A Strategy for Walking Away from Non-recourse Mortgages in Alberta
Buying a property doesn’t always work out. Sometimes investors and homeowners alike can’t keep up with their mortgages, and they face foreclosure from their lenders. This blog post is about non-recourse mortgages in Alberta and how they sometimes make it possible to avoid foreclosure with careful negotiation—as long as the lender is understanding.
Almost everyone needs a mortgage to buy a property, and almost everyone buys optimistically. But stuff happens. Job loss, divorce, falling markets, and other negative circumstances can all lead to personal economic disaster. Falling markets can quickly destroy equity in a property. We’re not just talking high ratio NHA mortgages insured by CMHC where a buyer pays 5% of the purchase price as a down payment and borrows 95% by way of new mortgage. Any twitch in market conditions can destroy that 5% down payment pretty quickly. Falling markets can affect even conventional mortgages where the buyer puts up cash of at least 20% of the purchase price and gets an 80% mortgage to pay for the rest.
In Alberta, we are still seeing the effects of the 2008 market crash—particularly in weaker segments of the market like condo conversions. Generally, a ‘condo conversion’ is when investors convert a walk-up apartment building from the 70s or 80s into condominiums. In the market mania of 2004–2007, thousands of new condo units were created and sold for amazing prices. Since the crash of 2008 there has been tremendous downward pressure on the prices of condo converted units.
“How a Former Alberta Couple Walked Away from Three Edmonton Mortgages Without Paying the Bank Anything.”
As an example, I am linking to the saga of a pair of Alberta real estate investors who had to walk away from several rental properties with non-recourse mortgages: https://albertacrisis.wordpress.com/2019/01/04/alberta-nonrecourse-mortgage/
Briefly, a non-recourse mortgage means that if someone defaults on their payments, the lender can only foreclose on the property. They cannot come after the borrower’s other assets to make up the deficiency. In Canada, non-recourse is only possible on conventional, uninsured mortgages (minimum 20% down-payment) in Alberta and, to a lesser extent, in Saskatchewan.
Here’s the background. The couple’s properties had lost so much value that the mortgages were more than what the real estate was then worth. Mortgage rates and vacancies were up, while rents were down. They found themselves in huge economic difficulty and far underwater with their condo converted rental units.
Realizing that their units were non-recourse mortgages, because of the way foreclosure law works in Alberta, they worked hard to negotiate a win-win solution with one lender. However, they found that a different lender preferred a lose-lose solution in the same set of circumstances. It’s an informative story, well worth reading to get all the details. In a nutshell, these folks negotiated a creative deal to sell their property for one bank, avoiding foreclosure and reducing the financial losses for all. Unfortunately, their proposal was not accepted by the other lender. Instead, the bank forced a costly foreclosure process to assume control of the property, negatively impacting the investor couple’s credit rating.
Overall, I applaud and congratulate our investors for the hard work they put into their successful first negotiation, fighting their way through the thickets of bank resistance. However, it is important that readers understand that, in my experience and anecdotally, banks are generally terrible at these kinds of negotiations. They have strict policies around defaulting borrowers and foreclosure situations, which they are usually unwilling to work around. The irony is that, as the linked story shows, it can actually be in a lender’s best financial interest to avoid foreclosure. Nonetheless, many of my clients have put a lot of effort into trying to negotiate a reasonable settlement with banks on non-recourse mortgages, with no success. If you’re facing foreclosure, don’t give up, but do proceed with realistic expectations.
To read more and/or listen to podcasts about foreclosure, check out these other posts:
- ‘Mortgage Default’ http://investorlawyer.ca/2015/05/25/mortgage-default/, and
- ‘Quitclaims and Foreclosures’ http://investorlawyer.ca/2015/06/23/quitclaim-foreclosure/#more-158486
- ‘What To Do About Foreclosure’ https://barrymcguire.ca/2016/06/07/foreclosure/
- ‘Creative Investing with Foreclosures’ https://barrymcguire.ca/2017/10/23/investing-foreclosures-court-notes/
“Sign of the Times – Foreclosure” image by Jeff Turner. Used under Creative Commons Attribution Generic 2.0