The Canada Mortgage and Housing Corporation (CMHC) is a quasi-government organization that is responsible for insuring a large portion of high-ratio mortgage loans outstanding in Canada (around $500 billion worth). There are also two other private mortgage insurers in Canada; Gengrowth and Canada Guaranty. For the purpose of this article, we will refer to all 3 companies as “the insurers”. The insurers’ main role is to provide insurance on mortgages where a homebuyer places 20% or less as a down payment. This insurance effectively offloads the risk from the big banks, allowing the loans to be securitized and sold to investors around the world. The sale of these securities replenishes bank coffers and allows the banks to make additional loans. This offloading of risk allows the banks to fund a greater number of Canadian homeowners. In other words, mortgage insurance offers a benefit to the bank, to make more money by selling more product. It is not designed to protect the consumer.
One of the biggest misconceptions we often see in our office is the client who thinks that mortgage insurance protects them (the borrower) against mortgage default. That assumption is entirely incorrect. What mortgage loan insurance does is help to protect the lender (not the homeowner) should payments be missed and the mortgage goes into default. This type of insurance should not be confused with mortgage life or disability insurance which helps cover mortgage payments for the borrower in the event of death or disability. These are two entirely different insurance products.
The premium, or cost, on mortgage insurance is determined by the percentage of the home’s purchase price that is to be financed by a mortgage. The higher the ratio, or greater the percentage of the mortgage relative to the value of the home, the more the insurance policy will cost. Amounts vary from 0.6% to 4.5% of the mortgage value. Typically the insurance premium will be added to a mortgage balance and amortized into the payments over the life of the mortgage.
In the event of foreclosure, knowing whether or not a mortgage is insured can make a huge difference in the final outcome. Generally speaking, if a mortgage is not insured, and the homeowner lives in Alberta, the lender only has recourse against the home. They cannot come after the homeowner for a deficiency judgment in the event the home is valued, or sells, for less than what the bank is owed.
The opposite is true for an insured mortgage. In a foreclosure against a borrower with an insured mortgage, if the bank is able to take title to the house, the homeowner may be responsible for the shortfall should be the value of the house fall short of what is owed on the mortgage plus legal costs. Value is determined through the court system and is not a black and white proposition, as the value of an individual house is somewhat subjective depending on a variety of factors. It is important that homeowners approach foreclosure on insured mortgages very carefully to ensure a positive outcome.
For example, if a homeowner went into foreclosure owing $200,000 on an insured mortgage, and the bank conducted a court approved appraisal that deemed the house to only be worth $150,000, the lender would be able to invoke their mortgage insurance policy to receive the full $200,000 they are owed. The insurance company will then pursue the homeowner for a personal deficiency judgment of the difference of $50,000 plus any legal fees. With this judgment in hand, the insurer is able to seize other personal assets of the homeowner, freeze bank accounts, garnish wages, and collect the balance in many other intrusive ways.
There is a lot to consider and understand when dealing with a foreclosure. It is important that a homeowner in financial distress understand what options are open to them. The only way to achieve this is to fully understand the rules of foreclosure and have proper guidance when navigating the foreclosure process.
Our office has reviewed thousands of foreclosures on behalf of clients. We and the team of professionals we surround ourselves with have successfully saved many individual clients tens of thousands of dollars each in the form of reduced and/or eliminated judgements simply by understanding the foreclosure process and implementing a customized plan.
Contact us today to get the solution you need to resolve your foreclosure before it is too late.