|THE RENEWAL OF TRUST IN
Commission of Inquiry into the Quality of
Condominium Construction in British Columbia
|Submitted to the Lieutenant-Governor in Council|
Government of British Columbia
by Dave Barrett, Commissioner
|Chapter Two:||The Framework of|
Residential Construction Continued
There were numerous oral and written presentations from strata councils and individual condo owners, on the extreme financial difficulties and stress being experienced by those trying to meet the crippling repair bills associated with their water-damaged homes and rotting structures.
Many owners told how they had requested, and had been rejected, for financial assistance or support from those holding their long-term mortgages. These were mainly the chartered banks and larger credit unions. It was alleged that the financial institutions were unresponsive and insensitive to the needs of people hardest hit by this crisis.
"When I go into my bank and I say, "I need to borrow money. I've got a special assessment", they don't care. They are telling everybody, "Its not our problem, its CMHCs problem, they own the paper."
Gavin Harrington, Condo Owner
As noted earlier, the market for multi-residential construction had expanded significantly as a result of CMHC's policy to provide potential homebuyers with the opportunity of a 5 percent down payment, compared to the traditional 25 percent required for long-term mortgage financing through banks. With these arrangements, financial institutions were insured by CMHC for mortgage defaults and corresponding loan losses.
Although the chartered banks and credit unions, through the Canadian Bankers Association and BC Central Credit Union, declined the opportunity to appear before the Commission, their written submissions suggested that this problem was being addressed through individual relationships with their customers.
"When the truth finally came out, the stall was because the bank was putting three or four more points on the interest rate so that they could get money off of the owner, and the stall was ... CMHC said, "we will guarantee this at a blended rate of ..." fill in the blank, and the bank was trying to get the owner to take out a personal loan so instead of paying an extra $40 a month blended rate, the bank was trying to get, one owner I just talked to a week ago, an extra $800 a month for a personal loan payment. His mortgage is $600 a month. It's absurd."
Deborah Mclsaac, Condo Owner
The Commission finds it regrettable that the financial institutions had no desire to participate in a meaningful way in the public hearings, and to work toward an effective structuring of solutions for the benefit of society and the economy. This is particularly regrettable since the solutions being developed through this Commission directly benefit the performance of financial institutions. In a letter to the Commission, they stated:
"To date, most banks have been approached by very few customers reporting structural damage to their condominiums. Many customers have already made limited repairs to their condominium through their own resources or by the strata corporation or builder. Due to the small number of cases within each bank, there are few discernible trends on the exposure to our customers and to the banks."
Jack Shore, Canadian Bankers Association
Evidence presented to the Commission suggests just the opposite. Many owners have approached banks reporting major repairs or renovations. They have not had the resources, and have found that the builder -- protected by a numbered company -- either walked away, denying any liability, or that their warranty did not cover the required repairs. The trends on exposure faced by condo owners are real. They may be less to the financial institutions because of the protection afforded by CMHC insurance, which covers up to 40 percent of the mortgages outstanding. It may be this protection which insulates the financial institutions from the belief that they need to be part of an industry wide solution.
"I had a pre-approved mortgage from the bank. They went out and did an assessment ... they said yes, this is a good building. Our building is $3.5 million worth of damage ... My share is $40,000 on a $160,000 suite ... And whose benefiting from all of this? The banks are benefiting from this. If it's a slow time for loans, all they have to do is open up their shop in Vancouver, because there's lots of people going there to get money to fix their leaky condo. They're doing real well. They're not concerned. They're quite willing to open a line of credit for me. They've done that already."
Robert Henderson, Condo Owner
There is evidence suggesting financial institutions are taking advantage of the homeowner by requiring a signature loan (at significantly higher interest rates), rather than providing loans, at lower rates, as is the case for mortgage finance.
"Another item this government needs to address is the banks' role in the leaky condo. When we first started looking at this problem, we obtained a seven page document from the Ministry of Municipal Affairs explaining to the banks the zero risk of lending money to a strata corporation ... they turned us down. The strata council then ... approached the bank about the procedure of reopening individual mortgages ... they wanted to know what business was it of mine to inquire about their policies. I explained I was assisting getting the owners to open up their mortgage. They told me it would be impossible ... we were persistent and contacted CMHC, and they told us what to do ... the bank had a fit. They wouldn't submit the applications to CMHC and IMCC They said we had to take out personal loans."
Maria Ferreira, Condo Owner
The above practices by chartered banks are related to the concept of "tied selling" in which customers are forced to either bring in additional business in order to qualify for loans or take higher-interest plans when alternatives are available. This imbalance of power between the banks and their clients has been recently criticized by the House of Commons Finance Committee which has urged the federal government to proclaim a 1997 amendment to the Bank Act which had prohibited tied selling.
|Recommendation #49: That financial institution clients who believe they are being coerced to obtain higher-interest loans for renovation and repair, submit their complaint to the federal office of the Superintendent of Financial Institutions, or the provincial office of FICOM, as appropriate, for investigation.|
|Recommendation #50: That the Government of Canada be urged to proclaim the 1997 Amendment to the Bank Act on tied selling.|
The recommendations contained in this report will substantially improve residential real estate market conditions, as well as assist many homeowners facing significant financial pressure. As a result, financial institutions will benefit in a significant way, not only because defaults and foreclosures will be significantly less, but also because the loans, typically made to developers and contractors in the normal course of business, will be regenerated with a return to a healthy real estate market. As a result, the Commission recognizes the need for a contribution to the Reconstruction Fund from financial institutions operating within the province.
|Recommendation #51: Financial Institutions operating in BC be requested to contribute, on a pro rata basis, based on their residential mortgage portfolio, $10 million to the Reconstruction Fund.|