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It’s every home-owner’s worst nightmare. Already drowning in debt, and with a rampaging cost of living crisis causing many families to barely be able to make ends meet, they get a notice from their mortgage company that says something to the effect of:
You have 30 days to pay back your entire mortgage balance in full, or we’re taking your house. Have a great day!
Sound like a bad dream? Like something that would never happen here in Canada? Well, I got bad news for you:
There are early signs of rough times ahead in the GTA real estate market, with some Toronto mortgage brokers reporting a rise in the forced sale of homes by private and alternative lenders.
Mortgage brokers report an uptick in forced sales of GTA homes, TheStar.com
I have to admit, even I was surprised that this was even possible. In my head, if you still have a job, and you’ve kept up to date with your mortgage payments, the bank can’t just foreclose on your house like that.
And the reason why this is happening is that these aren’t technically foreclosures. They’re called power of sales, and this is how they work.
Say you’re a mortgage company that gave out a mortgage on a $1,000,000 property in, say, early 2022. Then interest rates shot up over the course of the year. Depending on the type of mortgage this was, the mortgage holder may or may not see their monthly payment change, but regardless when the mortgage comes up for renewal, the property is now worth considerably less on the open market. The Toronto housing market has seen an average decline of about 20%, so let’s say this property is now worth $800,000. But the outstanding mortgage is still way more than that, say, $900,000.
It’s completely up to the lender whether they want to renew your mortgage for another term. In the above scenario, they might look at your salary, your credit worthiness, and the fact that you’ve kept up your payments so far and approve you for renewal. But if there’s anything different about your financial situation, like a change in job status, or if they’re simply feeling spooked about whether the house may fall in value even further, then they may reject you and demand the entire mortgage balance back all at once.
And if you can’t pay it, they can sell your house out from under you.
Welcome to the wonderful world of power of sales.
The big difference between a foreclosure and a power of sale is that technically, the borrower hasn’t done anything wrong. A foreclosure requires the borrower to miss multiple payments and ignore repeated requests from the bank to comply with their lending obligations. In a power of sale, the borrower may lose their house simply because their bank doesn’t think lending to you is a good bet anymore.
Is this fair? Not really. Again, the borrower didn’t do anything wrong here. But is it legal? You betcha. If you don’t own your home outright, stuff like this can always happen because nobody “owes” you a loan. Being able to borrow money isn’t a right, and if the bank, for whatever reason, no longer wants to keep lending you money, they can stop renewing your loan. That’s their right as a lender.
This isn’t to say that the bank can do this at any time, however. In Canada, our mortgages are generally amortized over 25 years, but that amortization is split into terms of generally 1-5 years, with 5-year terms being the most popular. Within a mortgage term, as long as you play by the rules and keep up with your payments, the bank has to play by theirs. But when the term is up, they can renegotiate the next term however they want, including not renewing your mortgage at all.
That’s why the period when mortgage terms are up for renewal are the most dangerous during a time of rising interest rates and falling house prices. That’s when they can really screw you.
Strategies To Cope (or Vultch)
On the home-owner side, if you’re about to close a sale and contemplating what type of mortgage to get right now, avoid variable rate mortgages. Those have really screwed people over this past year as interest rates have risen and put way too many borrowers at risk of having their homes taken away from them. Stick with a standard, vanilla fixed-rate mortgage, and don’t monkey around with trying to shorten the length of the term in order to get a slightly lower rate. The less often your mortgage comes up for renewal, the less likely you’re going to run into this problem.
If you already have a mortgage and find yourself coming up for renewal soon, save up as much cash as you can just in case the renewal goes south. If that means delaying major purchases, selling your car, or forgoing family trips, that’s a sacrifice you should seriously consider making. Having access to a wad of cash puts you in a much stronger position at renewal time, because you can pay down at least part of the balance and (hopefully) get your debt levels down to somewhere your bank would be comfortable lending to you again.
And if you find yourself staring at the above mentioned “give us our money or we take your house” notice, unfortunately your options are very limited. Going through a power of sale puts you at a severe disadvantage, because the bank will try to sell your house as quickly as possible to recover the amount they’re owed rather than try to get the best price for your property. In all likelihood, this will leave you with all the money you paid into the mortgage gone, and with no house to boot. If you need to raid your retirement savings, get a second job, or crawl on your hands and knees to your in-laws, then that’s what you’re going to have to do.
On the other hand, if you’re on the buyer side, this might be an opportunity to pick up a house at a severely discounted rate. During the 2008/2009 Great Financial Crisis, the only ones that came out on top of the US housing market crash were people who had the cash and the good timing to pick up distressed real estate while they were on fire-sale. This might be your chance. Check out Kijiji for listings that look like this:
A good rule of thumb is that the more capital letters and exclamation points in the listing, the more desperate the seller is. One man’s trash is another man’s treasure, and in this case, one man’s financial armageddon might be your ticket to home ownership. Just be prepared to wear Kevlar to the showing.
Can We Still Avoid a Mortgage Crisis?
Right now, power of sales are mostly happening in the alternative lending market, where borrowers who couldn’t qualify from a traditional bank have to go to get a mortgage from private lenders, or smaller credit unions.
In other words, sub-prime mortgages. Hmmm…where have we heard this before?
I gotta admit, this looks pretty bad. While the percentage of borrowers with sub-prime loans is relatively small (about 2% of the market), bad things that happen in this group have a nasty tendency of spreading like a contagion and infecting the rest of the real estate market like what happened in the US.
The one thing that gives me hope is that the Bank of Canada’s governor, when announcing the latest interest rate hike last week, said they would be hitting pause on any further rate increases while the BoC waits and sees what the impact is on the broader economy.
That’s probably a good call. As much as I love seeing house prices drop, this is getting just a little too close for comfort to what the Americans were experiencing in 2008. Of course, interest rates movements take months to completely work their way through the economy, so we’re likely going to see this get worse before it gets better, but I’m glad they’re taking the foot off the gas on the interest rate issue.
Let’s just hope they did it soon enough so that we coast safely to a stop rather than plunge over the cliff.
Conclusion
So apparently, there are circumstances where a bank can call your loan and force your house to be sold even though you did nothing wrong. Yikes.
And while it’s easy to say that the people who went to these alternative lenders did it to themselves and have nobody else to blame, these are also the people who inadvertently crashed the entire US housing market, and that’s a much bigger problem to worry about.
In the decade after the 2008 crash, a favourite Canadian pastime was to scoff at our American friends and say “We would never let something like that happen here. We’re far too smart.”
Well, I guess we’re about to find out, aren’t we?
What do you think? Have you been in or do you know someone who’s had their house seized in a power of sale? Do you think this will be limited to the sub-prime mortgage market, or do you think the effects will spill over to the Big 5 banks? Let’s hear it in the comments below!
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As downright stupid as the US can be about a lot of things in the public interest, the concept of unpredictably reframing loan rates every five years seems way less common on this side of 49N. We’re sitting pretty happily on a 15-year 2.6% fixed refinance from 2015. That said, given the monstrous auto market escalation since 2021, we’ve seen car repossessions skyrocketing over the last few months… and that can be every bit as jarring to the car-dependent. 🙁
The US mortgage situation is typical “privatize the gains, distribute the losses.”
Get a slick low rate before rates go up? Congrats, you made out well.
Rates going up so banks will go out of business because they gave out loans with too low of interest rates? Well, we made it so that the loans are backed by the government, so taxpayers will take care of the situation… (unlike Canada apparently where the bank will do a fire sale on your house to avoid becoming over-leveraged)
That never happens. A bank has no incentive to reclaim a home in a down market if the borrower is paying the outstanding mortgage.
Perhaps in the private lending space, which is unregulated, you get more of this kind of thing, but it would still be rare if the mortgage is being paid.
A lot of private lending is funded by HELOCs. With interest rates going up, lots of folks are going to want to claw that funding back and/or provide untenable renewal terms.
Yep… I agree.. there’s wayyyyyy more to the story behind these so called “power of sale” situations. Unless there’s some really weird/bizarre private lending clause involved, there’s no incentive to force a sale on an upside mortgage when the mortgage is current.
In the game of life…
Big fish eats little fish…
Dumb small fish and big greedy fish will eventually be eliminated from the game!
To stay in the game as long as genetically possible…
Big fish needs to learn not to be greedy…
Small fish needs to develop the hunger for continuous learning so that the little fish has a chance of growing up to be a big fish.
Live and learn!
Guess CIBC is trying to do to me , not renew my mortgages in 2026 , as they are closing my simplii financial accounts after they took over Costco from Capital one & messed up Royaly .
Crooks
Nice try at fear mongering. Just because you guys couldn’t afford a home you don’t need to go scaring the youth of today. Owning a home is still a great way to build wealth.
I was gonna say: if we are not bombarded by Ukraine soldiers being droned by granates we have to read up on something that “might” happen! A bank will put more value in a customer who pays their mortgage than ‘force sale’ their house. What’s your next blog? Aliens might bring Michael Jackson back to life? Marty McFly is alive!
You must be a real estate agent. Don’t you realize that the majority of youth have been priced out of the market because of speculation created by real estate agents and people who share your thoughts that a home is a wealth building tool. A home is a home where you live. It’s not a wealth tool. Period.
Well I do know a family that this just happened to, but the husband had been notified last summer that he would be losing his job sometime in the future. He didn’t bother looking for another job as he wanted his severance. There was a bidding war on their home and they are going to end up with more than they purchased it for but they haven’t been able to find anywhere to rent. The fact that they have 3 dogs and a cat is not helping but that is one big difference between owning and renting, you lose autonomy.
This is a bit click baity. Whatever about weird back-alley private loans, what interest would a major bank have in selling off the homes of people who have been making their repayments for less than they were purchased? Why? If that person suddenly stops paying, they can go down the repossession route anyway so why pre-empt the worst case? Got good credit rating? Never missed a repayment? Good for you, nobody’s taking your home.
I thought this was going to be an article around the surprising power of HOAs, and how they can put a lien on a home or force it into foreclosure because the color of their fence is not the right shade of brown. That really happens. But had no idea about power of sale. It’s not something you hear about very much!
Hi Wanderer,
“Power Of Sales Hot List – FREE LIST of Foreclosure Properties currently for sale”
Be careful. Those posts on Kijiji are probably scams used to attract desperate homebuyers and deprive them of their money. Don’t fall for these …
————————–
Also, this is not true that the borrower has not done anything wrong when a house go in a power of sale. At renewal, the entire balance of the mortgage is payable. So, if you don’t pay the balance, or qualify for a renewal with your lender or at another bank, you are technically in default …
This could happen, for example, if the lender is in bankruptcy and now unable to renew your mortgage. You would have to get a new mortgage at another bank or pay the full amount of the mortgage.
But usually, power of sale would be used by lenders when the borrowers don’t make the payments anymore. So, they would also be in default in that case.
Anyway, my conclusion is, when there is a power of sale, the borrower has always done something wrong.
Good thing I worked hard to pay my mortgage in full way before its maturity date. The only way to FIRE.
I don’t understand why anyone would take out a mortgage that doesn’t have a fixed rate for the entire term of the loan. That eliminates ever having to renew the loan. It doesn’t matter if the house value drops, your mortgage cannot increase, ever. It seems weird that the standard house loan here in the US is a thirty year fixed rate loan. The only reason you’d ever replace it here it is to get an even lower interest rate 30 year loan. Why don’t Canadian banks offer those loans? I take it European banks don’t offer them either?
I agree that you should only take out a fixed rate mortgage for the term of the loan. You also should save up a large down payment so you are able to buy your house at a rate a lot less than current market rents. Housing values go up and down. Quite significantly at times. Buying a house may or may not be a good idea. It really depends where you live, how long you plan to stay there and what the market is like. Our loan, which we have paid off, was about half the market value of our house. Of course we bought a fixer upper because we are blue collar workers and handy.
The mortgages in the US are backed by Freddie and Fanny, they buy these loans and resell them as securities. Hence the bank can give you a 30 yr fixed. Its not the case here in Canada, where you can fix it to a max of 5 years though its amortized for 25 years.
Long term loans with fixed rates bake in higher interest rates that always benefit the loan maker. Its technically best over the long run to take the shortest term loan with the lowest interest rate. Over 25 years etc this method will cost you the least money, maybe not stress tho.
Just as during the pandemic when banks were giving payment deferrals to people who’d been laid off but were otherwise in good standing, I think banks will fudge things for home owners who may be underwater on paper but who’ve been dutifully paying their mortgages. Banks aren’t altruistic entities, but they do have smart people working for their own self interests. It’s in no one’s interest for the banks to be taking possession en masse of houses in what would then potentially be a crashing market.
At the end of the day most of these (conventional) mortgages are either backstopped by the government or have enough positive equity that the risk to the banks would be relatively low. As for the mortgages through alternative lenders, well those were people who were living close to the edge already.
Home owners can also start shopping for a new mortgage between 3-6 months before the end of their current term, so it does give some time to shop around and try to make a plan. If nothing else it gives the chance to sell your home on your own terms before a power of sale could be forced.
I really don’t think that owning a house is the be-all, end-all, but less than 5 years into buying our first place it’s currently worth about twice what we owe on it, and much more importantly, gives a quality of life that we enjoy. For now I think we’ll keep paying the $1,200/month mortgage, slowly do repairs as required, and not worry about the boogie man (We just renewed for 4 years at 2.94 % fixed last summer anyway.)
Here in Europe I think we do not have renewing mortgages, you sign for 15-20-30 years fixed or variable, and you get 15-20-30 years, full stop. Of course if you choose variable your payment changes every month or so. That’s why we chose fixed (and 20 years, since we could afford a higher payment to have less interest to pay over the lifespan of the mortgage).
I find it very strange that there is no such thing as REAL fixed interest rates in Canada…
This article is such poor advice from a source with little or no knowledge of the canadian banking system. To my knowledge any of the Canadian chartered banks will renew a mortgage as long as nothing has changed since the original mortgage was negotiated.
Agreed. If that was happening, it would be all over the news. MSM, did you miss this breaking news??? I call BS here. No tier 1 bank is ever going to do a POS on a customer who pays as agreed. I can vouch for this as I worked in a bank for one of the big banks in Canada for 25 years. I think my personal and professional experience trumps this non-researched blog post. Sorry Bryce, I love ya but this was poorly written.
Shady private lenders. That’s a different story. But then, what kind of customer goes there?
Under the laws of contracts, open and honest disclosure by both parties of all pertinent facts and conditions relating to the details of the contract, to each other has to be in place, and so, unless this is both written into the contract as a condition, and disclosed purposefully, then the original contract is invalid. Then since possession/occupation is nine tenths of the law, and squatting is enabled, the occupiers have a valid reason to stay, and take ownership under squatting laws. Also, this scenario is in place under undisclosed British Maritime Law/the law system of corporations, and is not able to be enforced on landmasses as they operate under Common Law. So take them to a Common Law Court if they try to enforce this unlawful procedure.
Thanks for this article! It spooks people but it’s good to talk about it. Lots of people use B lenders. It doesn’t hurt to get a reality check from time to time such as this article. It happens, even if it’s not everyone who is going to go through that. Lenders have wills, and look for their own interests, and it’s good to be reminded about it.
Hi,
This post shows that it makes sense not to own a property.
WTK