If you have been missing your mortgage payments and are financially in a tough spot, you may already be thinking what happens when a bank forecloses on a mortgage. It is generally in the interest of both the bank and the borrower to avoid foreclosure proceedings, but sometimes this becomes difficult.
If you default on mortgage payments, the bank would usually get in touch with you to quickly resolve the problem and get the mortgage schedule back on track. In case your financial problems are temporary and the bank agrees, you may be able to get some concessions on the payment schedule and avoid foreclosure. However, if a resolution is not reached, the bank has several remedies to recover its debt. The most common foreclosure remedies used in Canada are “The Power of Sale” and “Judicial Foreclosure”.
Power of Sale
The Power of Sale remedy allows the bank to sell the property without having to involve the courts. This makes the process much faster, and also increases the chances of a resolution being reached between the borrower and the bank during the foreclosure process. Before the Power of Sale process can be commenced, the lender needs to serve you a notice and provide you a redemption period of 35 days, during which you can pay all the arrears and get the mortgage schedule back on track. However, at this point, you would also have to pay several charges involved in the Power of Sale process. If you choose not to, or are unable to settle the matter at this stage, the lender would serve a Statement of Claim for Debt and Possession, and you will have 20 days to file a Statement of Defence. If you fail to file this statement, the lender would go ahead and obtain a Writ of Possession from the court. Once this Writ of Possession is filed with the Sheriff, the process of eviction can be started.
After the house has been evicted, the lender would arrange for an auction of the property through a real estate agent. The money received from the sale of the property is used to cover all the dues and fees, and the balance is returned to you. However, if the sale is unable to cover all the dues and fees, and if you do not have mortgage default insurance, the lender has the right to sue you for the balance.
Power of Sale is the preferred remedy for lenders in Ontario, New Brunswick, Newfoundland and Labrador, and Prince Edward Island.
The Judicial Foreclosure process has extensive involvement of the courts at every step. The process is therefore much slower and can even take more than six months to complete. A very important aspect of Judicial Foreclosure is that once a Certificate of Foreclosure is obtained by the lender from the court, the ownership of the property is transferred to the lender. After this, you have no right on the property and can not make claims to any capital gains that may result from the sale of the property. The Judicial Foreclosure process is what happens when a bank forecloses on a mortgage in British Columbia, Alberta, Quebec, Manitoba, Saskatchewan, and Nova Scotia.