When Can a Bank Foreclose on a Mortgage?
By N. Balani
What is a Foreclosure?
Foreclosure is a legal process under which the lender takes charge of the asset (property) from the borrower who has missed payments on the loan. The lender gives the homeowner or the borrower an opportunity to sell the property and repay the dues within a stipulated time frame. If that fails, then the lender must claim the outstanding balance by legal foreclosure i.e. taking over the property and selling the property in auction.
To clearly understand what a foreclosure is, let us make clear that the “homeowner” is the “borrower”, and “the lender” is the bank or financial institution or mortgage lender who provides the mortgage. Both parties are bound by an agreement (mortgage contract) where the interest rate and amounts due each period are stated (mortgage payment) and must be adhered to by all parties until the end of the contract period. Once this contract is broken or breached in any way the lender has the right to recall the money owed by taking over the property/asset and putting it for sale to get back the outstanding amount.
Steps leading to Foreclosure
Missed Payment is never a good thing
The first sign of trouble is when the borrower misses periodic mortgage payments. The first missed mortgage payment could be due to loss of employment, death in the family, divorce, medical conditions, or any other financial difficulties the borrower may face.
Whatever the reason for the missed mortgage payment, the borrower must try to bring the charges back on track. If there is a known issue, it is better to call the lender and have a discussion to see if there is any scope to defer the mortgage payment.
The missed payments will also reflect in the borrower’s credit report and negatively affect the credit score.
Three months of missed mortgage payment means a Notice of Default
The next stage is when the situation worsens, and there are several missed mortgage payments. If there are 3 to 6 months worth of missed monthly payments, then the mortgage lenders send a Notice of Default (NOD) to the borrower pending legal action if not resolved. Generally, the mortgage lender will send a NOD in the fourth month of past due payments.
In many states and provinces, the lender must display these notices on the front door of the property in question.
Usually, the mortgage lender will give the borrower 30 days to respond or remedy the past dues before formally starting any foreclosure procedure.
Judicial foreclosure is not an easy process
Judicial foreclosures are not easy – they are typically long and challenging for both the borrower and the mortgage lender. Hence, it is in the interest of both parties to come to an acceptable resolution.
After 120 days of being behind in the payments, the mortgage lender can start a formal foreclosure procedure. Lenders cannot legally initiate foreclosure proceedings until the borrower is 120 days past due.
Average days to Foreclosure
What is the Pre Foreclosure Stage?
After receiving a Notice of Default the borrower is in the pre-foreclosure stage. At this point, the borrower enters a grace period. There is still time to try and save the home and avoid mortgage foreclosure. The grace period varies from 30 to 120 days depending on each state/province’s judicial process.
Notice of Sale or Auction
Once the period is over, and the default is still not remedied, then the lender files a notice of sale. The lender sets a date for the sale of the home, also referred to as a foreclosure auction. An eviction notice is served and the home is set to be sold. The home is sold to the highest bidder for cash payment only to obtain the outstanding amount.
The homeowner typically has up to 5 days before the auction as one last opportunity to pay back the past dues.
Since the number of buyers with sufficient cash on the spot is limited, many lenders have an agreement in place with the borrowers to take the property back.
This agreement is called a deed in lieu of foreclosure. If the bank buys back the property at the auction, then the home can be listed and sold on the open market as a bank-owned property.
Power of Sale vs Judicial Foreclosure
Many provinces in Canada allow a power of sale instead of a lengthy judicial process.
The power of sale (nonjudicial foreclosure) allows the lender control to sell the property in a shorter time to recover the dues and is less costly and does not require judicial involvement
The provinces in Canada which allow a power of sale are Ontario, New Brunswick, Newfoundland and Labrador, and Prince Edward Island. The provinces where foreclosure sale procedures are in effect to recover dues are British Columbia, Alberta, Manitoba, Saskatchewan and Nova Scotia.
In the USA, in 22 states including Florida, Illinois, and New York, judicial foreclosure is the norm. The other 28 states including Arizona, California, Georgia, and Texas, primarily use power of sale.
Canada vs. USA differences
Historically in Canada, there are fewer defaults on mortgages. The chart below shows us the Canada-wide rate for foreclosures. As reflected below, the foreclosure percentage to mortgages is only 0.15%. An extremely low number as many checks and balances are in place.
Source: Canadian Bankers Association
Generally speaking, when house prices go down, the foreclosure sales go up.
For example, in the USA (and Canada) when the 2008 financial meltdown occurred, home prices crashed, and there were extremely high levels of foreclosure sales. According to CNN Money’s website, “There were more than 3.1 million foreclosure filings issued during 2008, which means that one of every 54 households received a notice.”
The mortgage company Fannie Mae (The Federal National Mortgage Association, commonly known as Fannie Mae) and Freddie Mac had become illiquid due to the subprime mortgage crisis which led to the eventual collapse of the housing market in the USA. Foreclosure proceedings and foreclosure numbers hit a record high in 2009
(see chart below).
Can you Avoid Foreclosure?
There are still a few ways to avoid foreclosure after the first missed mortgage payment and beyond:
Special Forbearance – The lender may reduce or extend or defer missed payments for a short period under exceptional circumstances like temporary medical emergency or illness, temporary loss of income, or financial hardship.
Short Refinance – Under short refinance, there may be a loan modification as the lender may forgive some of the outstanding loan amounts to help the homeowner avoid foreclosure.
In conclusion, it is better to be aware of foreclosure conditions and to avoid foreclosure at all costs. If you are in any kind of financial difficulty, it is better to inform the lender immediately. Always try to monitor your credit history and have a financial plan in place.
Your personal finance should be reviewed on a regular basis so you can stay on top of any emergency expenses with some savings.
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Note: This article is for general information and should not be considered legal advice. Please contact professional legal help if you are faced with a foreclosure and need assistance. It is also written keeping in mind the Canadian foreclosure process.