Reducing Debt, Canadian Mortgage Professional, December 2007 issue (20)
Mortgage brokers aren't alone in their quest to reduce and consolidate client
debt. There are a variety of services available to supplement a broker's services
and provide hope for the hopeless. Here, Vanessa Chris delves into the details
of a few options.
Many mortgage brokers view the sub-prime arena as a journey - an opportunity to help clients with poor credit get on track again.
But what do you do when a potential client comes to you with a situation that - no matter how hard you try - just won't work? A situation where their debts exceed the equity in their homes, their credit scores are non-existent or they just can't seem to stick to a budget?
In these situations, it's not feasible to simply arrange a debt consolidation loan or encourage clients to significantly pay down their credit cards because the debt is so unmanageable. That's why many mortgage originators - such as Theresa Yates, a Kitchener, Ontario-based mortgage consultant with Mortgage Intelligence - turn to outside sources for help.
The majority of Yates' clients are sub-prime - an area of mortgage brokering she finds both challenging and rewarding.
"There are a lot of brokers that won't touch the clients I deal with," she says. "But I find it rewarding. Many of them come in with no hope and, when you get a mortgage for them, they're just so happy."
In an average month, Yates might get approximately 10 applications but, because of the dire situations of the clients, only two of them might work. Not wanting to turn them away empty-handed, she's developed a referral relationship with a bankruptcy trustee, Doug Hoyes of Hoyes Michalos and Associates.
Bankruptcy trustees
When Yates encounters a client whose credit is poor and whose debt is out
of control, she asks Hoyes to evaluate the situation and determine the next
step.
In most cases, simply calling up the credit card companies and asking for a reduction in payments or interest rates is out of the question. By the time a client ends up in Hoyes' office, they're usually looking at either a consumer proposal or a bankruptcy claim.
If he can make it work, Hoyes usually opts for the former. A consumer proposal is less damaging to a client's credit, and stays on their report for only three years after the debts are paid off rather than the maximum of seven years associated with a bankruptcy.
A consumer proposal is a legal process that abides by the federal Bankruptcy and Insolvency Act. It's basically a document, devised by a licensed bankruptcy trustee, that asks creditors to reduce or forgive certain debts.
"Let's say someone has $50,000 worth of borrowing capacity against their house, but $70,000 in unsecured debt. The broker can't get a second mortgage worth $70,000 to pay off the debt, so they send someone to us," says Hoyes. "We'll give the creditors a proposal that says the borrower will promise to give $50,000 to the creditor and then the broker can obtain a second mortgage for $50,000 that the client uses to pay off the debt."
While the process does affect a client's credit score, it's beneficial in the sense that it's a legally binding contract - so creditors can't back out once they've agreed to the terms. The process also only requires the commitment of the majority of the creditors and, after that, all other creditors are forced on board.
Working with a licensed bankruptcy trustee also has added perks - they can stop wage garnishment and prevent an individual from being sued. And while it's illegal for them to offer referral fees, they are loyal to their referrals.
"All trustees tend to be loyal to brokers they're comfortable with," says Hoyes. "By referring work to trustees, we often refer business back to brokers. In many cases, people come to me thinking they have to go bankrupt, but it's really not necessary yet."
In situations where a second mortgage is required as part of a consumer proposal, the broker also makes a commission on the mortgage. In other situations, after a client has obtained a consumer proposal and straightened out their finances, they come back when it's time to get a mortgage.
"If they already have a consumer proposal with no mortgage, it may be possible to get them one," says Yates. "They have to have had a proposal for one year, have made all their payments on time and they have to have at least a 10% down payment from their own funds - it can't be a gift. In many cases, the consumer proposal straightens people out and gets them back on their feet - and the lender sees it as another form of established credit."
Debt settlement
If your client is concerned with the effect a visit to a bankruptcy trustee
might have on their overall credit score, another option to consider is sending
them to a debt settlement company such as Total Debt Freedom.
Like a consumer proposal, debt settlement services work to reduce the total amount of debt owed so that it can be covered by a second mortgage. Since it's not governed by the federal government and does not require the work of a licensed trustee it, therefore, does not affect an individual's credit score.
Instead, a third party like Total Debt Freedom will get permission to act as a client's "agent" and then talk respective creditors into reducing an individual's overall debt.
"What we do is we engage the creditors," says Richard Cooper, president and CEO of Total Debt Freedom. "It usually takes three to four weeks to go back and forth and negotiate. But, in the end, the creditors usually settle because it's in their best interests. In some cases, the only other option is for the client to declare bankruptcy - in which case the creditors would net nothing."
While some brokers attempt to perform this service themselves, the process is time-consuming and brokers typically don't net the same results, Cooper says.
"It makes sense to hire a professional when you require this service," he says. "A mortgage agent might knock off 20% of the total debt, while our average is 40%."
Clients who qualify for the service must have less than a 600 Beacon score (the lowest Cooper's seen is 390), have at least $10,000 in unsecured debt and be at least 90 days behind in their payments.
In addition to the commission made on the second mortgage, a mortgage broker also qualifies for a finder's fee from Total Debt Freedom, which is a percentage of the company's earnings from the deal. In addition, because most of the loans are 12-month terms - aimed at getting the client back on their feet - a broker also has the opportunity to be paid on the renewal, Cooper says.
Private Lenders
Some private lending companies have different lending guidelines than other
non-conforming lenders, offering a viable option to clients with poor credit
situations.
Alberta-based Alta West Mortgages is one such example. The equity lender bases its lending decisions on the value of a property - and is often much more flexible than other lenders.
For starters, the company has been known to accept clients with no Beacon score, and pays much more attention to the consistency of payment histories and the judgments placed against certain clients.
"We usually deal with people who have over-extended themselves in some way," says president Dave McKitrick. "We have lots of clients who are good at making regular payments, but they've just found themselves in situations where they have a negative cash flow."
McKitrick says most of the homeowners that come to Alta West have maxed out too many credit cards, started paying some credit cards off with others and the minimum payments have grown so high that they can't keep up with them. As a result, the company does a lot of refinancing - also offering both second and third mortgages.
"Our monthly payments are less because we amortize the loan over 25 years, so the minimum payments are significantly lower," he says. "This helps the client's cash flow get back in line and enables them to boost their credit back up."
Alta West picks up a lot of deals that 'B' lenders choose to pass on - including applications from bankruptcy candidates.
"When we see someone has declared bankruptcy, we don't see it as a bad thing. It means they are focused on their mortgage payments," he says. "The only stipulation we have in those situations is we won't go over 75% of the equity of the house."
The client is also free to apply for a mortgage at any time. In fact, the company previously issued a mortgage while a client was in the midst of declaring bankruptcy.
Alta West's standard referral fee is 2%, but sometimes that's adjustable, based on the size of the mortgage. The fee will usually be tacked onto a client's total loan, along with Alta West's fee.
Because of the excess risk involved in this type of lending practice, Alta West's interest rates are noticeably higher - and they increase as more mortgages are put on a property (for example, the interest rate on a second mortgage will be higher than the interest rate on the first mortgage).
In addition to its mortgages, the company also offers "capitalizing payments", which is a service that can be used when a client has poor cash flow but a lot of equity in their house. In this situation, if a client has $100,000 worth of equity in their home, but $30,000 in credit card debt, Alta West will calculate the client's monthly payments, multiply the number by 12 and add the amount of money to the client's total mortgage amount.
With the credit card payments taken care of - coming out of the equity of the home - the client can use the extra cash flow to pay off other debts that Alta West couldn't take care of by any other means.
"On the one hand, it's not the best situation because the client is
paying all the money up front," says McKitrick. "But if he doesn't
have the cash to take care of his other debts, it works well. It's a very
popular service."
Kuljit Singh, Accredited Mortgage Professional
Mortgage Alliance AKAL Mortgages Inc. at 905-290-2525 x221 or
email at info@akalmortgages.com.
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