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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.
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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