Contemplating the personal liability of Foreclosure in Alberta is serious business. If for some unfortunate reason you find yourself in this position, you may be wondering just how much you could be on the hook for that outstanding debt you owe your mortgage lender?
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 ONLY, 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, don’t be surprised if the Insurers come knocking.
CMHC provides the majority of mortgage insurance to Canadian financial lenders. When borrowers default on debt obligations, mortgage insurance provides financial protection for lenders by supplementing any outstanding debts owed to the lender that cannot be recovered from liquidation of 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 solace to institutions as well.
If you are wondering whether or not a mortgage insurer will pursue the covenant of outstanding debt obligations (i.e., You!), the specific relevant 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 restitution from the insurer for losses, a deficiency 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 deficiency, the lender applies to the courts for a deficiency judgment against 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 deficiencies 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 implementing 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. 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 debtor, 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.