An interesting point that I have always found fascinating about the United States was the high number of mortgages that default. Talking to REALTORS® this week, I’ve asked and most argue it is common. This is drastically different compared to Canada, and I have done some digging below to help you understand the process from a Canadian perspective.
A mortgage is essentially a contract outlining an agreement requiring a payment on a loan, and the means as to how the monies will be recouped by the lender. A mortgage loan is established through the lender, whether it be private or by an institution, secured by real property. The borrower is then indebted to pay back the remaining balance through predetermined payment schedules until discharged in full. For the most part, mortgage loans written include clauses that include detailed dates and times regarding amounts owed and duties of each party to another. With a focus on financial institutions, at any point during the term of the loan if the borrower ceases to perform, as per the loan clauses, the mortgage will be deemed in default. In Ontario, Canada, once this is established the most commonly used method to enforce mortgage default takes place with the borrower beginning the Power of Sale process that does not require judicial proceedings.
Violating any terms of the mortgage agreement can result in a mortgage default, however reasons consist of failure to make a required payment, failure to pay property taxes, or provide adequate insurance on the property. With regards to non-payment, there includes a clause coined “grace periods” that are designed to provide the borrower additional time to make payment without facing a late fee charge. If the borrower makes payment during the grace period, it is assumed to be on time, however after the grace period elapses, late fee charges are applicable. “Grace periods primarily benefit the borrower. Fortunately, mortgage companies recognize that borrowers may need more than a couple of days, thus mortgage loans have a typical grace period of 10 to 15 days” (E-Personal Finance, 2013). If the borrower does not make payment during the grace period, the mortgage is then considered to be in default. Defaults in Canada account for less then 1% in the past 20 years, and are therefore very uncommon.
Defaulting a mortgage loan is an event that occurs as the last means for a lender to recoup monies owed. Though unfortunate, unexpected circumstances can often push borrowers into unanticipated situations. This can in turn result in a borrowers’ violation of the terms set out within the mortgage loan, thus resulting in default. Typically, if no payment has been made within the first 30 days after the payment due date, the mortgage is considered to be in default. Although the process varies depending on written clauses, terms, and provincial legislation, banks utilize the services of a credit agency or a demand letter in an attempt to receive the outstanding balance. “Where, pursuant to any condition or provision contained in a mortgage, there has been made or given a demand or notice either requiring payment of the money secured by the mortgage” (Mortgages Act, Section 42.1, 1990). After no payment has been received upon 30 days, it is then determined that the borrower has defaulted their mortgage, and the financial institution will act and issue a notice of mortgage default to the borrower.
The Power of Sale process is most commonly practiced in Ontario, where the mortgage loan includes a clause allowing the lender to sell the property if a default ensues. If the lender profits less then the debt owed they can thus sue the borrower for the remaining deficiency. However, if the real property sells for a surplus the borrower must return the funds back to whom its due, whether to the borrower or creditor. Since selling a defaulted property is considered a forced sale, to ensure all parties involved are not at a loss, it is one of the most efficient methods used in Canada. Throughout this process, the borrower is given time to pay back the monies owed to the lender. The process involves an initial 15 days until a Notice of Sale is issued. A redemption period of 40-45 days is then allotted to give the borrower additional time to put the debt in good standing. If payment is not made, the lender can then issue a Statement of Claim to the Supreme Court of Justice to repossess the real property. An additional 20 days are allotted to issue a defense where they would then obtain a default judgment, or 30 days if they issue a Notice of Intent to Defend. Throughout this process, if the borrower still does not put the mortgage loan in good standing, they are then issued a Writ of Possession, ensuring they are legally evicted from the real property (Martyn, 2011).
As is life, unexpected circumstances are bound to happen. Therefore prior to defaulting a mortgage, borrowers’ and lenders’ are encouraged to work together to establish the most suitable repayment plan. The Canada Mortgage and Housing Corporation (CMHC) provides borrowers’ facing financial difficulties with relevant advice and information regarding mortgage payment difficulties. CMHC is Canada’s national housing agency; providing mortgage loan insurance, securities, housing policy, programs, and housing research. “CMHC works to enhance Canada’s housing finance options to assist Canadians who cannot afford housing in the private market, improve building standards and housing construction, and provide policymakers with the information and analysis they need to sustain a vibrant housing market in Canada” (CMHC, 2013). Although CMHC is not directly involved with the default process, as a national voice on real estate, CMHC provides great insight should the circumstance arise.
If a borrower determines they are unable to make payments, three simple steps are suggested by the CMHC to resolve financial difficulties prior to default:
- Talking to a mortgage professional to communicate the financial difficulties encountered (CMHC, 2013)
- Clarifying the financial picture of the borrower prior to meeting with the lender to communicate all financial obligations (CMHC, 2013)
- Remaining informed to ensure the borrower can make the best decision regarding their financial situation (CMHC, 2013)
Since defaulting can result in a number of serious consequences, specifically affecting the borrowers’ financial stance and credit score, an educated stance on the process of default is one of the best approaches to ensure it does not occur. Communicating directly with the lender if difficulties arise can provide the borrower enough time to make an informed decision. This can further create mutual incentives to reach an agreement to safeguard all parties so that a loss is not incurred. If facing difficulties, and worrying whether or not payments should be made regarding a mortgage, communicating with the financial institution and working in conjunction with the lender will ensure a default is a last necessary measure.