The importance of an exit strategy

A woman called me on the verge of tears on Saturday morning as she was at risk of losing the family home. She and her husband as well as her daughter and son-in-law had purchased a home in February of 2022. In retrospect, we now call this time peak frenzy. However, they did not know it at the time.  They paid just under $1M for a beautiful home. The clients put down 16% from the proceeds of a previous sale as their down payment. They lacked an exit strategy from their private mortgage. They were on the verge of losing their original downpayment.

The plan

They went to one of the big five banks for financing. The bank’s representative told them that their credit was a little low, and to come back in a year.  In the meantime, the bank had this “B” lender with whom they worked with could help them with the purchase.  Come back and see us in a year and they’d be able to qualify for a regular mortgage. The clients did not at any point talk with an independent mortgage broker or a mortgage agent, just the representatives from the bank and the private lender. 

Reality: Why an exit strategy was needed

The private lender registered a 1st mortgage of 75% and a second mortgage of another 15%.  In other words, lender fees ate up over a third down payment. The lender registered mortgages amounting to 90.2% of the value of the property. No one alerted this family to the fact that refinances are limited to 80% of the value of the property. This was not a viable exit strategy, but the bank and the lender only saw a way of making a quick buck.

Hard exit

One year in, the bank appraised the property.  The property’s value had dropped to 17%. The bank was prepared to advance 80% of this new value, but it was less than 70% of the original value. The family needed an additional $200,000 to pay off the two mortgages. The private lender wanted their money back. The lender gave them a one month extension and then a notice of foreclosure. Without a viable exit strategy, this family is now facing foreclosure, homelessness and the loss of their family business. This story does not have a happy ending. The family is selling their house in a rush. They will be lucky if they can clear the mortgages, and will likely need to take on debt to pay the realtor fees.

It did not have to be this way. 

Responsible mortgage brokers see private lenders as lenders of last resort. As Dustan Woodhouse points out, there is a role for private mortgages. We as mortgage brokers have to make it clear that lenders are lending against the strength of the property, not the borrower’s credit. We make sure that their clients have a viable exit strategy so that others do not end up in the same situation as this family.