Mortgage Assumptions:
All mortgages in Alberta are deemed by law to be assumable. Many lenders are now requiring the buyer to qualify before allowing a mortgage to be assumed. This has caught the real estate industry by surprise because the impression has always been that Albertans have had the right to assume mortgages. As the legislation is decidedly unclear on this, and case law has not been adequately tested, financial institutions are feeling their way and, according to many of our members, are not acting in a consistent or upfront manner.
Brokerages are reporting that the mortgage verification form filled in by the lender sometimes comes back as if approval has been given for the mortgage assumption. Then, at closing, the banks refuse the assumption (will not send the mortgage assumption statement to the lawyer) or they require the buyer to qualify.
Recognizing that REALTORS® need to make their clients aware of the conditional nature of a mortgage assumption, the Alberta Real Estate Association attempted to find wording for a clause that could be included in the Purchase Contract prior to the printing of the 2005 standard forms. A satisfactory solution could not be reached, however.
Ideally such a clause would set a condition day early in the transaction so that the parties would know sooner rather than later whether they had a deal. This would require developing a new form for the lender to sign and notice to be given by a specified condition day. Practically speaking, there were serious doubts that the lenders would comply with a new practice of issuing a confirmation in an acceptable form and on time. And, by inserting this condition into the contract, we could be inviting more lenders to take a hard line approach on mortgage assumptions.
The alternative solution was to include a very general clause that would make the contract conditional until the seller's lawyer receives the mortgage assumption statement from the lending institution. It was determined that this could cause confusion as industry members might rely on the mortgage verification statement obtained by the seller, not being aware that the lawyers receive a later, official statement. As a result, the decision was made not to include a condition in the contract at this time and, instead, provide advice to REALTORS® through other channels.
So what is the current situation? Conveyancing secretaries say that either the lenders will not issue an assumption statement (and demand that the buyer provide additional information prior to doing so) or they will issue the assumption statement and not raise any more complications either pre- or post-closing. Some lenders are requiring a small "assumption fee" to be paid (around $150). The buyer is normally accountable for this fee.
Which lending institutions are enforcing the due on sale clause? Members have reported examples where ING, Maple Trust, MCAP, Community Savings and Credit Union (Red Deer), BMO and Scotia Mortgage were the lenders. Some lending institutions have made presentations to members about their new policy. Others are limiting the new practice to transactions that raise red flags (quick turnover, anonymous buyer, etc.) and others seemingly are not following a logical pattern. We have also heard reports that more lenders are going to jump on the bandwagon.
One thing we know for sure. REALTORS® must be aware that a mortgage verification statement obtained by the seller is not a guarantee that the lender will cooperate at a later stage in the transaction, and they must ensure that the seller does not enter into an unconditional purchase of another property until an assumption statement is issued. This might not happen until close to the closing date of the sale.
At the listing stage, if sellers indicate that they will allow their mortgage to be assumed, the seller's agent must make a concerted effort to get an official statement from the lending institution confirming that the mortgage is assumable. This may or may not be possible depending on who the buyer is, but it is best to be aware of this before marketing the property. At the offer stage, a condition must be written into the contract.
Source: AREA Update, February/March 2005
