Foreclosures Explained

Understanding Foreclosures

A foreclosure is the legal process in which a lender takes ownership of a property when the borrower defaults on their mortgage. The lender, also called the mortgagee, exercises the power of sale outlined in the mortgage contract.

The borrower, referred to as the mortgagor, holds legal title, while the bank holds an equitable title, giving the owner the right to redeem (repay) the mortgage before the foreclosure is finalized.

Types of Mortgages

Conventional Mortgage: Standard loans with a set agreement between the lender and borrower.
Collateral Mortgage: Secured against other assets in addition to the property.
CMHC Insured Mortgage: Government-backed mortgage insurance that may involve additional complications.

Causes of Foreclosure

A mortgage can be breached through various actions, including:

Non-Payment: Missed mortgage payments, taxes, or insurance.
Unauthorized Rentals: Renting the property without lender permission.
Unauthorized Renovations or Secondary Mortgages: Significant property changes or additional loans without consent.
Property Condition Issues: Disrepair, hazardous materials, illegal activities, or poor maintenance.
Condominium Fees: Missed condo fee payments.
Title Issues: Unauthorized registrations or legal claims.

Foreclosure Process Timeline

Missed Payments: The lender typically sends notices after a payment is missed.
Sue and Serve (30 Days): The lender files a Statement of Claim in court and serves it to the borrower.
Redemption Period (6 Months): Borrowers may repay the mortgage in full during this period.
Judicial Listing (90 Days): After the redemption period, the lender lists the property for sale.
Court Approval: Offers are reviewed by the court. The lender may request price reductions or set possession dates.

Costs Involved

Legal fees and disbursements typically range from $7,000 to $10,000 but can reach $55,000 depending on court proceedings.
Additional costs include appraisal fees, redemption period disputes, and contested possession dates.

Representations and Warranties

As-Is, Where-Is: Properties are sold without warranties. Buyers assume all risks.
No Estoppel Certificate: For condos, buyers cannot rely on previous financial documents.
No RPR or Compliance: Buyers receive no Real Property Report.
Buyer Beware: Buyers are responsible for verifying property details and condition.

Judicial Listing Terms

The court modifies the standard purchase contract with judicial terms.
There are no guarantees about the property’s condition, size, zoning compliance, or the presence of hazardous materials.
Sellers are not required to remove chattels from the property.
No Bill of Sale: No legal transfer of attached or unattached goods.
Condo Considerations: Buyers must obtain their own condo documents and conduct independent due diligence.

No Equity Property Sales

Properties insured by CMHC may experience expedited processes.
Short Listings: Often listed for a day or a limited duration.
Limited Advertising: May only be advertised on courthouse bulletin boards or platforms like Kijiji.
Banks aim to minimize losses rather than maximize sale prices.

If a Sale Doesn’t Happen

Some banks continue to lower the price until a buyer is found.
Others may take title to the property and manage it in-house.

Civil Enforcement Sales

In cases where a lender uses civil enforcement rather than foreclosure:

Requires a court-issued Judgment.
Notice of Intent to Sell is provided with a six-month window.
Notice of Method of Sale follows within one month, allowing the lender’s lawyer to choose the listing realtor.
Bailiff Oversight: A civil enforcement agency may manage the sale.

Special Considerations

Owner Exemptions: Alberta courts provide an exemption of up to $40,000 for owners in financial difficulty.
Joint Tenancy and Divorce: In divorce cases, disputes over ownership can lead to complex legal battles.

Example Scenario

A home sells for $500,000 with a mortgage of $420,000.
The husband owes an additional $20,000 to a creditor.
After legal fees and realty costs of $25,000, net proceeds are $55,000.
After the $40,000 exemption, the remaining $15,000 is split between spouses, leaving only $7,500 available to the creditor.

Role of Realtors in Foreclosures

Advising Clients: Provide transparency about the foreclosure process and buyer risks.
Property Evaluations: Assist with property assessments without warranties or representations.
Contract Management: Ensure buyers understand judicial terms and requirements.
Professional Recommendations: Encourage clients to obtain legal counsel.

Conclusion

Understanding the foreclosure process, its implications, and legal obligations is essential when assisting clients. Always advise buyers to conduct thorough due diligence and consult legal counsel when dealing with foreclosure properties.

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