By Peter H. Cass, with Carlie Vanderpost
Disclaimer: This article is not a substitute for legal advice. No action in regard to your particular matter should be taken until you have first sought full legal or professional advice from a lawyer fully retained to act on your behalf.
Introduction
Mortgage remedies for default are like most insurance policies: mostly unknown or not reviewed in any detail until a problem arises.
Every borrower, who has trouble meeting obligations, should be proactive to protect their credit rating, save on costs and reduce the potential for loss of equity in the security. At the end of this article, I will lay out a few creative options that I have seen work.
There are important differences between the types of security a lender has, the type of lender, and the type of property. I will describe these, in the following paragraphs.
For Houses That Are Owner Occupied
Where the lender is a bank or Trust Company (or similar institution), the usual procedure is that, when payments cannot be made in full and on time, staff at the lender’s office will contact you and try to work something out. Some clients are reluctant to deal with this approach. Not communicating with the lender is a serious mistake, as it will trigger default proceedings. Bear in mind that lenders have time limits that they have no control over. For example, when a mortgage is insured by Canada Mortgage and Housing Corporation (“CMHC”) or another insurer that has been paid a fee to protect a lender from loss, that insurer will void coverage if its timing is not followed. For uninsured mortgages, the lender will have an internal time limit—in my experience about 60 days of arrears before it is required to send out a sale notice. What’s behind this is that the quality of an institutional lender’s portfolio of mortgages is monitored by regulators, auditors, and those who invest in its stock.
Choices A Lender Has
Usually, an institutional lender will wait before issuing a sale notice. By law, the delay has to be at least 15 days after default and is often longer due to governance policies and the optics of public relations—let alone the good sense of allowing some leeway for a family to stay in their home. A sale notice allows a minimum of 35 days for a borrower to catch up. So now we have a total of at least 50 days grace, on top of what often is about 2 months of discussion time. Once that time is up, the routine procedure is issuance of a claim through the court, for payment and possession. A lender cannot take possession by eviction without an order from a judge. The minimum time to do that is 20 days after service of the claim. You can extend that by a further 10 days by filing a notice of intent to defend. One of the problems with all this is that the legal and other costs of the lender are added to the balance under the mortgage, and these pile up quickly.
Private Lenders Are Different
Not generally known by borrowers, is that a private lender doesn't have to wait as long as it takes to issue a sale notice and then a claim. Private lenders often want to move faster, and they can do that by issuing the claim, serving it, and then sending out a power of sale immediately. That way the 35 days for redemption, and the 20 or 30 days before your defense that is needed on the claim for payment and possession, run at the same time. Time and money are both working against you. By proceeding this way, legal costs are added to the balance under the mortgage much more quickly and in larger amounts.
Commercial And Investment Properties
There is a major divide between single family houses and any kind of income property. In those, the lender will hold security entitling it to notify the tenants to pay the rent, not to the landlord, but to the lender. This creates an immediate cash flow problem for the borrower and makes it much harder to remedy the default. There is the added problem that most investment loans say that the borrower cannot obtain secondary financing or additional financing without lender permission. A further difference between income and residential property that is owner occupied is that a receivership is much more likely with income property. The costs of the receiver are considerable and, as with other default costs, will be added to the mortgage balance.
Foreclosure
Foreclosure is a word often used, but very different from the more common power of sale. In a power of sale, the owner's equity, after payment of all prior claims and expenses, goes to that owner. In a foreclosure, a claim is issued and, eventually, if the default continues, a court will make an order that the lender is a new owner. When that happens, second, third, fourth and other security and lien holders can be cut out. I have seen that happen once the court is satisfied that there are no other reasonable or fair alternatives. When served with a statement of claim for foreclosure, an owner is entitled to convert that claim into a sale. That conversion does not prevent the foreclosure if a suitable buyer is not found in time. Court costs are considerable to defend and delay a final order of foreclosure.
Summary
There are many legal technicalities that affect the rights and obligations of a borrower who has not been able to pay or otherwise perform under the mortgage. A key issue is how much equity a borrower has to protect and, along with that, how much help the borrower can get from an equity lender and/or friends and family. A Registered Retirement Savings Plan (“RRSP”) can be a source of a loan to save the day. Terms can be low interest, or even, no interest, but a participation in increased value. “Rent to own” is also an option that may work. It involves an agreement with an investor, to give that investor control of title, with the former owner having the right to buy it back at a stated price within a certain time limit.
We are here to help and explain the choices that you can make when your situation starts to deteriorate. I emphasize, “starts,” because, all too often, I have seen expensive debt taken on to keep paying mortgages, or big legal bills from lawyers for lenders who are already on title, leading to a forced sale and even more losses over just a few months. Adding insult to injury, is the effect of delay on your credit score and, therefore, your ability in future to finance a purchase when you get back into the market.