What is foreclosure? Generally speaking, it is a legal process whereby a Lender seeks to recover the balance of a mortgage once that mortgage has gone into default. The Lender accomplishes this by taking ownership of the land subject to the mortgage, or by forcing its sale and using the sale proceeds to satisfy the remaining balance. However, foreclosure actions are not limited only to Lenders or Mortgagees; in fact, any creditor who has a valid security interest registered against a property can commence a foreclosure action on the property once the debt is in default. For the purposes of this article, we will discuss the default and process in relation to a mortgage.
There are many ways in which a Borrower can default on their mortgage. The most common default is failing to make payments as required under the terms of the mortgage. However, there are other ways a homeowner can default on a mortgage. This includes, but is not limited to:
- failure to maintain adequate property insurance;
- failure to make other necessary payments, such as property taxes and/or condominium fees;
- failure to prevent significant damage to the property; or
- adding or removing a name from title without the Lender’s authorization.
Every mortgage is different, but the standard mortgage terms for each mortgage will outline what constitutes an event of default. It is important for Borrowers to know what these are to avoid any unnecessary foreclosure proceedings. Keep in mind that a Lender is entitled to proceed immediately with foreclosure on an event of default. To be sure, this rarely happens in practice. More often than not, a Lender will be in contact with a Borrower to try and remedy a default out of court. Typically, it is only when remedying the default outside of court becomes unlikely that a Lender will initiate foreclosure proceedings.
What Does the Foreclosure Process Look Like?
The foreclosure process can take many directions, but typically it proceeds as follows:
1. Statement of Claim is Filed and Served
• The Lender will file a Statement of Claim, which sets out the facts and event of default upon which the claim is based.
• The Lender then serves the filed Statement of Claim on the Borrower, who has 20 days after being served to file a Statement of Defence, or a Demand for Notice (which means that the Borrower does not dispute the facts or relief sought in the Statement of Claim but wants to be notified of the steps in the litigation process)
• The Borrower has no defence for non-payment of the mortgage. However, they can file a Statement of Defence when being foreclosed on for reasons other than non-payment, which they may dispute.
• If the Borrower fails to file anything within the 20 days (which is what generally happens), then the Borrower is noted in default and the Lender can proceed without further notice to the Borrower.
2. Affidavits Filed and Served
• After the Borrower has been noted in default, the Lender will file an Affidavit of Value and an Affidavit of Default.
• The Affidavit of Value sets out what the property is worth, and is completed by a certified property appraiser.
• The Affidavit of Default sets out the amounts left owing to the Lender under the mortgage.
• These documents are then served on the Borrower.
3. Redemption Order Granted
• After the foregoing documents are filed with the court, the Lender will ask the court to grant a “Redemption Order”, which outlines a redemption period, which is the period of time the Borrower is given a chance to “redeem” the mortgage by bringing all outstanding payments up to date (this could occur as a result of a sale of the property, or by the Borrower obtaining new financing to pay out the Lender from another source).
• If the Borrower fails to do this within the period specified in the Redemption Order, the property may be listed for sale by court order or sold directly to the Lender.
• Generally speaking, the Redemption Period varies from 2 weeks to 6 months, depending on various factors, including:
• The amount of equity in the property (if any);
• If the property has been abandoned or if the Borrower (and their family, if applicable) are still living in the property; or
• If the property is a unique asset.
• Legal counsel may be able to advocate for their client (either the Lender or the Borrower) to extend or shorten a redemption period, which may be a valid reason for the Borrower to retain legal counsel. Legal counsel for the Borrower may also be successful in helping navigate the process and reduce legal costs incurred by the Lender, which become part of the repayment responsibility of the Borrower.
4. Redemption Order – Listing
• If the Borrower cannot redeem the mortgage during the redemption period, the Lender will ask the court to list the property for sale.
• The Lender (through a realtor) will then place valid offers for purchase before the Court. If an offer is accepted, the property will be sold, and the sale proceeds disbursed in accordance with the direction of the court.
• If proceeds are left after paying out all parties (in accordance with the direction of the court), the balance of funds are paid into court where other interested parties may apply to have them released or paid out. The Borrower is the last person to receive any of the remaining equity from the sale of the property.
• When the amounts owing under the mortgage are greater than the value of the property, the Lender will ask for an Order for Sale to Plaintiff. In this instance, the Lender becomes the owner of the property, which circumvents the court ordered sale procedure.
Foreclosure proceedings are intimidating and can cause a Borrower substantial stress.
If you’re being foreclosed on, contact a lawyer at Schnell Hardy Jones LLP today to see what your options are and how we can help you find a solution to your problem.