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Years of gain in real estate setting the stage for foreclosures

It has been a number of years since I have had anything of a foreclosure practice.

A rather sudden influx of cases has clued me in to the realization that the stage has been set for the “perfect storm” in foreclosures.

While perhaps good for lawyers, foreclosures can be horribly distressing to those who face losing their homes. As in most things, a significant part of the distress is the unknown. My goal with this column is to correct some common misunderstandings about foreclosures, hopefully to reduce the distress that more and more people are likely to face.

First, though, I will explain why I say that the stage has been set for the “perfect storm” in foreclosures. The biggest factor, in my view, is the fact that we have enjoyed several years of incredible gains in real estate values, and that market has now tanked. As a house value increases, so too does a home owner’s available credit.

In a rising market, a home owner running into trouble keeping up with mortgage payments can easily use that available credit to refinance the mortgage, thereby avoiding a foreclosure.

While this might be a temporary solution, increasing real estate values had made it so that this solution could be repeated as necessary.

Regularly refinancing a home with higher and higher mortgages causes a home owner to become more and more extended, and less and less able to keep up with mortgage payments. Changes in the mortgage playing field have compounded the use of this unsustainable solution.

It became possible to lower monthly payments by stretching a mortgage beyond the previous maximum of 25 years. It became possible to amortize a mortgage over 30 or 35 years. It had also become possible to squeeze every last dime of equity out of your home, with “no money down” mortgages.

Historically low interest rates have also played a role. These factors have resulted in a large number of homes in the Okanagan being mortgaged to the gills, with mortgages that the home owners cannot really afford. Home owners will resort to lines of credit and credit cards in order to continue making those mortgage payments as long as possible, but with time those other sources of credit will be maxed out and people will default on their mortgages.

Then there’s the rampant real estate speculation that has been going on. Large numbers of condos have been bought up with the hope of earning easy money by flipping the properties for a quick profit. Many people have made a lot of money in that game. That real estate speculation game requires an ever rising real estate market.

Most of those purchases were made without careful consideration for the fact that it might become difficult to unload the condo, leaving the purchaser with a huge and unsustainable mortgage.

Tanking property values alone will cause the foreclosure floodgates to open. To make matters worse, the tanked real estate market has ground construction to a halt for a lot of developers. Trades-people and labourers have counted on those projects going ahead for their livelihood.

Local businesses have counted on those workers having lots of money to spend on products and services. Lower incomes all around makes for more difficulty keeping up with mortgage payments.

Yuck, yuck and more yuck. I promised you that I would correct some misunderstandings about foreclosures. Most people do not realize that our laws have developed to ensure fairness in the foreclosure process. While the black and white terms of your mortgage may permit the mortgage company to tromp in and take your house immediately after you miss a mortgage payment, our laws have developed to make that impossible. First, the court will very likely grant you a grace period, typically six months, to enable you to use your best efforts to pay out the mortgage.

That grace period is called a “redemption period.”

You would prudently use the redemption period to try to sell your property at the best price possible if you are unable to refinance the defaulted mortgage.

At the end of the redemption period, the finance company can ask the court to either transfer the property to it, or for an order that the property to be sold, with the finance company controlling the sale.

If the property is valued more than the amount owing to the finance company, the court will be reluctant to agree to transfer the property because that would result in the finance company getting a financial windfall at your expense.

Instead, the court will more likely grant an order that the property be sold.

In order to have a sale approved, the finance company will have to prove to the court that reasonable steps were made to market the property and that the sale price is the best that could reasonably have been achieved in the market. They cannot disregard your interest in the property and have a “fire sale.”

Finally, after the property is sold, any money left over after the mortgage is paid off will go to you, not into the finance company’s coffers.

I hope that I have been of some help in clearing up some common misunderstandings. If there is anything in particular about foreclosure matters that you would like addressed in a future posting, please email me.

Published October 19, 2008 in the Kelowna Capital News