What You Need To Know:
What is a mortgage?
A mortgage simply is a debt instrument secured by a registered charge on real estate. Typically a mortgage provides for payment (usually monthly and by post-dated cheques) of an agreed on payment amount—part of which is payment of interest and part is payment of principal. Usually an amortization schedule is produced which provides a detailed statement of each payment allocated.
A mortgage is registered in the Land Titles Office closest to where the property is located and cannot be removed other than with the consent of the mortgagee or by court order. You are the sole owner of the mortgage unless you invest through a vehicle called a Mortgage Investment Corporation (MIC) which pools funds from different lenders (much like a mutual fund) and then invests the pooled money in different projects. In this case the mortgage will be registered in the name of the MIC and not yourself and managed by the directors and Alta West Mortgage Capital Corporation
A mortgage also provides for a term (can be any length of time but typically is from 6 months to 2 years) following which the mortgage must be paid off either through sale or refinancing or by extending the current mortgage on such terms and conditions as can be agreed on by the parties.
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How to protect yourself
Mortgages are generally safe investments in a stable or rising real estate market. If you are very cautious in nature the best way to hedge against unpleasant surprises is to restrict your investment in mortgages with a low “Loan to Value” ratio. This means the total mortgage charges divided by the appraised value. Usually under 75% is considered safe. Of course each situation is different depending on the location, type of property and strength of the borrower. To assess the LTV ratio you will need a professional appraisal which is usually provided by the broker.
As well as the LTV ratio and other characteristics of the property you, as the lender, must consider the present and past financial circumstances of the borrower. In short, there are 3 basic areas to look at when considering investing in a mortgage.
- Collateral
- Cash Flow
- Character
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What does a mortgage broker do?
A mortgage broker’s role is to pre-approve and package the deal for presentation to the investing public, such as yourself. For this service they are paid a fee based on the total amount of the mortgage
The package a broker assembles will normally include the following:
A Mortgage Loan Agreement which outlines the basics of the mortgage including property description, identity of parties, type of mortgage requested, additional security (if any).
- An appraisal
- A credit report
- Employment verification letters
- Mortgage Application/Net Worth Statement
If we commit to the investment we are entitled to request that certain clauses be included which improve and protect your position such as NSF fees, prepayment penalties, extension and discharge fees. The mortgage document itself can be tailor made to suit your needs subject to legalities.
When investing in a mortgage we check the following:
- The address of the mortgaged property and the address of the borrower are the same (unless the mortgage is on rented property);
- There is adequate insurance on the property and you are named as a loss payable;
- The balances owing on the prior mortgages and that payments are up-to-date;
- If the property has rental income you should ask for an “Assignment of Rents” document which, in event of default, gives you the right to collect the tenants’ rent cheques.
- The condition of the property by on site inspection.
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Is the mortgage liquid?
Mortgages are not considered liquid investments when compared to GIC’s, PUBLIC STOCKS OR BONDS. However they can be sold for cash sometimes quite readily using the services of a mortgage broker.
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What happens in event of default?
If the mortgage has matured and we cannot reach an agreement to extend or there has been a breach of any other term of the mortgage agreement, the lender may initiate foreclosure proceedings to have the property sold or the title transferred to the lender.
The mortgage document itself spells out in great detail what happens in case of default. However, many options outlined in the mortgage document require court sanction before implementation. In the case of minor defaults such as a bounced cheque, failure to renew on time, or produce post-dated cheques there are “liquidated damages” clauses which provide for sums of money to be added to the mortgage amount. While the lender has the legal right to foreclose, usually such defaults are handled through informal means through the assessment of penalties (in court parlance called liquidated damages). These can be collected immediately on default or on the maturity date.
On major defaults such as extended non-payments, cancellation of insurance, or failure to pay on maturity the lender may initiate foreclosure proceedings. The legal costs of such foreclosure proceedings are added to the mortgage amount.
The first step is for our lawyer to send out a collection letter followed by a foreclosure petition which results in an “Order Nisi”. This usually takes from 1 to 2 months. Once we receive an Order Nisi we have a judgment against the borrower for the total amount of principal, interest and costs. However, the borrower will be granted a “redemption period” (usually 6 months) in which he can redeem the property by paying off the mortgage. If there is little or no equity in the property the redemption period can be shortened to as little as one day.
If we are the owner of a second or subsequent mortgage we have the right to make the first mortgage payments to keep them current and add the advanced amounts of the first mortgage and charge interest at our rate currently applied on the second mortgage.
If we receive a copy of a Petition for Foreclosure on behalf of another mortgage holder, we have the right to start our own foreclosure action.
At the end of 6 months if the property has not sold, the lender has the right to apply for “Order Absolute” which means the lender can take over title to the property subject only to the rights of the higher ranking charges against the property which would include such things as taxes, condo fees and prior mortgages (if any).
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