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May 05, 2020

THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part IX of a Series –To foreclose or not to foreclose?

A private mortgage lender has a choice of remedies available to it following a default occurring under its private mortgage. As I’ve written in previous posts, preliminary mortgage recovery steps include the issue of a formal demand letter – preferably after some form of initial contact by the private mortgage lender with the homeowner - in order to discuss ways in which the homeowner/mortgagor might cure the default and bring the mortgage back into good standing. But when the preliminary steps fails to resolve matters, and the mortgage default appears to be long term, the private mortgage lender has to choose between two mutually exclusive remedies that are available.

This choice of remedies is fundamental. On the one hand, the private mortgagee can exercise its remedy of foreclosure in order to become the absolute owner of the home. One can think of foreclosure as a swapping of the debt in exchange for the ownership of the property. Put another way, the private mortgagee can accept ownership of the real property but in exchange must give up on its right to collect the indebtedness owing to it by the owner/mortgagor.

Or, on the other hand, the private mortgagee can instead sell the mortgaged property in order to use the net sale proceeds to reduce or, hopefully, repay in full the mortgage loan. This power of sale may be exercised entirely free of the court's process (as part of a mortgagee's self-help remedies), or in rare circumstances, a sale under the court's guidance, called a judicial sale, can be prosecuted.

With foreclosure, the private mortgagee becomes the absolute owner of the property - who then loses its ability to pursue the homeowner/mortgagor for repayment of the mortgage debt. This is the usual mortgage remedy in Canada’s 4 westernmost provinces. But one must appreciate that foreclosure is completely inconsistent with the power of sale remedy, in which the private mortgagee sells the mortgaged property to a third party and uses the net sale proceeds to repay the debt. Unlike in a foreclosure action, the sale of a mortgage property under the mortgagee’s power of sale does not affect in any way the mortgage lender’s right to collect the remaining debt from the homeowner after the sale is completed, if the net sale proceeds are not sufficient to repay the debt in full.

And so, the choice is clear. Private mortgage lenders have to decide - after default and demand - whether they would prefer to foreclose and own the property absolutely (in exchange for the debt), or alternatively, whether they would prefer to sell (power of sale) the property and use the net sale proceeds to reduce their indebtedness owing by the homeowner.

Needless to say, there are pros and cons to each remedy. Foreclosure requires the mortgagee to start a Foreclosure Action in the courts. While exercising a power of sale does not necessarily require any court action to be taken at all. Foreclosure can be fairly quick, if no one objects to the process. Power of sale can be quick, as well.

Perhaps the greatest concern with foreclosure is that the homeowner or any subsequent mortgagee can simply file a piece of paper with the courts that stops the foreclosure in its tracks and which requires the mortgagee to sell the mortgaged property under what is called a ‘judicial sale’. There is no going back to foreclosure when this happens. So, the most significant risk of going the foreclosure route is that the mortgage lender might find itself selling the property under a judicial sale, rather than selling the property under its power of sale.

More about this choice of remedies from an historical perspective in the future posts. Next post will briefly look at the history of mortgage remedies. As always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and mortgage remedy team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.

Be well and stay healthy.