Although they are both commonly referred to when discussing non-payment of mortgages, Power of Sale and Foreclosure are very different processes. With rapidly rising interest rates, many Canadians are struggling to pay their existing mortgage or are having to renew their mortgage at much higher rates than previous.
Unlike American TV shows where there are a bunch of people standing on a front lawn for a public auction, Canadian lenders rarely do this. Canadian lenders prefer power of sale over foreclosure, where the proceeds first pay off any lenders (mortgage or loan on the property). Then, after all debts have been paid, any further sale proceeds are given back to the seller/owner. Therefore, the focus of this blog will be on Power of Sale.
It’s also worth noting that in Canadian real estate, the banks do not want your home. They are not interested in becoming landlords. All they want is their money back, so good communication with your lender is the key to avoiding this process. A power of sale or foreclosure is a last resort by a bank.
What’s the difference between the power of sale and foreclosure?
In a Power of Sale, the lender forces a sale on the public market. They get all funds owed to them, while the current owner keeps any excess profit. In a Foreclosure, the lender takes ownership and also keeps all profits from the sale.
What is a Power of Sale?
It’s worth noting that most lenders would rather pursue a Power of Sale over a foreclosure. This allows the homeowner to pay off their debt and keep a profit.
In a power of sale, the mortgage lender is able to evict the property occupants. They can then sell the property if the borrower is in default of the mortgage.
But this isn’t like may be envisioning. It’s not some sort of auction of the house on the front lawn, where the home sells at the highest offer.
In a power of sale, the lender must sell the property at fair market value. It cannot be sold at a deep discount. In a Power of Sale, the owner is still on title but because they are behind on payments, the lender is forcing a sale.
Once sold, the homeowner receives any profits from the sale after deducting debt repayment and applicable 3rd party fees. These could include mortgage arrears and penalties, 3rd party fees, legal fees and real estate commissions.
Since all the excess profit from the sale goes to the former homeowner, lenders typically do not earn additional profit from completing the power of sale.
Power of Sale is a much faster process than Foreclosure and requires less involvement from the court system. Most Power of Sales will be complete within 6 months but a Foreclosure can take over a year to complete.
What is a foreclosure?
In the Foreclosure sale process, the lender is able to take title to the property (this differs from Power of Sale where the owner remains on title). With Foreclosure, the lender must sue the owner in court and wait for the courts to issue judgment.
This requires a lot more work from everyone. In addition to taking more time, this requires much more legal work to be process by the lender’s lawyers.
Once the Foreclosure is complete, the lender takes title to the property. The former homeowner will not receive any future profits from the sale of the property.
This means that if the value of the mortgage is much less than the value of the property, the lender is able to make a large amount of money using foreclosure.
Why does a power of sale or foreclosure happen?
A tough combination of COVID 19 and rising interest rates has been wreaking havoc on a number of industries since March 2020. As a result, the terms “Power of Sale” or “Foreclosure” come up in the news a lot more often. But how does a homeowner get to this part of the process?
The process begins after the borrower (homeowner) fails to follow through on their obligation (the borrower defaults) by not making the scheduled mortgage payments. Typically, the borrower has failed to make one or more mortgage payments and has not been in contact with the lender or have avoided calls. This is a bad idea.
Here’s an example:
let’s say your monthly mortgage payment is $3000 and you pay on January 1st. You don’t have the funds available so you just let the payment bounce. At this point, you are in breach of your mortgage contract and the bank has the legal right to start the process. However, they don’t really want to. The bank will call you to find out why you missed the payment. If you ignore the bank, it gets worse. If you work with the bank, you’ll find that they’ll be very flexible to try and work with you to either come up with a payment plan or re-structure the mortgage. Working with the bank could avoid the legal third party process of re-possession.
Although far less common, other defaults include the breach of a covenant in the mortgage: failure to insure the property, pay realty taxes, purposefully damaging the property, or using the property for an illegal use or activity. In the case of a breach of covenant the lender must contact the borrower in writing to notify them that they are in default of the mortgage terms and give them an opportunity to remedy the default.
What is the process for a Power of Sale or Foreclosure?
As mentioned, both Power of Sale and Foreclosure are last resorts. The Lender just doesn’t appear on your doorstep or change the locks without notice. These processes share many of the same legal documents.
In both cases they begin with legal action such as a Notice of Sale. Then after a 35 to 40-day period, the statement of claim is sent followed by the Writ of Possession. In the Statement of Claim, it will be clearly stated whether the action is a Power of Sale or Foreclosure.
- Step One: Contacting the Borrower
- Two: Delivering a Notice of Sale
- Three: The Redemption Period
- Four: Application to Take Possession of the Property
- Five: Selling the Property
Let’s look at these steps a little closer:
Step 1: Contacting the borrower
Upon default, the lender must contact the borrower. This is typically done in writing via a demand letter that is hand delivered or sent via Registered Mail. This letter notifiers the borrower that they are in default, as well as the opportunity to improve it.
Step 2: Deliver a notice of sale
If the borrower ignores step 1 and continues to be in default, the lender can deliver a Notice of Sale or a Notice of Default. This can only be done after at least 15 days following the default.
Once the Notice of Sale is sent, the lender must wait 35 -40 days before taking any further action. This is known as the “redemption period”.
Step 3: Redemption Period
The borrower obtains the redemption period to bring the mortgage into good standing, or pay off the entire mortgage debt (including the legal fees).
If the borrower chooses to not rectify the situation within the Redemption period, the lender can issue a Statement of Claim. This allows them to collect what the borrower owes and for possession of the property.
Step 4: Preparing for take back of the property or force a sale
Once the lender issues and serves a Statement of Claim, the lender can obtain default judgment (or deficiency judgment). After signing the default judgment, the lender must then bring a motion to request leave of the court order to allow for the issuance of a Writ of Possession.
Once the lender issues a Writ of Possession the lender delivers it to the Sheriff. The Sheriff determines a date on which to evict any borrowers living in at the property. They will give them a chance to move out of the property. If the borrowers do not voluntarily leave, the Sherriff can arrange for their removal. A exercise of a power of sale now happens.
Step 5: Selling the property
Once any occupants of the property vacate, the lender or mortgage company can then proceed. They will sell the property as a public sale. The mortgaged property must sell for fair market value, not at a steep discount. Such sale would ideally close quickly and to the highest bidder (if applicable). This is to ensure that the lender gets their funds back. The ownership of the property changes hands at the time of the closing.
The Power of Sale process takes around 6 months, Foreclosure can take over a year
Can a homeowner stop the power of sale process?
Every method of stopping a Power of Sale or Foreclosure involves paying the mortgage lender the money they are requesting. Here are some of the most common ways people manage to pay off their lender:
1. Get a second mortgage to bring the first mortgage back into good standing
2. Consolidate and start over: Replace a problem mortgage and outstanding balance with a new mortgage deed
3. Sell the property through a Guelph Realtor
The best solution may vary. It depends on the value of the property and the total value of mortgages. Plus, the stage of the legal process the lender is currently in. The simple solution: get a new mortgage in order to pay the arrears plus fees on the first mortgage. This allows you to bring it back into good standing.
If you cannot qualify for a mortgage you should sell the property before the lender can take it. This way you avoid many of the fees involved with the Power of Sale. You can also avoid losing equity in the case of Foreclosure.
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Have questions about the Power of Sale or foreclosure process? Need Guelph Real Estate agents to guide you? If so, get in touch with us!
