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How do lenders Foreclose on Property Owners?

Lenders foreclose according to the laws in the province where the property is located. There is either a "judicial" or "non-judicial" foreclosure procedure that must be followed.
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Provinces that use mortgages to document property ownership follow the judicial procedure, which requires lenders to file a court case to prove default before they can foreclose. Provinces that use deeds of trust follow the non-judicial procedure, which does not require a court case. Non-judicial foreclosures can take as little as 30 days to complete. Judicial foreclosures can take much more time because of the need to have the court approve the foreclosure action.

Foreclosure proceedings in Ontario are usually quite fast because the proceedings are typically laid out in the mortgage documents. Power of sale was developed in Ontario by lenders who wanted a quicker way to dispose of property as well as recover debt. Thus they began to include power of sale provisions in mortgages that would allow them to a) dispose of the property under the borrower’s default b) avoid the court process. Power of sale is now a part of the Ontario Mortgages Act.

The Mortgages Act refers to two types of power of sale: Statutory and Contractual . Statutory power of sale is when the mortgage documents have not included power of sale provisions. While statutory power of sale is very rare, the lender can still exercise power of sale as long as the borrower has defaulted for three months or more. Contractual power of sale is when the mortgage documents have included power of sale provisions.

Both types of power of sale are started by giving notice to the borrower after a default period of 15 days. The notice must be given to anyone having an interest in the property, including statutory lien holders, subsequent encumbrancers or people who have advised the lender in writing, that they have an interest in the property.

The notice is attached to the Mortgages Act, and is called a Notice of Sale Under Mortgage. It advises of the lender’s intention to exercise the power of sale, and includes details of the mortgage, such as:

  • The date the mortgage was made.
  • The parties to the mortgage and the property mortgaged.
  • The amounts owing.
  • A notice that if the amounts owing are not paid by a specified date, the lender will sell the property.

If the power of sale is contractual, the borrower has 35 days to pay, unless otherwise stated in the mortgage agreement. If the power of sale is statutory, the borrower has 45 days to pay. The lender cannot do anything further within this redemption period, but by paying the amounts owing, the borrower can redeem the mortgage.

Once the redemption period expires and the borrower has failed to correct the default, the lender can sell the property. Under power of sale, the property can be sold by auction, private contract, or tender. Usually the property is listed with a real estate agent and placed on the market for sale. To ensure that the property comes to the attention of a large segment of the market, guidelines have been set up, including; listing the property with a multiple listing service, obtaining appraisals, and ensuring the listing is for the usual period of such properties.

Once the property is sold and if there is any surplus, the lender must account to the borrower(s), and other subsequent encumbrancers. The Mortgage Act requires that the proceeds of the sale first be applied to the cost of conducting the sale, then to interest and cost owing under the mortgage, then to principal money owing under the mortgage, next to pay any amounts due to subsequent encumbrancers, and finally to pay tenants’ security deposits.

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This series of articles is brought to you by A. Mark Argentino and other real estate related resources, including Canadian Real Estate Association CREA and the Ontario Real Estate Association OREA.

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