Monday, October 28, 2013

Private Mortgages – What Happens in the Event of Default? (Ontario, Canada Only)

If you’ve invested in a private mortgage, which goes into default – what steps are available to redeem the mortgage and reduce any potential losses? This assumes you’ve taken all the appropriate steps to collect on past due amounts, and the prospects of keeping the mortgage in good standing seem unlikely.

In Ontario, the remedies are primarily:

·         POWER OF SALE

·         FORECLOSE

Power of Sale is a provision within the mortgage document itself, which allows the property to be sold in the event of default.  This is the most common of the two remedies noted above and the one most prevalent in the market. It is the quickest and most efficient means of resolving a mortgage default.

Two key points to bear in mind with respect to a Power of Sale – 1) it allows the lender to recover 100% of their administrative expenses (including legal fees) plus the full mortgage debt, 2) it allows the lender the right to pursue the borrower for any deficiency.

Foreclosures for the most part are very complicated (technical) and time consuming
(expensive). Circumstances under which one would  choose the foreclosure route, might include the willingness to wait on a ‘market turnaround’ (meaning 1-2 years) – particularly if the value is underwater, relative to the mortgage amount. But these are rare instances, and may end up making a bad situation even worse.

Whichever route you choose, make sure you are under the direction of a qualified lawyer who specializes in both real estate matters and handling mortgage defaults. The process is very much a legal proceeding and you need to ensure all the necessary steps are taken to successfully redeem your mortgage.

One final note, possession of the property in the event of a default is often key
in terms of how quickly you can move through the process. Pay special attention to this aspect of any default, as it can often involve untimely delays and additional legal costs.

As always, consult with experienced commercial brokers in your area, when considering default remedies and to help in evaluating the property.  

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