All lending contracts are held by two parties. I ask you for money, and you get to decide whether or not to give it to me. Each side has a responsibility — both to themselves, and to the other party.
- The recipient’s self-responsibility is to report honestly all financial factors, including credit history, income, assets, liabilities, etc.
- The lender’s self-responsibility is to ensure that their capital is covered, or at least recoverable. If there is risk involved in the transaction, then that risk must be priced into the contract.

On this basis, both parties get to decide whether or not they want to enter into the contract. Nobody can force a lender to lend; if they think that someone is a bad risk, or likely not to repay, then their correct decision is to either hike the risk premium significantly to cover that, or refuse to lend. The recipient can look at the terms and decide if they want to accept them, reduce their request, or seek out another source.

The lender’s analysis MUST come in front of the deal; they have to look at all information provided and determine what a reasonable risk is and how to price it in. They have to look at market conditions and long-term trends. That’s why they hire all the smart guys as statisticians and actuaries. They also (should) have all the financial information they need to determine whether or not the loan will ‘perform’ — that is to say, whether or not the recipient will be able to pay it back. (Which is why, if that info is misrepresented, the person doing so is committing a criminal act and SHOULD face criminal consequences.)

ONCE THE CONTRACT IS ENTERED, each party has external responsibilities:
- The recipient is responsible for making the agreed-on payments.
- The lender is responsible for accepting and maintaining the terms of the agreement, and not changing them in the middle. (“Hey, Joe, the bank had a bad quarter. We need you to make an extra mortgage payment this month…”)

If either side fails to live up to the contract, there are written penalties: the lender is liable for breach of contract, and could be taken to court (or tried in the media). The lendee loses the security that they put down against the loan, and loses their reputation as a sound borrower (aka ‘trashes their credit rating’). If there is no security — i.e. in the case of most credit card debt — then it is very difficult for the lender to make recovery… which, incidentally, is one of the reasons why credit card balances carry such a hefty interest rate. This is their risk premium.

This is the way money lending goes — whether it’s for a vacation, a washing machine, a car, a small business… or a house. So what happened with mortgages?

1) Bad business model. “RE always goes up.” That means that even if an individual can’t pay, the assumed recovery rate will be high. Mistake – bank.

2) Poor (or no) risk premiums. I have a spotless credit record going back 20 years, and I own 50% of my home. Yet when I go to get a mortgage, my rate is exactly the same as the young guy buying new house with 5% down. Oh sure, he pays a little more in CMHC insurance, but most banks will just ‘roll that in’ to the mortgage. So all recipients are treated approximately the same… even when they are not. Mistake – bank.

As I said, the lender’s analysis must come before the loan is made… but the recipient’s analysis comes after. They are obligated to live up to the contract (just as the lender is), OR FACE THE CONSEQUENCES. That’s what contract law is about. Furthermore, it’s the banks that write the contracts; all we do is ‘sign on the bottom line’ so one would assume that the banks would protect themselves within the strictures of said contract. If they did not provide sufficient protection… why is it my job to cover their deficiency?

To norm, I have to ask these questions in response to your statements:
“The prescribed “penalty for non-payment” was never intended to be interpreted as an option under a mortgage agreement”
… no? Then what was it in there for? And what *was* it ‘intended’ as?

“but we humans are … skilled at finding justifications for acting in our own best interests.”
Of course it’s my job to act in my own best interest, and that of my family! Who else should I be abrogating the responsibility to… the bank? Should I trust that their desire to see me continue making my mortgage payment regardless of what other hardships or stress it may cause is solely because they care about *me*? Really?

A mortgage is a contract. The only difference is, it’s the biggest contract that most of us will ever enter, and it has emotional bonds attached to it … on our side. There are no such emotional bonds attached on the side of the bank, are there? They are treating it in all aspects like a business arrangement, so why shouldn’t I?

Lunch with a Banker helped to put it in perspective. He recalled how in the 80′s as a manager in Alberta it was not uncommon for clients to enter his office, drop their house keys on his desk and walk out.

Before leaving some had a few not so kind words while others were in tears. He had hoped he would never experience that again but did offer that Alberta was at that time a debtors Paradise. He summed up their conversation something like this – “We don’t want to fulfill our contractual obligation – here’s your security! Have a great day!”
BTW I’m checking into it but I don’t think it’s much different here in B.C.

An sidebar is that his lending institution had mortgages on many homes in new developments. The result was not unlike what we see in some cities south of the 49th. During this time they had to start a new House Maintenance department with crews that did nothing but maintain the vacant homes until they could be resold.

My hope is that we don’t see that reality again but, you never know!

The prescribed “penalty for non-payment” was never intended to be interpreted as an option under a mortgage agreement, but we humans are funny beings and we’re skilled at finding justifications for acting in our own best interests.