TD's Mortgage Clause change creating big stir. Catches mortgage industry by surprise.

A recent story over on Mortgage Broker News is creating a bit of a stir.

It seems TD Bank has quietly changed the fine print on its Variable Rate Mortgage contracts for conventional mortgages – specifically around when a spike in loan to value triggers demand for a lump-sum payment or a new appraisal.

Under the terms of the new clause, if, at any time and for any reason, the loan-to-value on a conventional mortgage exceeds 80 per cent, the bank has the right to direct the borrower to bring it under that 80 per cent threshold or to obtain an appraisal proving the fair market value is indeed higher. The new wording replaces a similar clause that sets that trigger at 75 per cent but limits the scenario to instances where interest rate fluctuations have driven LTV over that 75 per cent mark.

Patrick Mulhern of Invis Mulhern Mortgages, who tried to get an explanation from TD without success, suspects that change is really a hedge against any future price correction for Canadian real estate.

Under the terms of the new clause, if, at any time and for any reason, the loan-to-value on a conventional mortgage exceeds 80 per cent, the bank has the right to direct the borrower to bring it under that 80 per cent threshold or to obtain an appraisal proving the fair market value is indeed higher. The new wording replaces a similar clause that sets that trigger at 75 per cent but limits the scenario to instances where interest rate fluctuations have driven LTV over that 75 per cent mark.

Mulhern believes that new, wider clause speaks to the lender’s concerns about a possible market correction and its power to drive down property values.

“In the new clause, it states that if at any time the principal balance exceeds the max LTV.” he said. “This protects the lender in case of property devaluation."

The amendment took place sometime last year, according to Mulhern, and he was only made aware of it because of an increase in variable rate mortgages he recently arranged.

“Unless I’m reading it incorrectly this type of clause has nothing to do with rate fluctuations and everything to do with loan-to-value,” Mulhern said. “Property value decreases would have a huge impact on all TD variable rate mortgages.”

Garth Turner, who covered the story in a blog post today, noted the impact this change could have:

If, at any time or for any reason, the value of your house drops to a level less than 80% of the amount of mortgage debt, then the bank can demand you write a cheque to cover the difference. If you don’t, your mortgage goes into default. You also have the right to have your property appraised (at your cost) to prove it’s worth at least 80% of the loaned amount, whenever the bank demands such proof.

The old limit was 75%, and the former wording also limited the nightmare scenario to situations in which rising interest rates triggered the action. This time anything – like unemployment triggering a highly local market decline – means you have a problem.

One realtor Turner spoke to had this observation:

“I think it’s preparation in the event of a price melt down and they want a 20 % cushion instead 25% to minimize the bank’s exposure to non CMHC mortgages.”

Garth Turner agreed and said:

"Exactly. The bank is preparing its non-insured portfolio against what might be inevitable, if the Bank of Canada is correct.

It’s only prudent, if you’re the lender. 

It’s a potential hell on wheels, if you’re the borrower."

The clauses are compared side by side. First the old (click image to enlarge): 

and the new:

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They say rats are the first to abandon a sinking ship: mortgage brokers diversifying out of mortgage business as sales plummet

The big news for those that follow daily real estate sales data is that it appears that not one single sale was recorded on either the East Side of Vancouver or in the toney confines of West Vancouver yesterday for single family houses.

Zero!

More interestingly large numbers of pre-July 9th sales still seem to be filtering through the system, presumably due to delays with CMHC approval.

On Wednesday we had 98 listings sold. But strip away the sales that took place before July 9th and the abysmal 98 sold listings plunges dramatically to only 35 post July 9th sales!

Yesterday of the 87 sales, only 27 were post July 9th!

What is that old saying?  That rats are the first to abandon a sinking ship?

If you're looking for a harbinger of what lies ahead as real estate stagnates, glance your eye at the mortgage brokerage industry.

In a recent industry news article we are told that some brokers are in the process of extending their reach beyond mortgages." 

It seems the brokerage industry has been anticipating these abysmal numbers quoted above and are preparing for a huge slowdown in the mortgage market...

Some mortgage brokers are now moving to diversify their product offerings as signs of a market slowdown begin to appear.

“Many operators are beginning to add commercial and personal insurance to their product mix,” said Gord McCallum, president and CEO of First Foundation Residential Mortgages in Edmonton. “For some it’s a strategic move; for others it may be a hedge in anticipation of the eventual cooling of the market.”

Six months ago, McCallum’s firm began offering clients home, business and auto insurance as well.

“It is a value-added service we want to offer clients to differentiate our firm from the competition,” he said.

The product offering is additional ammo in the firm’s battle against banks, and relies on employment of a licenced insurance broker to operate the firm’s auto insurance business. Mortgage brokers occupy the top floor of the office while the auto insurance is handled at the ground floor, he said.

“We are fighting fire with fire,” said McCallum. ”Auto insurance is an advantage because banks by law can’t offer general and auto insurance in-branch.

The article makes no bones about the looming reality in the Canadian housing market... tough times are coming.

And by tough times they mean dramatically less sales as the year moves along.

Given how dismal the figures are as the pre-July 9th sales wind down... it's clear that even the brokers know what we are seeing today is nothing compared to what's coming.

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