Bankers

Budget? What budget? Let’s talk over stuff we actually care about. Like screwees and screwers in the housing business. And we have some saucy ones for you today. So, break out the Timmies and the latex. We’re going in.

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First the screwer. It’s with awe, reverance and admiration that we salute the guy with 20-pound gonads who owned and sold 4541 Belmont Avenue in nutty Vancouver. This glorified one-bedroom garden shed has everything. Walls. Floors. Doors. Roof. All the features that pack those Airbus flights from Beijing, as BC-horny Chinese lust after an unmistakeable West Coast je-ne-sais-quoi.

When this beauty was listed last month near Locarno Beach this unworthy blog marvelled that someone would be courageous enough to ask $2,199,000.

But guts, heroics and marketing savvy did not end there. When an offer didn’t materialize, our epic screwer raised the asking to $2.4 million. Suddenly it was high enough to attract the interest of those little Mainland buggers, and this week it sold – for $2,305,000.

Remember this. It’s a Nortel moment.

Now, to the screwee segment of our show.

As you might remember, last year’s federal budget was feted in this space for actually doing something about the oft-staggering cost of breaking a mortgage. F and his truncated elves at Finance promised to ‘bring forward regulations’ governing how much our hard-ass banks can charge people who need (or want) to get out of a home loan. Months later the feds promised to have draft regulations for public discussion by the end of 2010. * Crickets. *

But we did get a working title: Standardization of Prepayment Penalties.

Why is this an issue? Simple. The rules buried in most mortgage contracts stipulate that if you end the relationship early, the bank gets to ream you in one of two ways – by extracting a penalty equal to three monthly payments, or by charging you an amount equal to the difference between your mortgage rate and current rates on the amount owing over the period left in your loan.

This is how a major bank which shall remain nameless (the Royal) defends the charge: “In order to lend you the money at this ‘fixed rate’ for a set period of time, RBC Royal Bank borrows the funds needed in the market and enters into fixed term contracts. When you break your mortgage term (or contract), RBC Royal Bank is in turn charged a ‘breakage cost’ as its contract will not be fulfilled. The mortgage pre-payment charges are collected from you to partially offset the costs that the bank is charged because you are no longer paying that agreed upon amount back to us on a monthly basis.”

Because the l-a-s-t thing this country needs is a bank (which gives you 1% on your savings account and loans the money out as a mortgage at 4%) suffering a ‘breakage cost’, Ottawa and the provinces have pretty much turned a blind eye to consumer pain. The result has been a slew of staggering IRD penalties as fixed-rate closed mortgages declined along with bond yields. This was behind a CBC investigation this week which unearthed a screwee who bought a condo he couldn’t afford with a $400,000 mortgage at 5.19% he couldn’t pay. When he sold his unit (at a loss), Scotiabank slapped him with a $25,000 charge – because current rates had plunged more than 2%.

And so this is what you need to remember about these penalties: when interest rates fall, you will be nailed with an IRD; while when rates rise, the banks will levy the three-month penalty. In virtually no instance will you get away with no blood. Even if you call the TV guys.

Worse, you might actually end up paying a bigger penalty the shorter the time you have left on your mortgage. That’s because short-term interest rates are usually lower than longer ones, so the IRD could  be beefier between your existing five-year mortgage rate and the current two-year cost than that being charged for a 3-year term. (Most people mistakenly believe the rate differential charged will be between their old 5-year rate and the current one of the same length.)

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Right now, with a federal erection looming over us (ask me to tell you about Diefenbaker one day…) the chances of getting better rules in 2011 for this prepayment penalty thingy are nil. In fact, it may be a totally dead issue, unless people choose to bring it up during a campaign. Interestingly enough, many US states have passed consumer protection laws in which lenders are forbidden to demand any penalty whatsoever for breaking the first mortgage on a primary residence.

That sounds like a fine solution but, of course, the banks would argue such largess would simply increase their costs, cripple their businesses and lead to tighter lending rules. You know, like not giving mortgages to people without money. Oh. The. Horror.

So, if the feds would rather work on new fighter jets than consumer protection, do people breaking mortgages have no recourse?

Not entirely. Get a nasty lawyer. Like this one. Litigation does wonders to curb banker appetite for human flesh.