As with many questions of law, it depends on where you are.
Before we go any further, imagine a world where anyone could easily walk away from personal liabilities with respect to mortgage defaults. In effect, the only recourse of lenders would be to foreclose on the mortgaged property with a far greater likelihood of suffering a loss on the investment. If this sounds too fictional, think in terms of the very end of the last quarter of 2008 in the U.S. when the housing market crashed and the Canadian market suffered as well. Imagine the nightmare to the lenders and to mortgage insurers.
But we are in Alberta
In Alberta, this question is relevant from a liability perspective. The concept of high-ratio insured mortgages in Alberta aims (at least) to strike a balance between the competing interests of lenders and borrowers by providing some protection to individuals in certain circumstances against personal liabilities on their mortgage. That is to say, it is relevant in determining the extent to which an individual may be held personally liable for default under a mortgage. The protective mechanisms come into play where there is a shortfall (or deficiency) in the amount realized from the proceeds of a foreclosure with respect to the amount owing under the mortgage.
In the beginning, the Social Credit government set Alberta mortgage law a part from that in other jurisdictions by amending the Judicature Act in 1939. These amendments prevented any action on the covenant to pay (protection from personal liabilities) contained in a mortgage. Today the successor to that 1939 initiative provides that under the Law of Property Act in Alberta (Alberta Property Act), there are certain protections from personal liabilities with respect to such shortfalls. Where the protections apply they are absolute and it is contrary to public policy and therefore void to attempt to circumvent them via securing a waiver from a borrower under any guise. Need I mention that there are exceptions to this unbecoming generosity of the law?
The protections are for individuals not corporations
The protections only matter to individuals, as opposed to corporations. A corporation will always be personally liable for any shortfall. If you think this unfairly discriminates against corporations wait till you hear about the other exceptions!
The nature of the property matters
The protections are available to an individual only where the subject property is residential or farm land. Notably in the definition of residential land or farm land, the property must have been used for the bona fide benefit of a member of that individuals family. Although the definition of family member seems quite generous, going as far as to include grandparents and adult interdependent partners, a caution note should be sent to individuals who have purchased a supposedly eligible property (residential or farm land) strictly and solely for the purpose of rental income.
We all love rental income! Pass the word around if such rental property has never been used for the bona fide benefit of an individual or a member of that individuals family, personal liability may just be lurking around the corner.
What then is a high-ratio mortgage and why does it matter?
Speaking legally or operationally, the definitions will differ but the outcomes will be similar. The law in Alberta defines a high-ratio mortgage as one in which the sum total of all the mortgages against a property exceed 75 percent of the fair market value of the property at the time the mortgage is created. This 75 percent threshold will come as a surprise to many as the common knowledge is to define a high-ratio mortgage with respect to an 80 percent threshold. The common knowledge approach is not wrong, simply inaccurate; both positions are correct.
In practice, the situation has been five percent more generous than the Alberta Property Act stipulates. That is to say, operationally, insurance covered by a mortgage insurer for a number of years has operated at a minimum and more generous mortgage threshold of 80 percent. Under the Alberta Property Act, the regulation that defines high-ratio mortgage with respect to the 75 percent threshold is up for review in 2019. It may be revised to become consistent with the operational context of what a high-ratio mortgage is 80 percent thereby harnessing the present five percent generosity factor into the law.
If your mortgage is high-ratio which legally speaking is a75 percent mortgage threshold under the Alberta Property Act, and it is given to secure a loan under the National Housing Act (Canada)(think Canada Mortgage and Housing Corporation (CMHC) ), or is insured by an insurer licensed to undertake mortgage insurance in Alberta (think Genworth or Canada Guaranty), forget the protections. That is to say barring anything else, you will be personally liable for any shortfall resulting from a default under the mortgage just like almost everywhere else.
What about HELOC’s?
Home Equity Lines of Credit (HELOC) are quite often a utilized method of financing in Alberta. What this means is your lender provides you with several methods of borrowing including lines of credit (secured or unsecured), credit cards, and as security takes a mortgage over property that you personally own, which in most cases is your home.
So do the protections under the Alberta Property Act apply where there are other collateral forms of indebtedness including promissory notes? While the scope of this article does not allow a comprehensive review of this, the short answer from the courts is more or less “if it looks like a duck, quacks like a duck and walks like a duck, it’s a duck”. In other words, you cannot do indirectly what you cannot do directly and that the courts must and will inquire into the whole of the surrounding circumstances at the time of the transaction to determine its substance regardless of the form it may have taken. Accordingly, the burden of proof that the protective provisions of the Alberta Property Act do not apply to a transaction would be upon him who asserts it.
Who’s your daddy?
At the end of the day, this whole issue is entirely composed of made-up politics. From the Alberta provincial personal liability mortgage protections created as a now historical anomaly to the fallout from The Great Depression, to the federally created and directed CMHC mortgage insurance politics, policies and exemptions, we have another complicated arena that few understand and fewer can navigate properly.
But the importance seems to be diminishing as the politics and realities governing CMHC are both reaching their self imposed lending limit of $600 billion and reacting by pulling back and placing increasing limitations on their once exuberant expansion policies. Even the International Monetary Fund has gotten in on the action stating in late 2013, Ottawa should consider phasing out insuring home mortgages through CMHC. Since that time, CMHC has limited the number and amount of CMHC insured mortgages both as to amount and numbers as well as lowering the maximum amortization period for their mortgages. In May 2014, CMHC increased its premiums by approximately 15 percent. Since that time, CMHC has officially discontinued its condominium developer program although it had not utilized it since 2011. Additionally, its second residence program and self-employed without third party income validation mortgage insurance products (both high and low ratio) have been tightened with several other restrictions.
Finally, as it relates to personal liability for mortgages in Alberta, a long observed but unresolved debate abounds with respect to mortgages given to the Crown in right of the Government of Canada and the Government of Alberta. Since, generally speaking, the Crown is not bound by a law unless the law specifically says so, the argument goes that because the Alberta Property Act does not expressly state that the Crown is bound by its part five (the part that contains the provisions that deal with the protections against personal liabilities), the protective provisions in it do not apply to an individual where the mortgage is given to a government agency. If this argument holds true, it would mean that a mortgage given to a government agency, is the silent exception to personal liability protections arising from mortgages, even in cases where the protection would ordinarily otherwise been available.
Simply put, a high-ratio mortgage (as defined above – whether legally or operationally), is one exception to the protective mechanisms against personal liability under the Alberta Property Act, which is a high speed train to personal liability in Alberta. It is quite a twisted irony, because for many of us it doubles as a vehicle to the Canadian home ownership dream by providing the leverage to embark on the home ownership race with only a modest down payment.
And so it goes….