My Mortgage Is in Trouble—What’s Next?
The 2007 collapse of Alberta’s real estate boom caught a lot of home-buyers by surprise. There hadn’t been a major collapse in the real estate market since 1980, then triggered by the still hated National Energy Program. Many home-buyers—both owner-occupiers and investors—had little experience in 2007/08 when prices came crashing down. As late as 2012, we were still experiencing 07/08 ‘crash backlash,’ which in 2015 has been aggravated again by falling oil prices.
Luckily it’s not as bad as the 1980s, but many folks are still rightly concerned. We get a lot of questions about mortgage default. How long does it take the bank to foreclose? What if the mortgage is now worth more than the property? Can I use a Quit Claim to get rid of the property? A very good client suggested, and I agreed, that it would be worthwhile to discuss some of these issues a little bit more. Following are a series of questions from my client and answers by me.
Client: Enlighten me. What happens if someone defaults on a mortgage in Alberta on a single-family home?
Barry: Once a borrower misses one mortgage payment they are, as the bank and the mortgage refer to it, “in default.” Most likely no later than two missed payments, the bank’s collections department makes a call. They want to know when the borrower is going make those outstanding payments. There will probably be follow-up calls until payments are brought into good standing. If payments are not brought up to date, then the bank sends the file off to their foreclosure lawyer.
The foreclosure lawyer writes what is called a Demand Letter. This Demand Letter says how much is outstanding on the mortgage, what the daily rate of interest is, what the legal fees are up to date, and threatens formal legal action if everything isn’t cleared up by a certain date. If the borrower is unable to make the payments and bring the mortgage into good standing, then the next step is for the foreclosure lawyer to start formal foreclosure proceedings. This is done by way of a legal document known as a Statement of Claim. This document is prepared by the foreclosure lawyer, filed at the courthouse, served on the borrower, and now the foreclosure process has officially started.
Client: The bank forecloses, presumably? How long does this process take from the last time a payment was made?
Barry: Depends on the lender. It is not uncommon for the bank to let at least 2–3 payments go before their collections department calls the borrower. Then perhaps another missed payment or two before they send it on to their lawyer, who writes that Demand Letter followed by foreclosure proceedings.
At the first court appearance 2–6 months after the first missed payment, any decent amount of equity in the property will get an owner-occupier six more months to bring the property into good standing. Investors are treated more rigorously. In summary, my estimate is that for an owner-occupier with equity it is 8–12 months until the foreclosure is completed. For an investor or an owner-occupier with little or negative equity it is 3-9 months. Timing depends a lot on how aggressively the lender pursues the foreclosure.
Client: What happens if there is a gap, say $50,000, between the house value once sold (by court order) and the mortgage plus accrued interest, plus, as I understand it, insurance, inspection and appraisal fees, management fees, and those exorbitant foreclosure lawyer legal fees? Is the homeowner on the hook?
Barry: For individual homeowners in Alberta, if the loan is a conventional mortgage (a mortgage not insured under the National Housing Act [NHA] and typically where the borrowed amount is less than 80% of the purchase price) then whether it’s owner occupied or for investment purposes, the bank’s security is limited to the property. If the bank forecloses, sells the property (say $$300,000) and doesn’t get enough to pay off the mortgage, (say $350,000) tough luck for the bank. They can’t chase the borrower’s other assets for what’s called the deficiency (in this case, $50,000). Not all jurisdictions are so forgiving as Alberta!
Even in Alberta, a conventional mortgage granted by a corporation does not have the same protection. The corporation is responsible for the deficiency, which is $50,000 according to our example above.
If it’s an NHA insured mortgage (usually CMHC or a private insurer like Genworth), then the borrower is responsible for the deficiency. All the borrowers’ assets are at risk. For NHA mortgages, the lender is responsible for the foreclosure action. If the borrower does not pay up the arrears, then the lender either sells the property at a loss or, if they can’t or don’t want to sell, uses what’s called a Rice Order to put the property in their own name (and perhaps later into the insurer’s name) at a court approved value. Losses are quantified by a court judgment and are then sent on to the NHA insurer and referred to as Deficiency Judgments. CMHC is by far the biggest NHA insurer and their policy seems to be that they file the Deficiency Judgment but do not actively pursue collection. Apparently they wait for the borrower to want to buy more things on credit at which time the Deficiency Judgment pops up and makes the borrower deal with the judgment if they want to borrow more money. Remember I said policy, and policies change.
Client: Is there a court record?
Barry: Yes, foreclosures start with a court action so there is a court record searchable by name of the defendant.
Client: Will s/he be able to buy a new home, in AB or elsewhere, with a mortgage or will it be hard or impossible to get a new mortgage? Will s/he get a bad credit rating if not paid?
Barry: I believe it’s more difficult to get a new mortgage and that credit ratings are affected. However I don’t know the exact details and this information would be better obtained from a lender or mortgage broker.
Client: What is different in Alberta vs., say, Ontario in this instance?
Barry: Alberta is the only province where, for a conventional mortgage, the bank’s security is limited to the property. If the lender forecloses on the property, sells it and doesn’t get enough to pay out their mortgage, they can’t chase the borrower’s other assets for the Deficiency (see above). This is definitely part of the so-called Alberta Advantage.