When you take on a mortgage for a property, you may not think ahead about the worst case scenarios. However as financial situations change and you find yourself facing a foreclosure on your home, you face a difficult situation in life. Foreclosures are a long and straining process emotionally and financially for homeowners.
This post seeks to explain what a foreclosure is, what parties are involved, the foreclosure process in Canada and a detailed look at judicial foreclosures.
What is a Foreclosure?
According to Investopedia, “Foreclosure is the legal process by which a lender takes control of a property, evicts the homeowner and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as stipulated in the mortgage contract.”
To put it simply – a foreclosure is what happens when a homeowner fails to pay the mortgage on their home.
What Parties are Involved in a Foreclosure?
The homeowner is someone who takes a mortgage on a home. However, this term is slightly misused as the homeowner technically does not own the home. The better use of a term is to call that person a borrower.
The lender of the mortgage, usually a bank, owns the home and the borrower is lending money through a mortgage to live in that home. The borrower pays back the lender in mortgage payments over a period of time such as 15, 20 or 30 years. That is what a mortgage is. It is a loan agreement for the purchase price of the home minus the down payment (usually 20-30% of the purchase price of a home). If the borrower fails to make these mortgage payments, they face a potential foreclosure on their home with the lender.
Details of Property Mortgage Loans and Lender Rights
Secured Loan
The mortgage document from the bank puts a lien on the purchased property, making the loan a secured loan. A lien is what the bank places against the property to have a right to that property. If you have ever had a mortgage or a car loan, then you have probably dealt with a lien before. It is a legal right of a particular party to stake a claim or a right in an asset that has not been fully paid for yet.
Most property mortgages are a secured loan. In a secured loan, the bank has a right to foreclose and take back the property for failure to pay them back.
It is the same thing in the case of a car being repossessed. When a person takes out a loan to purchase a car and does not pay their loan payments, a repossessor comes and takes back their car. The lender has a lien against the car, so they can come and grab that car from the owner or borrower.
Unsecured Loan
It is very unusual to find unsecured loans on a property mortgage. There are rare cases when a lender loans money without any collateral. Mortgage loans are of high value so it is very rare to find a lender that is willing to loan money against property in a case where they may not be able to get that money back.
First Lien Holder
The bank seeks to make sure they are in the first lien holder position. Being a first lien holder means that in the case the borrower does not make their payments, the first lien holder has the right to that asset. In this case, if the bank is in the first lien holder position, they have a right to that property.
Second Lien Holder
Sometimes, there is a second lien holder on a property. That could be a home equity line of credit or some other refinance. The second lien holder position is riskier because if a foreclosure happens on a property, the first lien holder position takes priority in the situation, leaving the second lien holder in a risky financial position.
Reasons for a Foreclosure
Foreclosures typically happen because of hardships faced in life. Unemployment, divorce or a medical challenge. Those are the main reasons why people stop paying their mortgage amongst other situations.
A drastic change in your mortgage rate leads to a foreclosure as well if the borrower cannot make their payments anymore.
Foreclosures are very difficult. It is often a last resort. It is one of the last things we want to see happen for anybody. People do not want to lose their home so they are often willing to do whatever they can to make sure that they can keep their home.
History of Foreclosures in Canada and the U.S.
Historically as house prices come down, the amount of foreclosures go up. Recently in Canada, foreclosure rates are very low. The reason for that is because house prices keep increasing, so homes can be sold for more than they were bought for.
Negative changes in the economy also create an increase in foreclosures across a nation. During the 2008 recession, we saw high levels of foreclosures across the U.S. According to CNNMoney, “There were more than 3.1 million foreclosure filings issued during 2008, which means that one of every 54 households received a notice last year.” (CNNMoney.com)
Judicial Foreclosure vs Power of Sale
In Canada, the foreclosure process varies depending on which province you reside in. Foreclosure processes are lengthy, costly and require court intervention.
Not all provinces go through with this process and instead, they allow lenders to use a power of sale. The power of sale process does not require court intervention and gives the lender control in selling the property in a short amount of time. Compared to a judicial foreclosure, the power of sale is faster and less costly.
The power of sale happens in Ontario, New Brunswick, Newfoundland and Labrador and Prince Edward Island. This process does not involve court intervention and is usually faster than the judicial foreclosure.
The judicial foreclosure happens in British Columbia, Alberta, Quebec, Manitoba, Saskatchewan and Nova Scotia. This process involves court intervention and the length of the process varies significantly.
The Foreclosure Process in Canada
*This information is not to be taken as legal advice – please contact professional legal help if you face the foreclosure process and require assistance.*
There are four main stages in the foreclosure process in Canada: missed payments, defaulting, pre-foreclosure and an auction.
STEP 1 – MISSED PAYMENTS
As we explained in simple terms – a foreclosure is what happens when a homeowner fails to pay the mortgage. Thus, the first step of a foreclosure happens when the borrower makes a missed payment. The homeowner, or the borrower, fails to make timely mortgage payments, usually because they have some sort of a hardship in life.
Grace Period
When a borrower misses a payment, it is a red flag for the bank (lender) and immediately alerts them of a potential change in the borrower’s financial situation. The borrower receives a reminder letter, informing them of their missed payment. The lender usually provides a grace period for the borrower to make their payment and get back into good standing with their mortgage.
Bank Assessment
In the meantime, the bank begins an investigation on their end. They look at all kinds of factors such as looking at the history of past mortgage payments. They use this time to assess potential risk factors of your financial situation.
In many cases in Canada, people bank where they have their mortgage and that is very commonplace. So the banks go through and look at the details of their account. They check average balances every month in the bank account, credit card limits or types of assets on deposit.
This serves as a risk assessment for the bank and at the same time, the bank gives the borrower notification of the missed payments. They really look for solutions to help the borrower overcome the foreclosure process. Foreclosures are lengthy and expensive, so if possible, banks also look for ways to avoid it.
What to do at this stage?
Borrowers typically react in two different ways. They react positively to it, deal with the bank, call them and try to work out options. Or on the flip side, borrowers react negatively. They hide from the bank or look for ways not to deal with the financial situation.
If you are in a tough situation, it is essential to talk to your lender as soon as possible. Oftentimes, lenders are pretty agreeable. That will open up doors to different financial options for the borrower. Again, it is expensive to file a foreclosure in the courts and the process is often lengthy. So cooperate with your lender as much as you can to find an agreeable solution and avoid the worst case scenario.
STEP 2 – DEFAULTING
At some point, the bank becomes frustrated with this process and they take that mortgage and assign it to a lawyer.
Demand Letter
In this stage, the lawyer acts on behalf of the bank. Their job is to transfer ownership from the person who owns it to the bank. The lawyer sends documents to the borrower and the first letter that typically comes out is a demand letter.
In this demand letter, it explains that a law firm acts on behalf of the bank and demands that you pay the balance of the mortgage. They are very clear and let you know how much you owe and when the payment is due.
A demand letter is sent before any legal proceedings can happen in a foreclosure. At this point, lenders are still usually willing to work with the borrower to figure out a payment plan and avoid a foreclosure.
Mortgage Default
The borrower typically has 20 days to file a response. If they fail to respond, the court automatically defaults the mortgage, meaning the lender now has the option to foreclose the property.
Option to Reinstate or Redeem Mortgage
Before this happens, the borrower can also choose to reinstate (restore to good standing) or redeem (pay off) their mortgage.
Notice of Default
However, if the borrower fails to respond to the demand letter and/or fails to pay back their mortgage, they will then receive a Notice of Default. The borrower then has 90 days to pay the most recent bill and reinstate the mortgage, otherwise the foreclosure process continues.
STEP 3 – PRE-FORECLOSURE
Right now number three is in the stage of pre-foreclosure. After receiving a Notice of Default from the lender, the borrower enters a grace period known as the pre-foreclosure stage.
Redemption Order
The court likely orders a Redemption Order, giving the borrower yet again another opportunity to pay back the mortgage.
If the borrower pays off this default during the pre-foreclosure phase, they get back up into good standing and the foreclosure ends. But if the effective loan is not paid off, then the foreclosure continues.
So there is an opportunity to pay and get back in good standing. To note, there is interest on that payment over the months this payment was delayed. The borrower has to pay everything they owe, plus all the interest.
If the borrower fails to pay back the mortgage in 90 days, the lender proceeds with the foreclosure process and records a Notice of Trustee’s Sale at the county recorder’s office.
Order for Foreclosure and Order of Sale
However, sometimes the court does not bother with a Redemption Order if they have reason to believe the borrower lacks the funds to pay the mortgage back in time. In this case, this process goes straight to an Order for Foreclosure.
The court also has the option to go straight to on an Order of Sale instead. This means the home is sold under the court’s control and the borrower has 30 days to vacate the home.
Option for Short Sale Process
The borrower also has the option to work out an arrangement with the lender through a short sale process. In this arrangement with their lender, the borrower sells their property for less than what they owe, and the bank is amenable to this. Why is the bank amenable to this? Well, because they would rather recoup some of their investment then lose all of it.
Bank Sells the Home
Once the bank owns the property, they really have one simple choice – they need to sell the house. In Canada, banks don’t own real estate. They’re not allowed to typically under the bank act. However, there are many opportunities for the borrower to pay back their loan and avoid a foreclosure.
STEP 4 – AUCTION
Step four is the auction and the lender or their representative set a date for the home to be sold at the foreclosure auction.
The notice of trustee sales is recorded in the county recorder’s office. Then, they deliver notifications to people all around the neighbourhood and put an announcement in the newspaper. Essentially, they provide public notice of the foreclosure auction.
Right of Redemption
The borrower has the Right of Redemption. Yet another opportunity to pay back the mortgage! The borrower has the right to go to that auction and take back their property if they pool enough money together in time. Typically, they have 5 days before the auction to get caught up on payments to avoid the foreclosure.
Auction Bid
Otherwise, the process of an auction bid occurs. Now, this does not mean a homebuyer can bid a few dollars on a home. The lender calculates an opening bid for the auction, which is based on the loan balance and any liens or unpaid taxes plus the cost of the sale. Interested homebuyers come to bid on the property and each party places their bid, not knowing what amount the other party placed on their bid. The property is sold to the highest bidder in the auction.
How Long Does a Judicial Foreclosure Process take?
The time frame is not set for the foreclosure process. It takes as little as four months to over a year. There are many variables that are determined when a foreclosure process begins. Banks can be as aggressive or not when they go after a property or home. In many cases, it depends what the banks assessment of the property is.
Banks look at the equity in the house and go after it more aggressively if they know they can sell that house quickly.
Does it have court fees on there? If it does or doesn’t, it can also speed that up.
What are the current economic conditions? What does the economy look like today? If there are a lot of houses going through foreclosure and there are a lot of listings on the market – it can take an extended period of time to sell that house and recover funds.
As well, different people default at different times. Depending on how precarious their financial situations are, as prices fall, people default at different times. As prices come down, more and more people get stretched financially. This affects how long the whole process drags on for.
What To Do When Facing a Foreclosure
As with many situations in life, getting advice on your situation sooner than later is generally better. You have more options to explore if you start early. Even in cases where you are unsure or overwhelmed, take time to sit down and figure out some basics. How much equity do you have? Can you sell your home now? Do you have to go all the way through the foreclosure process?
In many cases, you can negotiate and talk to a realtor and get their fees down a bit if you plan on selling your home. As well, earlier on, you may be able to negotiate your mortgage payments or find a way to pay off your debt. Typically, the sooner you understand your financial situation, the more options you have to deal with it. If you ever find yourself facing foreclosure, take action immediately to avoid the worst case scenario!
*This information is not to be taken as legal advice – please contact professional legal help if you are faced with a foreclosure and need assistance.*
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