Concessionary Financing, the Salvation of the Housing Markets #20

By Gerry Neely
B.A. LL.B.

An article in the Financial Times of Canada of April 12, 1982 reviews the extent to which "concessionary financing" by vendors has been the salvation of the housing markets in the past few months. The article in question suggests that in Canada and the United States, 70% and 500710 respectively of house sales result from the agreement of vendors to take back a mortgage, either to hold or to sell, or to buy-down the interest rate on a mortgage, or to otherwise provide cut rate loans to buyers who cannot afford conventional mortgages. With today's high interest rates and the resulting inability of a purchaser to establish sufficient income to satisfy either the gross debt service ratio or the total debt service ratio, creative financing rather than a reduction in sale price, may be the difference between a sale and a continuing listing. An amount applied by the vendor to buy-down the interest rate on a first or second mortgage, may widen the list of eligible purchasers far more than would the same amount applied toward a reduction in the purchase price of the home. As for the vendor who agrees to take back a second mortgage but needs more cash than the (net to the vendor) down payment made by the purchaser, the amount such vendor will receive on the sale of the second mortgage in the secondary mortgage market, may decide whether there is a deal or not.

A vendor receives an Offer to Purchase which requires the vendor to take out a mortgage. Let us assume that such an Offer would only be acceptable to the vendor if he is assured of the sale of the mortgage at a certain maximum discount. The following clause would give back the licensee or vendor time to search for a buyer of the take-back mortgage:

"Subject to the vendor obtaining on or before the ___ day of _______________, 1982, a commitment satisfactory to the vendor for the sale of the said mortgage at a discount of no more than $_____________."

And since the success of the vendor's search for a buyer will depend on the financial standing of the purchaser, as well as the security of the property, the following sentence should be added to the above clause:

"The purchaser hereby authorizes the vendor or his agent to obtain a credit report or such other financial information concerning the purchaser as the vendor may reasonably require, and consents to the release of such information to prospective purchasers of the said mortgage. The purchaser further agrees to sign a separate authority if that should be necessary."

Additional clauses dealing with interest buy-downs will appear in the next column.

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