??
Cre
editScore:W
Whatarethellendersrequirements?D oesthelendeerofferadiffferentLTV
basedoncredittscores?Ifso
o,doestheclientqualify?
enderofferstthebesttermsfortheclienntsuchaspreepaymentpriivileges,based
Terms:whichle
heclient?
ontheproductchosenforth
Rates:whichlen
nderoffersth
hebestrateb
basedonthe productchossenforthecliient?
enderprovide
esthequickesstresponsetooanapplicatiionsubmissio
on?
Speed:whichle
Service:whichlenderprovid
desthebestservicetobothhmortgageaagentsandclients?
Re
eputation:whichlenderhaasthebestovverallreputatiioninthemo
ortgageindustry?
Re
elationship:do
oesthemortggageagenthaaveagoodreelationshipwiththe
len
nder/BDM/un
nderwriterthatcreatesloyyaltytothatl ender
Fin
ndersFees:iffeverythinge
elseisequalaandtwoormoorelendersaareappropriatteforthe
clie
ent,whichoffthoselenderrs,ifany,paysthehighest commission??
LoyyaltyProgram
m:ifeverythin
ngelseisequalandtwoorrmorelendersareapprop
priateforthe
clie
ent,whichoffthoselenderrs,ifany,offe
ersaloyaltyoorpointsproggram?

Inallcases,therightlendermu
ustbethelend
derthatisbeestfortheclieent,regardlesssofthe
finderrsfeesorloyyaltyprogram
mthatthelend
dermayorm
maynothave.Byconsisten
ntlydoing
whatisintheclien
ntsbestinterrests,themorrtgageagent willincreasehisorherchancesof
minghighlysu
uccessful.
becom

Pa
auseforcllarification
nLoyaltyyorpointsprogram
Aloyaltyorpoiintsprogramisaprogramprovidedby alenderthattrewardstheemortgage
aggentforfundingmortgagesthroughit.

Chapter16:ChoosingaLender

369

16.4 Key Terms and Definitions

BDM/BDO
BusinessDevelopmentManager/BusinessDevelopmentOfficer.Thesearetwoofthetitles
heldbyrepresentativesoflenderswhoaretaskedwithobtainingbusinessfrommortgage
agents.

BFS
BusinessForSelf.Thistermappliestothoseclientswhoareselfemployed.

O/O
Owneroccupiedproperty

PrimeLending
Referstomortgagelendingtoborrowerswhoareconsideredverygoodrisks

PrivateLender
Aprivatelenderistypicallyanindividualinvestorwithfundswhowouldliketoinvestin
mortgages.Thisindividualwillusuallyinvestthroughhisorherlawyerwhomayhaveclients
requiringmortgagefinancingoramortgageagent.Hisorherpurposemayvarybutnormallyan
investorwillinvestin2ndmortgagesduetotheirhigherrateofreturnwhencomparedto1st
mortgagesandotherpotentialtypesofinvestments.

ProductSheet
Adocumentprovidedbyalenderthatoutlinesthetermsandconditionsofitsproducts

RateDrop
Typicallyreferstothepracticeofdecreasingaclientsmortgagerateafterheorshehasbeen
approvedbutbeforethemortgagetransactionhasclosed,whenthelendersinterestrateon
theproducthasdecreased

RateHold
Typicallyreferstothepracticeofmaintainingarateforaspecificperiodoftime,wherebythe
lenderwillkeeptheclientsmortgagerateattheapprovedamountafterheorshehasbeen
approvedbutbeforethemortgagetransactionhasclosed,whenthelendersinterestrateon
theproducthasincreased

RateSheet
Adocumentprovidedbyalenderthatliststheinterestratesforspecificproducts,basedon
specificterms

SelfInsuredlender
Atermusedtodescribeasubprimelenderthatchargesalendersfee.Thisfeeisoften
comparableinamounttothefeeschargedbydefaultinsurers.Thisfeeisusedbythelenderto
offsetamountslostbyborrowerswhodefaultontheirmortgagesbutisnotanactualinsurance
premiumsincetheselendersdonotusedefaultinsurance

SFD
SingleFamilyDwelling

370

Chapter16:ChoosingaLender

SubPrimeLending
Referstomortgagelendingtoborrowerswhoareconsideredpoorrisksorwhodonotqualify
forprimelending

Chapter1
16:Choosing aLender

37
71

16.5
5 Review
w Questio
ons

AnswerstotheRevviewQuestio
onsarefoundatwww.REM
MIC.ca

Sho
ort Answe
er Questio
ons
1. Disscussthedifferencesbetw
weentheprim
meandsubprrimemortgaggemarket.

2. Disscussthedifferencesbetw
weenprimean
ndsubprimeemortgages.

3. Wh
hatfactorscaancauseabo
orrowertobeconsideredssubprime?

4. Wh
hattypeofbo
orrowerwillttypicallyrequ
uireaprivatemortgage?

hatinformationistypicallyyfoundinale
endersproduuctsheet?
5. Wh

6. Wh
hatinformationistypicallyyfoundinale
endersratessheet?

7. Wh
hatshouldam
mortgageage
entdoifheorsheisunsurreifalender willapprovehisorher
clie
entsapplicattion?

8. Wh
hatfactorsm
mustamortgageagentconsiderwhenchoosingalen
nder?

9. Wh
hichfactorsaaretheleastimportantforramortgageaagentwhencchoosingalen
nder?

10. Whatimpactd
W
doesacreditsscorehaveon
ntheabilityoofaborrowerrtoaccessalenders
pro
oducts?

372

Chapter17:Sub
bmittingtheA
ApplicationanndObtainingaCommitmeent

Chapteer 17: Submit


S
tting the Appllicationn and
Obtaaining a Com
mmitmeent

Lea
arningOutccomes
Succcessfulundersstandingofth
heconceptsp
presentedintthischapterw
willenablethelearnerto:
Discusstheiteemsinanapplicationwhichhmustbeexpplainedintheenotessectioonofthe
ap
pplication
Understandthhedifferencessbetweensubbmittinganaapplicationtooaninstitutionallender
ndaprivatelender
an
ExplaintheimportanceofttheInvestor/LLenderDiscloosure
CompleteanI
C
nv