Mortgage Broker

CmB magazIne cmba-achc.ca spring 2018 | 37 secondpriority L oan transactions involving borrowers seeking financing through private lending or by way of a second mortgage tend to carry additional risk that is not present in a traditional first mortgage transaction, and require extra care for real estate practitioners such as mortgage brokers. ere are a variety of legal and factual situations that make these mortgages more unique. Certain factors include: n Less restrictive lending criteria and borrowers that are not eligible for bank financing; n Dealing with borrowers with unstable forms of income (non-salary, fluctuating levels of income, self-employed, contract work); n A sense of urgency to complete the transaction; and/or n Borrowers with poor or no credit history. Based upon these additional risk factors, it is clear you will be dealing with a diverse set of borrowers seeking private funds with varying levels of experience, sophistication and financial knowledge. In addition, you will be engaging with a broad range of private lenders with different levels of knowledge and experience. Be mindful that the private lenders may do very little, if any, real due diligence in these loan transactions and will look to the mortgage broker (or the lawyer) to "do it right" and "keep them safe." Knowing this, it is important to always remember that there are probably more risks in second and private lending that are not seen in a typical bank or credit union first-mortgage transaction. With these extra risks, and without the sophisticated due diligence that a bank performs in its loan transactions, the mortgage broker must remain vigilant. PrIorITy ISSuES A central area of concern for secondary mortgages is ensuring that the loan-to- value ratios do not negatively change as the term of the mortgage progresses. is requires protecting the priority position of the second mortgage transaction as against future advances secured by any pre-existing mortgage. In British Columbia, Alberta and Ontario, this priority issue is dealt with slightly differently. In B.C. and Ontario, generally, in order to protect said priority against further advances, the lender of the subsequent (second) mortgage must ensure that the prior lender (first or prior mortgagee) receives actual (as opposed to constructive) notice in writing of the registration of that subsequent mortgage. In Alberta, the first mortgage or revolving line of credit will take priority for all advances up to the registration amount, including subsequent advances. It does not seem that Alberta requires actual notice to be provided. In B.C., it is prudent practice to send the first lender written notice of the subsequent mortgagee's registration and state that this notice is being sent pursuant to section 28 of the British Columbia Property Law Act (PLA). is is the provincial legislation that provides the protection to the second mortgagee from losing priority over further (future) advances made under a prior (first) mortgage. However, the legislation and legal practice dictates that certain procedures be followed. Please note that the legislation is quite general and legal practice in this area has evolved but rarely been adjudicated by the courts. e notice to the first lender should request that receipt of the notice be acknowledged and returned to obtain (without uncertainty) confirmation in writing that notice under section 28 of the PLA was received. Although the additional step of having the notice acknowledged and returned by the prior lender is not a requirement under the PLA, should an issue arise regarding priority of re-advancement under the first mortgage, the certainty of this notice may resolve any dispute of "actual" or "formal" notice received by the first mortgagee. In practice, banks and credit unions can be reluctant to acknowledge the notice as they seem to regard such acknowledgement as prejudicial to their priority. Some second mortgage lenders (or their lawyers) have started to give notice of the second mortgage registration as part of their initial request for information in respect of the first mortgage (that is, the request for the balance owed under the first mortgage). the priority of Second/ private Mortgages Protecting The rules around registering additional loans differ from province to province. Here's how to avoid trouble later By timothy lAck AND Preston wAliA

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