What Is a Foreclosure Anyway?

Many people do not understand the process of foreclosure. It is the means by which a mortgage lender enforces his right to be repaid his money.

When a borrower gets a mortgage loan, technically he pledges the title to his property, almost like a loan from a pawn broker. The mortgage document says that if the loan does not get repaid on time, in accordance with terms of the loan, the lender can take the property and sell it to collect his money.

Usually a mortgage has a number of promises by the borrower, such as making the periodic payments, paying the taxes, maintaining insurance and keeping the property good repair.

If the borrower fails to do any of these things, he can expect to receive a letter from the lender (or his lawyer) advising that he is in default, and that if things are not put right action will be taken.

The mortgage usually has a provision that if there is a default the lender can demand the whole balance due. This is called an “acceleration clause”. If the lender demands the balance, and the borrower does not pay up, the lender may begin foreclosure proceedings in the Supreme Court of British Columbia.

In those proceedings the lender will typically ask the court to make a declaration that the mortgage is in default, and an order fixing the amount due and owing. He will also probably seek an order fixing a “redemption period”, a time within which the borrower may pay off the loan and get title to his property back. Finally, he will ask to court to order that if the loan is not repaid by the end of the redemption period he can take title to the property himself.

When the case gets in front of a judge, usually the redemption period is fixed at six months, unless there is very little or no equity left in the property. If there is a risk the lender may not get all of his money from the property, the court may order a shorter redemption period.

The order the court makes is called an “order nisi”, a sort of interim order, but it will usually include a judgment against the borrowers personally in addition to the orders involving the property.

If the loan is not paid off, at the end of six months the lender will usually have a choice to seek an “order absolute”, which will transfer the property into the lender’s name, or more commonly the lender will ask the court to allow him to list and sell the property.

If the property is ordered sold, any offer has to be presented to court for approval. The borrower always has the right to argue against any sale on the basis that it is improvident, or that he needs more time, or perhaps some other reason.

When the property is sold by a court order, the proceeds of sale are paid out in accordance with the order approving the sale. Commission, taxes, strata fees and the like are paid first; then the first lender gets paid. If there is money left, it goes to any subsequent mortgage holder, and finally to the borrower.

If there is a second mortgage holder, he will lose his security if the first lender obtains an order absolute, so he has an interest in getting the property sold earlier. The court will often allow the second mortgagee to list the property for sale during the redemption period.

Of course, the second mortgagee always has the right to redeem the first mortgage and step into that lender’s shoes.

In many U.S. states, residential mortgages are “non-recourse” loans. That means that if the lender enforces his rights by foreclosure, he can look to the property but not to the borrower personally to repay the loan. That is not the case in B.C., unless the lender obtains an order absolute. In that case any indebtedness arising from the mortgage is extinguished.

If the lender chooses instead of asking for an order absolute to seek an order for sale, and any debt remains after applying the proceeds of sale, the lender still has a claim against the borrower for the shortfall.

DuMoulin Boskovich LLP assists both lenders and borrowers in matters relating to foreclosure and enforcement of security. Contact Andy Sandilands, Conor Zokol or Ross Ellis for advice, or if you have any questions about your situation.

Contact Andy Sandilands of DuMoulin Boskovich LLP for your legal needs.

 

andy@dubo.com