The Foreclosure Process In Detail

From the Home Owner's Perspective

This is a more detailed outline of the foreclosure process in lay terms from a home owner's perspective. It covers the general process before and after the listing of a foreclosure. It is a summary of the most common process; it does not constitute a complete examination from a legal perspective, and is not intended to provide legal advice. Each situation is unique and can lead to differences in approach. If you are finding yourself facing foreclosure or collection issues from your lender, it is advisable to seek legal counsel.

 

For a table of the process, click on Foreclosure Process Map to the left



What is a mortgage?

In order to buy a home people usually take out a mortgage. The mortgage provider is usually a bank, but can be a person or corporation. Occasionally, some property sellers agree to provide a mortgage as part of the sale. To secure the mortgage, the borrower agrees to the bank placing a charge or mortgage on the title of the property. The borrower (owner) then cannot sell the property and pass the title onto someone else while the charge exists on the title. Typically, when the owner sells the property, they pay out the mortgage from the proceeds of the sale, and the charge is then removed as part of the closing process. When the mortgage is paid in full, the charge is removed from the title.

  

What is generally referred to as a mortgage is a loan agreement with some additional features.  It can include penalties for early payback, allow for additional extra payments and other terms such as the charge on title, that the owner will keep the property insured, pay the property taxes and keep it in good repair, as well as rights if payments are not made.

  

What happens if you miss a mortgage payment?

If you miss a mortgage payment, you don't immediately lose your house. Banks do not want to foreclose if they can avoid it, and they are often willing to work with you. If your situation is temporary, such as unexpected expenses, lost work or revenue, you may be able get some relief with temporarily smaller payments or by refinancing the mortgage. Going to your bank and discussing your situation will likely make the process easier and less stressful. If your situation is more permanent and you have some equity in your home, hopefully the bank will work with you while you go through the selling process. Even if a solution can’t be found, and you are forced into foreclosure, the process takes some time. If you find yourself in this situation, you may want to seek legal advice.

  

What if your mortgage is for more than you can sell your home?

Sometimes people experiencing financial stress may recognise the need to sell their home, but are unsuccessful in getting an offer for an amount that will cover the mortgage and selling costs. This could be due to changes in the market, the condition of the home, or to refinancing and incurring additional debt. Although rare, occasionally the lender will agree to a short sale (where the net proceeds from the sale will not fully redeem the mortgage and other costs). The bank may agree to remove their charge from the title if they determine this may be in their best interest. A short sale can take two forms:  one is where the borrower can make up the shortfall on closing or the borrower and the lender agree to terms to make up the shortfall after the sale; the other, which is very rare, is where the lender feels the balance owing is uncollectable, such as in a bankruptcy situation, and may forgive the shortfall.

 

If you are selling your home for a price that won’t cover the mortgage, you will need to have the bank involved and agree that they will remove the charge on title, otherwise the sale won’t go through and you may be liable for damages from the buyer. A lawyer’s involvement is recommended here. 

  

 

What to do if you receive a petition for foreclosure?

Following is an outline of the foreclosure process, including what a petition is. If you receive a petition for foreclosure it is strongly advised that you seek legal advice immediately. You may have some options, and if you want to file a response to the petition it has to be done within the specified time period at the court named in the petition. The petition moves the situation from a collections issue to a formal court issue, and you will want to have some good direction here from a legal expert.

 

  

What is a Foreclosure?

If a borrower fails to repay a mortgage, usually by falling behind in the payments, the bank then has the right to proceed against the person and/or against the property. Rights in personam (against the person) may result in a court judgement for the borrower to repay the loan. Since the borrower has defaulted in payments, in most cases, the bank seldom relies solely on a personal judgement, though it is often part of the process.

 

Usually the bank will also enforce their rights in rem (against the property). This can be achieved in one of two ways, either by obtaining an order for conduct of sale or by obtaining an order absolute. With an order absolute, the lender takes title and possession of the property. By becoming the owner of the property, the bank becomes responsible for the property, including property taxes, insurance and maintenance. Further, all claims against the borrower (for outstanding funds for example) become unenforceable. For these reasons, an order absolute is very rare.

  

Order for conduct of sale is the most common approach taken by lenders. Here the borrower is still the owner of the property, but the bank has obtained the right to sell the property by way of the court order. A more detailed outline of this process follows.

 

  

What are the steps in the foreclosure process?

Click PDF visual of the process in a new window.

Default:  A borrower defaults under the terms of a mortgage, usually by missing payments. Default can include maturity of a mortgage term (without a renewal) or by default in payment of taxes or strata fees, or by a breach of other terms of the mortgage.

Demands for Payment:  Banks will normally contact the borrower by phone and mail if a payment is missed. If terms for repayment or other solutions are not sorted fairly quickly, the bank may start the foreclosure proceedings. A demand is then made on all parties on the mortgage through a demand letter. The demand letter can vary depending on the terms of the mortgage agreement and the situation and typically takes one of two forms:

  • Demand to have the borrower pay a certain amount by a certain date to catch up on arrears to reinstate the mortgage;
  •  Demand to have the borrower pay the whole amount borrowed (accelerate the mortgage), plus daily interest and other expenses to redeem (pay off) the mortgage. 

The demand letter may indicate that a foreclosure may be commenced after the demand period expires, especially if the mortgage has been accelerated. (Once the mortgage is accelerated, the bank waives any right it may have to a prepayment penalty.)

  

Commencement:  After the demand period, if the Demand for Payment has lapsed, the following documents are necessary to commence a foreclosure:

  •  a Petition;
  •  an Affidavit supporting the facts in the Petition;
  •  a Certificate of Pending Litigation (CPL).

 

The petition and affidavit set out the relief sought, and the factual bases for the relief. This includes the reasons for the foreclosure (missed payments) and an accounting of the amount owing, with supporting documents. The petition names as parties to the foreclosure all parties liable under the mortgage and all other charge holders to the property (second mortgage, judgement creditors and builders’ lien claimants, for example). The CPL is filed with the land title office as a charge on the title of the property.

 

All parties to the foreclosure are served and have 21 days to file a Response to Petition to the court. If the parties cannot be personally served due to being impossible to locate, or they intentionally evade personal service, then an ex parte application is made to the Court for an Order to effect Alternative Service on that party. This can include a service on a related party (spouse), posting a notice at the residence, emailing or mailing, and publication of a notice in a local newspaper.

  

Order Nisi:  Once all parties have been served and the time for filing responses has elapsed, a hearing for the application for Order Nisi is held where the bank sets out the relief sought, including:

  • a declaration that the mortgage is valid and enforceable and is registered against the property;
  • a declaration that the mortgage is in default;
  • a summary accounting of the amount required to redeem the mortgaged property;
  • the length of the redemption period (see below);
  • judgement against the borrower and any guarantors (may include personal judgements);
  • costs;

 The order Nisi is a final order. Any subsequent orders such as Order for Conduct of Sale or Order Absolute are ancillary or supplemental orders.

  

Redemption Period:  At the hearing of the application for Order Nisi the court will set a redemption period in which the borrower can redeem the mortgage by paying the full amount owed, plus interest, costs and taxes at the time the mortgage is redeemed. The redemption period is usually six months, but is at the discretion of the court and can be shorter or eliminated, and in some cases extended. In setting the redemption period the courts may consider the following:

  • the value of the property as determined by a recent appraisal;
  • if the property is occupied by the borrower;
  • if the property taxes are up to date;
  • if the cause of default is temporary;
  • how long the borrower has owned the property and the amount of equity;
  • whether there have been other defaults;
  • whether rent is being received;
  • whether the borrower has an action against the lender.

The court can shorten or eliminate the six month redemption period if the bank can demonstrate reasonable cause, such as the borrower has no equity in the property, the property has been abandoned or is wasting, or if the bank would suffer undue hardship if a longer period was given. To be granted a longer redemption period the borrower will likely have to demonstrate their efforts to pay the mortgage and that they have an opportunity to pay the mortgage off by selling the property themselves or satisfying the mortgage through other means. If the parties mutually agree on a particular redemption period the courts will usually grant that period.

 

During the redemption period the borrower can do two things. Firstly, they can pay the mortgage off, perhaps with help from family or refinancing, but usually these options have already been explored by the owner before the hearing for the Order Nisi. Secondly, they can sell the house themselves. If they have sufficient equity this may cover the outstanding amount on the mortgage, interest and other costs.

 

After the redemption period the bank has two options, which have different outcomes for the borrower and the bank.  They can apply for an Order Absolute, which would grant them title and possession to the property, and they would forfeit any other claims against the borrower. Usually the bank does not pursue this option, as in addition to forgiving the debt, they incur other costs such as the property taxes, insurance and maintenance costs. If this option is pursued, the lender is now the owner and the original owner (borrower) will be required to give up possession. Since the lender is now the owner the courts do not need to approve the sale and it proceeds like a regular sale.

 

Usually the bank will pursue an Order for Conduct of Sale. This allows the bank to list the property, and they will be identified as the seller on the listing, although the borrower is still the owner may still be in possession of property

  

Court date and approval of sale:  After the property has been listed and the bank has received an offer they believe the court will accept (the courts do try to protect the borrower’s interests) they will apply for an order approving the sale. On the court date, other parties can submit competing offers, usually done with a submission of sealed bids. The courts have discretion on the process and there are some variations as to how it’s done.

  

Completion of sale: The party obtaining the order approving a sale has the responsibility of completing the sale. The net proceeds are normally directed by the order to be paid as follows:

  • Taxes, utilities, strata charges;
  • Real estate commissions;
  • Lender’s mortgage and costs;
  • Any other charge holders (second mortgage);
  • Any balance to the borrower, or to court if the borrower is absent or the balance is in dispute.

 

Please note:  While this is a more detailed layout of the foreclosure process than the buying process, it is not to be considered a complete examination. Every borrower’s situation is different and there are many items that need to be considered in detail. Anyone facing foreclosure is strongly advised to seek legal support.