Foreclosure on our home?
asked November 11, 2020 by Anonymous
We own a home in Saskatchewan, but we now live in Alberta. We had to move for work after the oil crash. We have been trying to sell our house for 3 years, but there is no market in that location. We have it listed $50,000 below what we paid. It is slowly drowning us. We cannot continue paying a mortgage and rent. I have thought about just letting the bank have it. Or bankruptcy. I don’t know what to do, what are our options?
Walking away from a mortgage isn’t an option in most provinces in Canada unless you live in Alberta or Saskatchewan. And in Alberta and Saskatchewan, you can only walk away from your mortgage under certain circumstances.
Most Canadians who are considering walking away from their mortgages are doing it because their mortgages are underwater. In case you’re not familiar with the term, an underwater mortgage is one where your outstanding mortgage balance is higher than how much you could sell your home for (i.e., your home’s fair market value). If you were to sell your home under this scenario, you’d still have money owing to the bank. You could be forced to pay the shortfall out of pocket. This isn’t a fun situation to find yourself in.
Okay, so let’s say your mortgage is underwater, and that’s the reason why you’re considering selling it. You may think that you can hand your home keys back to the bank. Not so fast! It’s not that simple. First, you need to find out if you have a non-recourse mortgage. A non-recourse mortgage is a lot like a regular mortgage. It’s secured by a pledge of collateral (i.e., your property). However, the main difference is that you’re not personally liable if you walk away from a non-recourse mortgage.
If you’ve put less than a 20 percent down payment on your property and you have a default insured mortgage, unfortunately, you’re out of luck. That’s because your loan is backed by one of the three mortgage default insurance providers. These include: Canada Mortgage and Housing Corp. (CHMC), Sagen (formerly Genworth Canada), and Canada Guaranty.
If you put down less than 20 percent and you were to walk away from your home, your bank would be left with the shortfall that the mortgage insurance provider would need to cover. In this instance, the mortgage default insurance provider would likely sue you for any losses and go after your personal assets to recover the money owing to it.
However, there’s a slight loophole in Alberta. If you’ve put at least 20 percent down on a property and thus it’s not a default insurer mortgage, you might have a non-recourse mortgage in many cases. In fact, Alberta is the only province in Canada where non-recourse mortgages are widely available.
When you walk away from your home and mail your home keys to your mortgage lender, it’s referred to as “jingle mail.” This is what happened during the American housing market in the last 2000s that helped lead to a crash in the housing market in the U.S.
Walking away from your home only makes sense in certain cases. It makes sense in the case that you described where you’re struggling to carry two homes simultaneously, and you’re hurting from a cash flow perspective. But that’s not a reason on its own to walk away. You could sell your home to free up some cash. It only makes sense when home prices have declined by at least 20 percent, and your equity has been wiped out. You might not even be able to sell your home.
Alberta is a province of booms and busts. During times of boom, things are great. People go out on their lunch break and buy cars. However, during times of bust, the opposite is true. Albertans struggle to stay employed. Many lose their job, making it tough to pay the mortgage. This has led to big home price declines in places highly dependent on resources, such as Fort McMurray.
You may not be aware, but Alberta has a history of “jingle mail.” It happened in the 1980s when mortgage rates were close to 20 percent. During this time, Albertans left the province in droves, causing home prices to fall by over 30 percent and mortgage delinquency rates to shoot up.
When “jingle mail” happens on a wide scale, it makes a weak real estate market even worse. Banks have no choice but to sell homes at a huge loss, causing home prices to fall further.
In the 1980s, the situation in Alberta was slightly different. Albertans were literally able to pack up, mail their home keys to the bank and leave the province with no personal consequences, not even a blemish on their credit score.
When you purposely walk away from your mortgage, it’s called a “strategic default.” If you have a non-recourse mortgage, it could actually create an incentive to walk away from your home, especially if you’re running into cash flow issues.
However, things have changed since the 1980s. You can’t just pack up and start a new life in Toronto or Vancouver in most cases. Since the 1980s, credit bureaus have started to include mortgage payment history on credit bureaus.
This means that while you may be off the hook for a mortgage owing when you engage in strategic defaulting, you won’t get away scot-free. It’s likely to show a huge blemish on your credit bureau. That can make it difficult to get new credit for the next six or seven years.
That’s why you should carefully weigh the decision to walk away from your mortgage. Filing for bankruptcy can have an equally damaging effect on your credit score. As such, it should only be considered as a last resort.
Before you consider walking away from your mortgage or filing for bankruptcy, a far better approach is approaching your mortgage lender and trying to come up with a solution that works for both parties.
Probably the last thing the lenders want is to foreclose on your property. Foreclosure takes time and is expensive. As what happened in this story, the mortgage lender may be willing to accept a lower selling price for your home and agree that your mortgage is paid up to date, even if there isn’t enough money left over from the sales proceeds to pay off your mortgage in full.
The benefit of doing this is that you can help keep your good credit intact. Just be prepared to negotiate. Your bank will have the final say on whether to accept an offer, which can be frustrating. You’ll feel better once you unload this property, and no longer responsible for making the mortgage.
If all else fails, that’s when you might consider mailing your keys to your lender or declaring bankruptcy but save it as a last resort.
Related to: Walking Away from a Mortgage in Alberta
answered 7 months ago by Sean