Understanding Your Personal Liability In An Alberta Foreclosure
Your personal liability in an Alberta foreclosure refers to any money you may owe the lender if the property being foreclosed on is worth less than what it ends up being sold for. With the price of homes and the down market, this can be serious business and you need to understand the potential consequences you’re facing.
When it comes to your personal liability in an Alberta foreclosure, you need to start by determining what type of mortgage you have in place as this can help you understand how much of any shortfall you may be responsible for.
Once you know this, you’ll have a clearer idea of how much you could be on the hook for with any outstanding debt you may owe your mortgage lender and even how you can move forward. So let’s start by breaking down the two most common types of mortgages in Alberta.
If you were fortunate enough to obtain a Conventional Mortgage (defined as a mortgage based on a downpayment equal to or more than 20% of the purchase price), and you live in Alberta, the lenders only remedy in the case of a defaulting borrower is to foreclose and sell the house. If there is not enough to pay the mortgage, (known as the “deficiency”), then the lender is out of luck.
On the other hand, if you have a High-Ratio Mortgage (defined as a mortgage based on a downpayment amount of less of than 20% of the purchase price), that mortgage is most likely insured by one of three Canadian mortgage insurers; Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guaranty. When a mortgage goes into default, and the debts can’t be repaid from sale proceeds, then your personal liability in an Alberta foreclosure can be much higher!
Understanding Insured Mortgages & Foreclosure Liability
When borrowers fail to make their mortgage payments, mortgage insurance provides financial protection for lenders by covering any outstanding debts owed to the lender that cannot be recovered from foreclosing and selling the insured property.
In fact, lenders are covered for most losses, leaving the insurer with the right to pursue the homeowner for any outstanding debt.
Insurers recover their losses either by pursuing judgments on borrowers, submitting claims to the Law Society of Alberta Assurance Fund, or both. The purpose of the Law Society is to “protect the public in its dealings with members of the Law Society”, by compensating the public for any financial losses incurred through fraudulent activity by a lawyer.
Apparently it also offers this to institutions as well.
If you are wondering whether or not a mortgage insurer will pursue the outstanding debt obligations from you, the specific circumstances are important to understand. The lender is first required to foreclose the property that was subject to the defaulted mortgage.
In order for the lender to pursue the insurer for losses, a deficiency or shortfall must have occurred between the total debt obligations, legal fees and charges incurred from the foreclosure process, and the resulting proceeds from the sale of the property.
Then, if there is a lack of funds to pay everything, the lender applies to the courts for a deficiency judgment against the borrower. If the lender has followed due process as dictated by the insurer (CMHC, in this example), then CMHC pays the lender the deficiency.
CMHC would then attempt recovery of the shortfall from the borrowers on these judgments. Remember, there may be no hard and fast rule here. CMHC can decide whether to enforce their deficiency judgment through a lawsuit against the borrower, or take a take a passive approach by filing the deficiency judgment and waiting for the borrower to ‘surface’. If the borrower eventually becomes involved in another property purchase, the judgment can be implemented, leaving the borrower to negotiate with CMHC to get their financial affairs in order.
Finally, in the eyes of the insurer, it is important to understand that any and every person or entity registered on the mortgage is fair game. This means if there are two individuals on the mortgage (say you and your spouse or ex-spouse), your personal liability in an Alberta foreclosure would be identical.
They would go after both of you for the same amount and hope one of you pays the entire amount off. If someone has been included on mortgage as a personal guarantor, they too are liable for any defaulting debt.
At the end of the day, understand that as a borrower, your level of risk is dependent upon the type of mortgage you hold (i.e., conventional or high ratio), the available equity in the property, and, if there is none or in the case of default, the available equity is insufficient to cover all foreclosure expenses, the insurers litigation appetite.