𝐀 𝐝𝐞𝐚𝐥 𝐜𝐫𝐨𝐬𝐬𝐞𝐝 𝐦𝐲 𝐝𝐞𝐬𝐤 𝐭𝐡𝐢𝐬 𝐦𝐨𝐫𝐧𝐢𝐧𝐠 𝐰𝐢𝐭𝐡 𝐚𝐧 𝐋𝐓𝐕 𝐨𝐯𝐞𝐫 100%.

We were asked to paper a loan assumption that looked simple on the surface.

A few years ago, a couple bought a home in the GTA with a large interest-only private mortgage.

Fast forward to today: the property is worth materially less, but the mortgage principal hasn’t moved. Payments are current. No default. Yet the LTV is now over 100%.

Here’s where it gets complicated.

The private lender is facing investor redemptions and needs liquidity. A new lender is prepared to step in and assume a portion of the existing first mortgage 𝐛𝐮𝐭 𝐨𝐧𝐥𝐲 𝐢𝐟 𝐭𝐡𝐞 𝐛𝐚𝐥𝐚𝐧𝐜𝐞 𝐢𝐬 𝐩𝐨𝐬𝐭𝐩𝐨𝐧𝐞𝐝 𝐢𝐧𝐭𝐨 𝐬𝐞𝐜𝐨𝐧𝐝 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐮𝐧𝐝𝐞𝐫 𝐬𝐭𝐫𝐢𝐜𝐭 𝐬𝐮𝐛𝐨𝐫𝐝𝐢𝐧𝐚𝐭𝐢𝐨𝐧 𝐭𝐞𝐫𝐦𝐬.

Using simple numbers: 

A $1.4m purchase with a $1.1m mortgage is now worth ~$1m (110% LTV). A new lender assumes $500k of the $1.1m mortgage in first position and the remaining $600k is then postponed to second.

On paper, everybody wins.

But just how risky is this arrangement?

⛔️ What’s the real exit if refinancing isn’t available at renewal?

⛔️ What happens on enforcement if the LTV is still underwater and there’s no cash on hand to cover the shortfall?

⛔️ How confident can the new first lender be that the postponed lender won’t push back when things get contentious despite having signed subordination terms?

Deals like this highlight the creativity (and complexity) we’re seeing in a wobbly market.