"Beware of collateral-charge mortgages"

I've talked about collateral mortgages a few times in the past.

Today I opened up the latest edition of the CMP (Canadian Mortgage Professional) Magazine and came across an article that I had to share.

"Beware of collateral-charge mortgages"
While private lenders are increasingly looking for 'opportunity financing' that expands their portfolio beyond refinancing and debt consolidation, that core business remains an industry pillar. The growing use of collateral-charge mortgages by the big banks, however, is threatening to erode that support, said David O'Gorman, broker/owner of MortgageLand Inc., an independent firm brokering private lending deals.

'We're saying 'no' more often now than we did in the past, and i can think of no less than six people since last year that we've simply had to turn away because there was nothing we could do for them,' he told CMP. 'It's because they've signed up for a collateral mortgage with the banks, and have pledged all their equity to that bank. It makes it all but impossible for a second lender to come behind and provide a second mortgage or refinancing or even for a homeowner to switch lenders at renewal.'

Last fall, O'Gorman and other brokers working with private lenders raised the specter of a loss of business stemming from collateral mortgages at the big banks. They are securing mortgages with a promissory notes backed by collateral charges. That translates into a first or second lien on the property for as much as 125% of its value. That doesn't, in fact, mean the borrower is guaranteed access to all those funds.

The private lenders that O'Gorman deals with - along with most banks and monolines - refuse to accept the transfer of collateral mortgages, forcing homeowners to pay additional fees to register a new mortgage in order to move the loan from the original lender for a much-needed second mortgage or refinance.

O'Gorman wrote to people, with 'different to the norm' conditions and increasing the borrower's exposure to significant loss, all the while flogging a cheap closing service, enticing the borrower to go without the opportunity of having an independent legal opinion of the documents they are signing, just plain stinks' he wrote in the two-page letter.

A policy adviser for Flaherty did contact O'Gorman for a brief discussion, although the broker doubts the matter will move beyond that.


Be leary of collateral mortgages. Ask a professional to explain them to you and why they may not be the best option for you.