Podcast Episode 9: “Mortgage Basics 9/9 – True and False 3.”
Here’s the final episode in this podcast mini-series on mortgages, chock full of common questions. Can lenders put caveats on the title of my rental property? What are the legal fees for a foreclosure? The test portion of this blog post also has handy appendix covering the court process of a foreclosure in Alberta.
Mortgages: True or False
Even more fun with true and false questions:
Question # 9: My mom and dad and all my relatives are getting crappy results from their mutual funds in their RRSPs. Some of those relatives have lots of money in cash accounts. I’ve got lots of equity in my properties. They will give me second mortgages either in their RRSPs or out of it, doesn’t matter. We don’t want to be too adventurous so the LTV will never go higher than 95% and I’ll pay them 6% which will be a lot more than they were making in their mutual funds. We all think this is a good investment.
Answer: False. This is not a safe investment. If you have positioned yourself as a real estate expert and are giving this kind of advice, you are inviting a lawsuit. Prices can drop and equity can be eroded. Normal second mortgage lenders rarely go higher than 85% LTV and only to 85% if the borrower pays a ‘high sweat’ interest rate of 12 to 24%. Of course, if this kind of loan ever goes bad your family relationships will be ruined.
Question # 10: My husband took out a commercial loan for his business. Our house is in my name alone. The bank asked me to grant a mortgage on the home to secure the loan. My husband has defaulted on the business loan and the bank has commenced foreclosure on our house. I’m worried that we will lose our home.
Answer: False. Your mortgage of your own property was in fact a guarantee of your husband’s liability. Since the bank did not obtain a proper guarantee with a notarial certificate the mortgage given as collateral to the guarantee was also invalid. Guarantees, like all other parts of mortgage/foreclosure law are very tricky. If a guarantee is ever involved and been called on by the lender, don’t give up without having a foreclosure expert review the facts.
Question # 11: I just finished buying my first investment property. Very exciting! However, two weeks after closing, a very official looking document on pink legal size paper was delivered to my mailing address. That document was a “caveat” and it said that my lender was forbidding the registration of anything else against the title. My know-it-all brother says this is normal, but I don’t believe him.
Answer: True. Most lenders take both a mortgage and an assignment of rents as security for the loan. The assignment of rents can only be registered against your title by way of caveat. Whenever any caveat is registered for any reason, the Land Titles Office sends a copy to the owner at their address on title. The assignment of rents says that if you are collecting rent and not making your mortgage payment the lender can use the assignment of rents to have your tenant pay the rent directly to the lender and not to you. The assignment of rents is standard lender security and does not prevent you from dealing with your property.
Question # 12: I lost my job and the lender has started to foreclose on my two investment properties. Fortunately there is lots of equity in both properties, but the legal paperwork says that they are trying to take over the properties immediately. Also I’ve heard that the legal costs could be $20,000.
Answer: False and probably false. Courts do not like taking properties away from owners. Any equity in your property is known as the ‘equity of redemption’. You will receive a reasonable amount of time from the court to bring your properties back into good standing. This amount of time is known as the ‘redemption period’. As long as the equity in your property is sufficient so that giving you time doesn’t hurt the lender, you will get a reasonable amount of time to bring the mortgage is back in the good standing or to sell the property.
On the legal fees side of things you have to pay all of the lender’s fees and costs. Yes, there are scenarios where the legal bill could be $20,000. However, if it is a simple, undefended foreclosure action your legal fees and costs are more likely to be in the range of $1500-$5000.
Court Process of a Foreclosure
Note: In this outline, the word “Mortgagor” can be replaced with the word “Borrower”, and “Mortgagee” with “Lender”, for clarity purposes.
Generally when a borrower misses two payments the lender will have a demand letter or default notice sent out to the borrower to “encourage” the borrower to catch up on the missed payments.
Statement Of Claim
If the demand letter is unsuccessful in getting the mortgage payments caught up, a formal action for foreclosure is commenced by way of a Statement of Claim issued by the lender.
The Defendants to be named in the Statement of Claim are the registered owners of the property, any person in possession of the mortgaged property, and any persons having rights under the Dower Act (i.e. spouses residing on the property but not named on title). Those who hold a registered interest in the lands by way of another mortgage, a caveat, a builder’s lien or other encumbrance are not named as parties in the lawsuit, although those holders of encumbrances registered after the mortgage in foreclosure must be given notice of the lawsuit.
The relief requested in the Statement of Claim is generally as follows:
- A declaration as to the amount owing under the said mortgage with interest according to the terms of the said mortgage and, in default of payment, sale or foreclosure and possession of the said lands.
- An order for possession
- An appointment of a receiver
- Such other relief as to the Court may seem just
- Costs of the action
- A shortening of the period of redemption
In addition, it is important to note that a mortgage action may be commenced in a judicial district other than where the land is situated.
Application For Order Nisi
It is rare that a mortgagor in default will file a Statement of Defense. The normal course is for the mortgagor to do nothing, and then at the expiration of 15 days after service of the Statement of Claim the mortgagee will be in a position to note the mortgagor and other defendants in default.
The next step in the action will therefore be a Court application before the Master in Chambers for an Order Nisi. This Order confirms the mortgage debt and determines the length of the redemption period (the period during which the borrower can catch up the mortgage or sell the property without further interference from the lender) and the method of sale of the property if the mortgage is not redeemed. This application is brought on notice to the borrower and all subsequent encumbrance holders. Supporting documentation for that application will be:
- A Notice of Motion setting out the relief sought in the application as referenced in the Statement of Claim
- An Affidavit of Default which provides evidence to the Court as to the balance presently due and owing to the mortgagee under the terms of the mortgage;
- An Affidavit of Value, which is normally prepared by a qualified real estate appraiser, and which provides the Court with evidence as to the value of the land which is under foreclosure;
- A Certified Copy of Title showing the encumbrances registered against title
Section 42 of the Law of Property Act provides that in the case of urban lands the period of redemption shall be six months from the date of the granting of the Order Nisi. The Court however does have the authority to shorten this period of redemption if there is insufficient equity in the property to secure the mortgage indebtedness, including legal costs. Therefore, and applicant must provide evidence as to the amount of the arrears under the mortgage together with the total value of encumbrances registered against the property, and the value of the property in order that the Court may determine the equity held by the mortgagor in default and set the redemption period. If there is little or no equity in the property relative to the amount owing on the mortgage, then the Court will likely shorten the redemption period to one day and also truncate the sale process.
Advertising and Sale
Once the redemption period has expired, the property is advertised in accordance with the terms of the Order Nisi. This can involve advertising with a realtor, a tender process, or advertising in the office of the Clerk of the Court. If satisfactory offers are received through the advertising process, then an application is made to have the property sold to the successful bidder. If there are no satisfactory offers, the application by the mortgagee is for a final order vesting title in the name of the lender.
Where the mortgage is a high ratio mortgage issued by a bank and there is no equity in the property, the bank can take title the property directly by way of a Rice Order without any advertising.
Application For Final Order
The application for the final order in the foreclosure process is made again by way of Notice of Motion served on all Defendants and all subsequent encumbrancers, and is supported by a final Affidavit of Default updating the Affidavit of Default which was filed in support of the application for the Order Nisi.
The application is also supported by an Affidavit Proving Publication in accordance with the terms of the directions for advertising granted by the Clerk of the Court, together with an Affidavit either setting forth the offer which the lender wants to have accepted or deposing that no offers sufficient to pay off the mortgage have been received. In the event that no satisfactory offers are received, the lender will apply for a final order vesting title in the name of the lender.
Whether the final order is to effect the sale of the lands to an offeror or to transfer title to the lender where there are no sufficient offers, the terms of the Order will provide that the borrower has to vacate the lands by a certain date, failing which the Court will allow the lender to have the borrower forcibly removed after obtaining an Order for Possession from the Clerk of the Court.
Foreclosure is complicated so contact Barry McGuire now for the legal help you need.