Toronto Real Estate Terms You’ll Need To Know To Follow The News

If you’ve been reading the newspaper or online articles about the mortgage or real estate market in Toronto or in the United States, there might be some terms you’ve come across which aren’t familiar or there’s some confusion about.

Here’s a short list of terms with explanations of their meaning which will make your life easier.

• Foreclosure - when a home owner gets behind in their mortgage payments to their mortgage lender, the bank has the right to take that property over, evict the owner and sell it for as much as they can. The term foreclosure is most commonly used in the United States and NOT in Canada
• Power of Sale – this is the Canadian equivalent to the US term foreclosure. However, Canadian mortgage lenders must be more cautious than their US counterparts to ensure they maximize the sale price of the home because if there is any shortfall in funds after the sale, the old home owner is responsible to pay the bank the difference.
• Underwater or Upside Down – when the homeowner’s mortgages total up to a higher number than the current market value, the homeowner is deemed to be ‘underwater’ or ‘upside down’
• Short Sale – this occurs when the homeowner is trying to sell their house or condo and the sum of their mortgages is higher than the current value of their home. In these cases, once an offer is received on the home, it must be presented to the lender for their approval. The lender may agree to take a portion or all of the loss OR they may want the homeowner to set up a repayment plan to make up that shortfall.
• LIBOR - London interbank offered rate – as defined in Wikipedia “is the daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market)”. This is a key measure of how liquid funds are in the world and therefore for us locally. When the LIBOR spread is high, many banks don’t want to lend to other banks thereby reducing the amount of credit available. This is currently what’s causing so many problems in the US… people with good credit can’t get a car loan or they’ve had their line of credit reduced or cancelled altogether.
• Securitization – This is what caused the breakdown of the world’s financial system. Wall Street firms and others put together packages of sub-prime mortgages, charged a fee, and sold those packages to buyers world-wide. They really didn’t care what was in their package, or if the underlying security was good, because they were just a conduit from the initiating lender (perhaps a local mortgage company) and the final holder of the mortgage (banks, insurance companies, pension plans, etc in countries around the world).
• Price Discovery – I LOVE this one. I heard this term on Bloomberg Radio recently when talking about the real estate market in the US in September. They said that in many communities ‘price discovery’ was taking place as buyers realized that house or condominium prices were finally at a low enough level to be attractive once again!
• Recourse VS Non-Recourse Mortgages – In Canada, when a bank takes over a property and sells it under Power of Sale, they retain the right to come after the old owner to recoup any shortfall if any. This is called a ‘recourse’ mortgage and is the case across Canada except in Saskatchewan and Alberta. However, in the USA, most mortgages are ‘non-recourse’ – if they take over a home under Foreclosure and sell it for less than the amount of the mortgage financing, they do NOT have the right to go after the borrower for any shortfall! Unfortunately, this perhaps encourages homeowners who are ‘upside down’ to just simply walk away from the home knowing that there will be little consequence.

Hope this helps you make sense of any reading you might be doing!

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