6. Option 2 for a bank is Foreclosure

| POS Overview | Bank Options | Legal Aspects| Standard Charge Terms | POS Considerations | Quit Claim | Foreclosure | Power of Sale | Issues | Sale Price | POS Process | POS appropriate? | Clauses in Offer | How will Lindsay Protect you? | Conclusion

Briefly, Foreclosure is a remedy that requires court action on the part of the bank.  Foreclosure clauses and opportunities do not have to be contained in the mortgage as foreclosure is a remedy open to anyone at any time.  Successful foreclosure moves ownership from the owner to the bank, thus is a desirable outcome for some banks in some jurisdictions.

I have written about why foreclosures are not often used in Canada and Ontario, but will repeat it again below.

"One of the interesting differences between Canada and the United States is very evident in how banks exercise their remedies when an owner is in default.  In the United States many properties end up in foreclosure rather than power of sale.  The reasons for this are as follows.  Banks in the US are mostly privately owned and are very interested in maximizing their profits. 

If an owner defaults on mortgage payments, the bank will often initiate foreclosure proceedings through the courts to obtain possession of the property so they can sell it.  Banks and the US in general are a very litigious society and their systems are set up to deal with litigation much quicker than in Canada.  Thus, banks in the US will try to foreclose on properties where the owners are in default in order to have the title passed over to them via the court foreclosure action and then turn around and fix up the property and then try and sell the property for a profit.  Any profit or proceeds from the foreclosure sale over and above the mortgage amount are the banks and thus it's in their interests to profit from the transaction.  

The converse is true in Canada.  The major banks and lenders in Canada are for the most part publicly owned and certainly are government regulated.  Much more regulation than the US, that is a fact.  Banks in Canada also do not want the negative press that comes along with removing owners from properties and putting them on the street while they make a profit from the transaction.  The Mortgages Act, common law and legislation in Canada are far different than in the US.  Thus, the banks in Canada have to follow the law and the Mortgages act and the provisions of the clauses contained and allowed to be contained in mortgages and they sell the property under power of sale, while the owner is still residing in the property or not, and still retain the right to sue the owner after the sale.  This allows the banks to exercise their rights while not causing negative press amongst the public and the owners.  It's a winning situation for Canadian banks."

A bank will bring foreclosure application to court asking for a Final Order of Foreclosure (FOF) and asking the court for the transfer of ownership.  If successful the mortgagee is the owner and the previous owner and subsequent encumbrances are foreclosed and therefore they have no right to redeem the land.  The only option of the owner (and any other interested or registered parties) during foreclosure proceedings is to argue the foreclosure in the courts and redeem while the application of bank for foreclosure is before the courts, not after, it would be too late.

The advantages of Foreclosure are:

• when the bank becomes the new owner, they can sell the property without interference
• the bank can keep any surplus of funds (see above)
• foreclosure is one action for both possession and satisfaction of the outstanding debt, thus you "get it all" in FOF

Disadvantages of Foreclosure

• if the sale yields less than the debt (if the calculations of net proceeds is wrong) the bank has no recourse against the previous owner
• the owner can request that the process be converted into a Judicial Sale, which is similar to a power of sale and is used when there is little possibility of any equity or funds remaining after the sale. 
• Thus, the bank must be quite sure that the owner or subsequent encumbrancers will NOT defend the court action before you file for FOF or else you are wasting much time (again, in the US law suits are very common and the interests of the private bank are very high)

Procedure of Foreclosure proceedings

• the bank issues a letter of demand to the owner demanding that the owner brings the mortgage up to date and in good standing, otherwise the bank will sue for foreclosure (often the threat of litigation and loss of your property is almost as strong as the litigation itself)  Demand letters often work.
• the bank issues and serves it's statement of claim and the owner has 20 days to defend the claim
• the bank asks the court for a Final Order of Foreclosure (FOF) and if granted the bank becomes the owner of the property

What are the rights of the owner/mortgagor under foreclosure?

• The owner may request in the courtroom to redeem and pay all outstanding debt and often the court will give the owner 60 days to redeem
• The owner can ask the court to issue an order for a Judicial Sale and have the property sold through the courts.  The normal method of Judicial Sale is an auction and these are seen in the province of Ontario.  Most often, real estate agents do not get involved with judicial sales.  Real estate agents may represent a buyer at an auction, but they do not list Judicial Sale properties on the mls very often.
• the owner also has the option to sell the property and they can file a request in court to redeem and list the property for sale and try to sell it

What analysis is necessary in deciding whether foreclosure remedy is appropriate for the bank/mortgagee?

• the bank must assess the value of the property as compared to the amount of mortgage debt and decide if FOF is a profitable method of sale.
• the bank must assess the risk of the owner/mortgagor converting the FOF action to to a Judicial Sale - if the risk is high, then POS may be a preferred route to save on costs and time

In conclusion, Foreclosure can be risky as the entire process could be for nothing as the owner may defend the action in court.  Thus, it's important to analyse the owner and the owners propensity and ability to defend the action, not always an easy task.  Again, private banks, especially in the US, have a preference and propensity to go to court, thus another reason why Foreclosures are so popular and frequent procedures taken in the US.

The next section will discuss the third and most often used option in Ontario and that is when a bank sells the property under Power of Sale

This series of articles about Power of Sale Properties, Foreclosures and advice when you purchase a power of sale property is brought to you by Lindsay Schenk  Please understand that these are my personal thoughts and experiences, do not use my information herein as legal advice and always professional seek legal advice on any issue pertaining to real estate and especially Power of Sale.

| POS Overview | Bank Options | Legal Aspects| Standard Charge Terms | POS Considerations | Quit Claim | Foreclosure | Power of Sale | Issues | Sale Price | POS Process | POS appropriate? | Clauses in Offer | How will Lindsay Protect you? | Conclusion

If you have any questions or require further information about Power of Sale properties or anything to do with real estate, please send me an email

I can assist you with all of the complexities when you purchase or sell your next home.  Please don't hesitate to email me

Thank you,
Lindsay

You may read more about Power of Sale, Bank Sales and Foreclosure Properties

or go back to list of Real Estate Helpful Articles

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Sign up to receive Foreclosures, Power of Sales and Bank Sales for MLS listings and properties in Mississauga and Oakville Would you like to receive the new residential Power of Sales or Bank sales or Foreclosures in the Mississauga, Toronto, Oakville and GTA areas?  This would include new power of sale and bank sale listings as they are added to the MLS database system.  You may fill in the fields below and click "Sign Me Up!"   What is a power of sale property? POS disclaimer Your Email: Your Name:       By submitting this form you are agreeing to these terms.  Everyone who fills out this form is now automatically signed up to receive my real estate newsletter.  You can always unsubscribe after you receive your first issue.  It could be worse!   You may read the latest issue of my On-Line Real Estate Newsletter before you decide. Yes, I agree to the above   I would have signed up anyway Yes, I agree, but I would prefer not to sign up Agents and Realtors beware You will receive a very fast answer from Mark.  Thank you and have a great day! Definition of Foreclosure or Bank Foreclosures:  A situation in which a homeowner is unable to make principal and/or interest payments on his or her mortgage, so the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract. Power of Sale and Tax Sale properties - questions and answers What is a Power of Sale Property? When a borrower defaults on a home mortgage, the lender may attempt to recover its losses by selling the property under power of sale. Definition of Power of Sale:  A clause commonly inserted in a mortgage and deed of trust that grants the creditor or trustee the right and authority, upon default in the payment of the debt, to advertise and sell the property using standard methods such as the MLS or at public auction, without resorting to a court for authorization to do so and without actually taking possession of the property. Once the creditor is paid out of the net proceeds, the property is transferred by deed to the purchaser, and the surplus, if any, is returned to the previous owner (the debtor).  The debtor is thereby completely divested of any interest in the property and has no subsequent Right of Redemption—recovery of property by paying the mortgage debt in full once title has transferred to the new buyer. You will often see advertisements about Court Auctions, Pre-Foreclosures, Homeowners in Bankruptcy, HUD Homes, VA Homes, Government homes and similar sounding wording.  In my experience, many of these types of investment property opportunities come out of the US and are not as common here in Ontario.  In our trading area, most of the POS, Tax Sale properties or foreclosure properties are put on the MLS before they reach the point of foreclosure.  The reason for this is that our provincial laws are very strict about the procedure and marketing of a power of sale property and the company or person who is initiating the power of sale must do their best to obtain what is called TRUE market value as opposed to fair market value for the property, otherwise if the property is sold too far under TRUE market value, the owner could sue them for the difference.  Another reason is because power of sale is much less expensive remedy for the lender to attempt to get their money back. What's an estate sale? What is a Distressed Sale?   Why fix up run-down homes?  Sadly for the previous owner, the answer is simple: Your potential accelerated wealth creation. Adding value to run-down homes through quick cosmetic rehabs is one of the most powerful leverage tools available to property investors.  Traditional 'buy and hold' strategies are too slow for the investor looking for accelerated wealth creation.  On the other hand, buy and hold strategies show strong price growth over time and seem to work well here in Ontario and the GTA. Please understand that these are my personal thoughts and experiences, do not use my information herein as legal advice and always professional seek legal advice on any issue pertaining to real estate and especially Power of Sale. You may use this form to subscribe to automatically receive power of sale and bank sale listings in Mississauga, Oakville and the GTA.