Personal Liability of Foreclosure in Alberta

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.

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13 Responses to Personal Liability of Foreclosure in Alberta

  1. Michael Readwin says:

    If there is a lien/mortgage on the property that is separate from the main mortgage and the main mortgage is in foreclosure, who if anyone is liable for the separate lien/mortgage on the house? If someone purchases the home from the foreclosure company and the main mortgage is totally paid off but there is no additional funds to pay the small lien/mortgage on the house. What if any position does the person who has the small lien/mortgage on the house have. I have been told that the party that has the small lien/mortgage on the home is out of luck and has no recourse except to come after me personally.

    • admin says:

      Michael,
      Based on your description of the situation, the second mortgage holder is provided with any dispersements from the sale proceeds after the first and legals have been paid out. If there is insufficient equity in the sale to payout the seconds interest in full or in part, the only potential recourse is to pursue the homeowner IF the mortgage was high ratio (Insured). in most cases, though, private seconds are not insured, a risk alternative lenders take on themselves which is reflected in the higher interest rates for such instruments.

  2. Candace says:

    If we have no other option than to allow our house to fall into Foreclosure; how will this affect our credit and our chances to apply and be approved for a mortgage in the future?

    • admin says:

      Candace,
      Thank you for your question. The impact of foreclosure can be significant if you are wishing to purchase again in the near future. Technically, it takes upwards of 7 years to clear your credit record of the impact of foreclosure and qualify for a new traditional mortgage again. That said, I do work with lenders who will provide you with a mortgage sooner that that, but you are paying a risk premium for the privilege to have access to funds under those credit conditions.
      Feel free to contact us to see if there are alternative available to foreclosure. We may be able to help you.

      • Candace says:

        Good Afternoon!

        Just one last question, if you are deliquent in your property taxes and foreclosure on a conventional mortgage is your option, are you still responsible for these taxes or does this become a part of the foreclosure?

  3. Nick says:

    If the mortgage is clearly not high ratio (it’s Conventional) but the mortgage lender inserts a clause in the mortgage which says that the borrowers agree to waive the provisions of the Law of Property Act of the Revised Statutes of Alberta R.S.A. 1980 which limits the remedy of the Mortgagee to that of the land alone can the Lender then go after you despite being conventional?

    • admin says:

      Thanks for your comment, Nick.
      I am not aware of that clause, but certainly it draws concern regarding the lenders ability to recourse after foreclosure. Which lender has included this clause? I recommend you speak with your lawyer before signing anything related to that disclosure.

  4. The protection offered by the Law of Property Act cannot be waived by individual borrowers. The clause waiving the protection will not be enforced by the courts. Corporate borrowers do not have this protection.

  5. Dan says:

    After going through a foreclosure in 2010, there was a Deficiency Judgment against me for approximately $20K from the CMHC. I was unaware of this judgment and I was never contacted by anyone about it. Now, three years later, a collections agency has attempted to contact me at work (I guess they Googled my name) to attempt to recover the debt. They have never sent me a letter as they don’t have my current address. They have only emailed me at my new place of employment.

    My question is this…can this collection agency use the original Deficiency Judgment from the CMHC to garnish my wages ???

    • admin says:

      Dan, thanks for your question. Under the Law of Property Act, a mortgagee (Lender or Bank) in Alberta is limited to recovery of the property unless the mortgage is high ratio, insured by CMHC, or granted by a corporation. If insured by CMHC, as your mortgage seemed to be, then the lender is entitled to both recovery of the property and any judgment against the mortgagor (you) for the deficiency in the event that the amount owed under the mortgage exceeds the value of the property. In this case, CMHC paid out the lender, and now hold the default judgement against you. The lender can take steps to collect on the judgment in order to recover an losses in the transaction. I would also recommend you speak with a lawyer to determine if a statute of limitation applies here, although I do not believe it does. Hope that helps.

  6. Kevin says:

    I have a high ratio mortgage that a buyer wants to assume. Is it true after 12 months of of payments I won’t be responsible for this mortgage? This is in Alberta

    • admin says:

      Kevin, this is not true at all! Whomever has advised you is sorely incorrect. Not only do you remain responsible for payments as long as your name remains on the mortgage, but should the buyer default on future payments, the bank pursues you for deficiencies regardless if you remain in the property. A change of ownership is considered a material change in the mortgage agreement and the lender can call the loan due. Hope that helps.

  7. Tracy says:

    We are 3 payments behind. We have tried to connect with our lender to negotiate new terms but to no avail. They ate demanding all paid by Feb 11. We have 4 kids and unusual medical circumstances. I don’t know how much time we have or how long we can keep the roof of etc our heads. What can I do?

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