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On August 1, 2004, an amendment to Alberta's Law of Property Act came into effect. This amendment will enable mortgage lenders to pursue borrowers who default on a high-ratio insured mortgages that were originated after August 1, 2004 or anyone who assumes such mortgage. A high-ratio mortgage is defined by a regulation as a loan secured property that exceeds 75 percent of the market value of the property at the time the mortgage is given.
The amendment to the Law of Property Act is designed to discourage irresponsible behavior such as deliberate defaults, flips and buying a property as owner occupied when the intent is to use it as a rental.
Historically, if there has been a default on a mortgage in Alberta, lenders have been restricted to only selling the property and could not pursue the borrower for a deficiency judgment. The only exception was for mortgages made under the National Housing Act. This change will level the field for competition among mortgage insurance providers by providing them with equal access to deficiency judgments on mortgage defaults.
As a result of this change, when a borrower sells a property that has a high ratio insured mortgage (originated after August 1, 2004) and the purchaser assumes the mortgage, then both the original and new borrowers could be pursued on the covenant to pay if there is a default under the mortgage. In order for the original borrower to be released from their obligations under the mortgage, they will then need to get their lender's consent. A key prerequisite to releasing the original borrower will be making sure that the purchaser, who is assuming the mortgage, is approved by the lender in accordance with their guidelines. Lenders will need to consider what changes in their prices may be needed to process assumptions and request by the original borrower to be released from their mortgage obligations.
To make sure that borrowers are aware of their personal responsibility, the Government of Alberta is requiring lenders to amend their mortgage documents by August 1, 2006 to prominently include the following statement:
"This mortgage is a high ratio mortgage to which sections 43(4.1) and (4.2) and 44(4.1) and (4.2) of the Law of Property Act apply. You and anyone else, who expressly or impliedly, assumes this mortgage from you, could be sued for any obligations under this mortgage if there is a default by you or by a person who assumes this mortgage."
This is a very positive change for Alberta as it makes people aware that they are responsible for making payments on their mortgage, regardless of whether they are the original borrower or are assuming a mortgage. The change is all about trying to making borrowers more responsible so that the high ratio mortgage market is stable and provides a variety of mortgage financing options to Alberta consumers.
The full text of the Law of Property Amendment Act, 2003 and accompanying Regulation can be found at the Alberta Government web site: http://www.gov.ab.ca.
Source: CREB® Talk, Volume 11 / Issue 34 / August 20, 2004 - a weekly publication for Calgary Real Estate Board Members (reproduced with permission)
Contrary to popular belief, there is nothing in Alberta legislation that prohibits lending institutions from enforcing a due on sale clause. Generally speaking, lenders have the ability to declare the mortgage balance due and payable when the mortgaged property has been sold unless the lender has approved the buyer to assume the mortgage. However, the court does have the jurisdiction to rule in favour of the buyer if it deems that the lender does not have a good reason to refuse the assumption. Factors taken into consideration would include the creditworthiness of the buyer, the terms of sale and whether the mortgage is in default.
In recent months, whether due to the increasing concerns about mortgage fraud or because of increased focus on the Law of Property Act, some lending institutions have flexed their muscles by refusing mortgage assumability. There are conflicting reports on when this is happening. There is the suggestion that lenders have been targeting transactions where they don’t expect buyers to apply to the court for relief from forfeiture if, for example, they are involved in illegal activities or have a bad credit history. Some of our members, however, have reported examples of refusals
MCAP, ING and Maple Trust have officially announced a new policy of requiring buyers to qualify before the mortgage can be assumed. They have made presentations to our members about their policy. A Red Deer member also reports that Community Savings and Credit Union is asking for buyers to be qualified and apparently the policy ATB has been enforcing due on sale clauses for some time now. In 15 out of the 16 court cases, the judge has ruled in favour of ATB. AREA intends to investigate the circumstances to get a clearer understanding of the issue.
Liability Implications
The law is clear about liability on the covenant (i.e., the ability of the lender to pursue the personal assets of the borrower in addition to foreclosing on the property). However, the rules have recently changed. Effective August 1, 2004, the Law of Property Act states that liability exists on all insured high ratio mortgages, not just those insured by CMHC. No liability exists on mortgages that are not high ratio, even if they are CMHC insured. Another important but misunderstood point: the original borrower and subsequent buyers who assume a high ratio mortgage are all liable upon default of the mortgage. This has serious implications for both our members’ clients and REALTORS.
As of August 1, 2006, lenders will be required to insert a statement in all high ratio mortgages, naming the borrower and anyone who assumes the mortgage as personally liable for any default. Until this requirement becomes effective, REALTORS would be well advised to warn buyers of the consequences of obtaining a high ratio mortgage and of the possible consequences to sellers of allowing their mortgage to be assumed.
Because of the increase in mortgage fraud and the liability issue, organized real estate in Alberta would be wise not to lobby for automatic assumability for all mortgages. Each transaction must be judged according to the circumstances, and seller’s agents and buyer’s agents must use good judgment when attempting to negotiate for an assumable mortgage. AREA will produce guidelines on this topic.
Meanwhile, here are some words of advice:
- Don’t market a property as having an assumable mortgage. Instead, indicate that it is possible the mortgage may be assumed.
- Make offers to purchase conditional upon lender acceptance of the buyer.
Stay tuned for further updates. AREA UPDATE, December 2004/January 2005, is published by the Alberta Real Estate Association
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