I moved to the greater Washington DC area (Virginia) with my family during the 2008 financial crisis caused, in part, by the collapse of the US housing bubble. During the crisis, foreclosures were becoming increasingly common, as people walked away from homes whose value had dropped below the value of their mortgage. At the time (pre-law school), I understood “foreclosures” as little more than a white eviction notice on a front door; case closed.
In recent months, a significant portion of the Ontario economic landscape is now facing a similar crisis. Although not directly related to a housing bubble collapse, the financial hardships caused by COVID-19 have increased the number of individuals struggling with their homes and/or subjected to foreclosure processes. Now, of course, “foreclosure” indicates much more to me than a piece of paper, and instead signifies that a serious and complex process is underway; a process that many may benefit from understanding. Below, I will outline the steps of the process behind a word that is frequently used without much thought to the long and somewhat tedious Court proceeding behind it.
First, an important distinction should be made between a power of sale and a foreclosure. The former, which is more common in Ontario, involves evicting the occupiers of a property, selling the property (taking reasonable steps to obtain fair market value) and then distributing the proceeds to the mortgagee (the loan company), other encumbrancers and, if any surplus is available, to the mortgagor (the property owner).
A foreclosure, on the other hand, involves a mortgagee taking title to the property, and is a Court-supervised process. In other words, instead of selling the mortgagor’s property to enforce its security, the mortgagee becomes the registered owner of the property itself. A foreclosure process in Ontario may include the following steps (found at Rule 64 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194):
- Statement of Claim: The mortgagee, as plaintiff, must issue, serve and file a special form of Statement of Claim (Form 14B) commencing a formal action against the mortgagor, with the mortgagor and, in most cases, subsequent encumbrancers named as defendants.
- Statement of Defence and/or Request to Redeem: The mortgagor will have 20 days to serve a Statement of Defence defending the action and/or Request to Redeem to attempt to salvage the mortgage and keep the property.
- Request for Sale: If the defendant does not intend to defend the action or serve a Request to Redeem, but would like a sale of the property instead of a foreclosure (to be entitled to surplus of a sale), they may instead file a Request for Sale within 20 days.
- Noting in Default: If the mortgagor fails to defend the proceeding within 20 days and has not filed a Request to Redeem, the mortgagee may require the Registrar at the Court office to note them in default.
- Default Judgment: If the mortgagor has been noted in default, the Registrar may sign a Default Judgment. Depending on whether the mortgagor has filed a Request to Redeem, the Registrar may sign a Default Judgment for Foreclosure without a Reference (Form 64D), Default Judgment for Immediate Foreclosure (Form 64C), or a Default Judgment for Foreclosure with a Reference (Form 64B).
- Redemption Period: If a Request to Redeem is served by the mortgagor, the mortgagor will have the opportunity to bring the mortgage into good standing within 60 days in order to keep the property.
- Notices of Reference: Where a reference is ordered, Notices of Reference must be served on all named defendants. If subsequent encumbrancers were not added as defendants in the original Statement of Claim, they will be added as parties and served with a Notice of Reference to Subsequent Encumbrancers Added on Reference.
- Reference: Where a reference is ordered, parties must file evidence of their respective claims for interest in the value of the property. The Referee will conduct a Reference and, among other things, determine the validity of the claims, take account of what is due on the mortgage and claims, and fix a time for payment of the amount due to the mortgagee. The Referee will prepare a report outlining the accounting of the respective interests in the value of the property. If the state of account pursuant to a report changes before the first day of payment, the mortgagee may serve a Notice of the Change of Account on the person required to pay.
- Transfer of Property: If a party redeems the mortgaged property by paying the amount found due within the prescribed period of time, the mortgagee shall transfer the property to the party making payment or the party’s nominee. The Registrar may request Directions from a Judge if the Registrar is of the opinion that a reference ought to be determined by a Judge.
- Conversion to Power of Sale and Reconversion (if necessary): If there is likely to be surplus if the property is sold, the Court may, on motion of any party, convert the proceeding to a power of sale. Likewise, a proceeding that has been converted to a sale may be reconverted to a foreclosure if it appears that a sale would result in a surplus.
- Final Order of Foreclosure: On confirmation of the Referee’s Report, if the mortgage is not redeemed, a Final Order of Foreclosure (Form 64E) may be obtained against all defendants without notice foreclosing the defendant(s)’ right, title and equity in the property.
The foreclosure process, like most formal litigation, can be lengthy. In many cases, foreclosure may be more expensive than a power of sale given the number of steps and level of Court involvement required. Nevertheless, in circumstances where a mortgagee intends to wait to sell the property to achieve a better price, expects to achieve a sale price greater than the mortgage and encumbrances, or where power of sale may not be possible, foreclosure may be a preferable alternative.
It is important for mortgagees, non-arms-length mortgagees and mortgagors alike to understand the complex process of a foreclosure. Understanding what steps will be required by using this process, as well as the other options that may be available, will help you set expectations and assist you and your lawyer to develop a plan that bests suits your individual needs. Please don’t hesitate to reach out to our team with any questions.