Do You Trust Your Banker?

Every so often, I hear a story that really quite shocks me. I have mentioned in various writings over the past few years about reasons why someone should be cautious when dealing with bank lenders, and I have a good summary about it (although I could probably add more as time has gone by and I continue to hear more) in this page about banks vs mortgage brokers.

However, this one was different, and goes far beyond anything I could imagine one of the chartered banks in this country doing and being able to get away with. A few weeks ago, I was invited to go to an open house by a realtor in Vancouver. It was a strata property, and when I got there she had mentioned she had a client to that she sold to 10 years previous and thought it would be a good idea to go say hello. I came along with her when she went and knocked on the door. The realtor’s client was home and let us in.

This lady was about 80 years old and lived alone. She did not have any family around that she could trust. She had also had some health issues over the past few years, particularly on the mental side, and although she had said she was better and still seemed fairly aware, I did not have the perception that she was at her peak mental capacity.

While she is talking to the realtor, she comes out at a certain point and says “I don’t own this property anymore, I needed some money. I now get $100/month until I die, and then they get the property.” This seemed curious to us as she was still living in the property, which I would not believe she would do if she was actually not the owner of the property anymore. The realtor had to go back to the listing to show it to some interested parties, and I stayed and worked through what happened.

It turns out that the client still owned the property. The lady went to her bank (one of the large chartered banks). She had clear title on her property. That bank did not give her a mortgage, but instead arranged a mortgage for her through the Canadian Home Income Plan (CHIP). I also offer CHIP mortgages, and they have their place and are a legitimate option for some people. However, they are not for everyone. The interest on the mortgage accrues against the property compounding as the owner of the property never has to make a payment on the mortgage.

I saw the CHIP document that showed that she had gotten approximately $150,000 from the CHIP mortgage. However, they do not give a monthly installment payment, and if they did I would expect that the return would be better than $100/month on $150,000.

After a few meetings and a number of hours, I had gotten the whole story. The fund was to pay off her son’s mortgage when he wasn’t making payments on his property. The CHIP loan was arranged and after it was completed the bank’s financial planner convinced the client to not pay off the son’s mortgage but to put the money into mutual funds and then do a monthly distribution which would mostly cover the son’s mortgage payment. Therefore she was paying 4+% interest on her son’s mortgage and was losing money on her investment and the investment amount had eroded to the point where there was barely enough money left to pay out the son’s mortgage if she even wanted to, which is the reason she supposedly got the CHIP mortgage.

When I represent my clients to a lender, I try to provide a solution that works for everyone, and particularly for my client. I provide options and give them a choice. What her bank did was exploit and steal money from an old lady with a declining mental capacity. By the letter of the law I am sure they could justify their actions, that they did all they had to do to cover themselves and say it was a legitimate strategy. By the spirit of the law, what they did was reprehensible.

Why did they do this? Why did they have no moral qualms about a client taking out a mortgage loan and then putting her into a losing investment?