Today we look at Power of Sale and Foreclosure. They’ll both commonly referred to but are very different.
What’s the difference between the two?
With COVID 19 wreaking havoc on a number of industries since March 2020, it’s possible that you’ve heard the terms “Power of Sale” or “Foreclosure” come up in the news. Typically when we think of these terms, it’s usually in reference to the United States market. Here in Canada, both Power of Sale and Foreclosure are rare.
Although these processes are very different, it’s ultimately in response to one thing: the mortgage lender just wants their money. A Power of Sale or foreclosures are a last resort. Mortgage lenders are not in the real estate business and do not want to take possession of a home. Lenders are just trying to recover all, or as much of the money they lent out.
The two processes can result in very different outcomes for a homeowner, but many homeowners do not know the differences between these processes. If you receive a legal notice from your lender it is important to understand which legal process is being applied. Depending on this, the timeline and the amount the homeowner receives after the process can be vastly different.
Let’s review what each one is:
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 and keep a profit.
In a power of sale, the mortgage lender is able to evict the property occupants and sell the property if the borrower is in default of the mortgage. But this isn’t like may be envisioning: some sort of auction of the house on the front lawn, where the home sells at the highest offer for a steep discount.
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 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.
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 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. 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 Statement of Claim is issued and served, and the mortgagor does not file a Statement of Defence, the lender can obtain default judgment. After signing the default judgment, the lender must then bring a motion to request leave of the court 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.
Step 5: Selling the property
Once any occupants of the property vacate, the lender can then proceed to sell the property. The property must sell for fair market value, not at a steep discount.
The Power of Sale process takes around 6 months, Foreclosure can take over a year
What Can a homeowner do to stop this process?
While the two legal processes have some major differences, the methods of stopping these processes are similar. 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 with a new mortgage
3. Sell the property through a Guelph Realtor
The best solution may vary. It depends on the value of the property, the total value of mortgages and what 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.
This is especially important in a strong sellers market. Where buyers are lining up for home purchases, a realtor can help you achieve top dollar so that you have greater equity after closing.
Why does a Power of Sale happen?
Most people think a Power of Sale happens because someone doesn’t pay their mortgage. Although in most cases this is true, legally a default occurs where a borrower has violated one or more terms of their mortgage agreement. The most common of these is the failure to make a required regular payment. Other examples of default include:
- A failure to have adequate property insurance
- Not keeping the premises in a reasonable state of repair or violating property standards
- Failure to pay their property taxes
- Using the property for an illegal purpose such as a drug operation or gambling facility
Are there more Power of Sale and Foreclosures happening during COVID?
Surprisingly, no. Not according to CMHC data.
According to CMHC, Guelph has some of the lowest default rates in Canada! As of Q3 2021, the mortgage default rate in Guelph was 0.3%. This is lower than the Ontario average of 4.6 and the Canadian average of 4.4. All three (Guelph, Ontario and Canada) have had declining default rates since 2012.
However, at the same time new mortgage debt has more than doubled in Guelph since 2012 to almost $440K in Q3 2021.
It appears, based on CMHC data that more Canadians saved money and less were in a position of mortgage delinquency. However, they appear to be piling those excess funds into the real estate market. In fact, Canadians go to extreme levels to ensure that their mortgage payments are met. COVID has impacted many industries whereas other were not.
In fact, the percentage of homeowners with a 660 or less credit score has been steadily decreasing over time in Guelph. This means that Guelphites are improving credit.
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!