Sat Post #1: Foreclosure Process in British Columbia

Yesterday's post prompted a discussion about the Foreclosure Process in British Columbia so as the second last post of the year let's make that the topic.

Ever popular downtown realtor Ian Watt has a site that specializes in Foreclosures and some info on the topic.  This info is from his site. 

Buying a foreclosure in BC is somewhat different from buying a regularly owned property and it is certainly different from buying a bank owned property in the United States. 

First of all, please understand that in BC the courts will ensure the homeowner is protected and their property is marketed and sold for an amount as close to "Fair Market Value" as possible. 

Whereas in the US, the laws protect the banks and properties can sell substantially well below market value, buying a foreclosure in BC could get you a deal and save you some money on the purchase price, but rarely does a property ever sell less than 20% off fair market value.

  

The Foreclosure Process in most cases works like this:

After a lender has been given the right to sell the property by the BC Supreme Court, the lawyer acting on behalf of the lender hires a realtor to market the property. The property can still be owner occupied and showing may be limited and sometimes difficult due to the nature of the circumstances. 

When the foreclosure property is listed on the MLS, the listing agent will showcase that property to as many purchasers as possible in hopes to get an offer that is suitable to the lender.

When a buyer submits a written offer, which includes a Schedule A (which amends the regular Contract of Purchase and Sale), to the listing agent, the listing agent will present that offer to the lender's lawyer and he or she will act of behalf of the lender during the negotiation. During this period the lender and the purchaser will negotiate a price they are both satisfied with. 

Upon accepting the offer, the purchaser will have 5 business days (in some cases) to do all their due diligence. After the buyer is satisfied with her due diligence and she has her financing in order, she then prepares a certified deposit cheque or bank draft and remove all subjects in regards to the lender. This is now a subject free offer as far as the buyer and the lender are concerned. However, there is one last subject which is "Subject to Court Approval". 

The lender's lawyer will now set a court date and this could take on average 2 to 4 weeks time. A few days before court, the listing realtor will disclose the price which the offer was accepted for. That will give any other perspective purchasers the ability to decide if they want to come to court and outbid the original offer or not.

Unlike a regular property for sale, the first offer that comes in and is accepted by the lender is not necessarily the person who ultimately ends up owning the property at the end.

At Court the listing agent will collect all, if any, competing offers which must be subject free, contained in a sealed envelope, include a schedule A addendum, and be accompanied with a certified deposit cheque or bank draft. 

When the judge has this property address file in front of her, the judge may give the owner one last time to redeem the owner's mortgage and any other outstanding debts. If there is no attempt to pay off all the debts she will proceed with the offers to purchase the property.

Should there be mulitple offers, whoever has the highest subject free bid in the sealed envelope will most likely be awarded the property. Depending if the property is vacant or owner occupied, the completion and possession could be after the court date will be somewhere between 2 to 8 weeks.

It is strongly recommended that the purchasers are in court to either up their bid or be present to initial any changes that the judge may request. There are no second chances for anyone after the judge has made her decision and there is no chance to back out of the contract.

The property is now sold and all documentation is forwarded to the parties involved for conveyance.

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Email: village_whisperer@live.ca
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What if?

All the talk of a housing correction of 12% (or more) in 2012 - and the impact such a correction might have on those already tightly squeezed by their current debt situation - raises an interesting question.

What will banks do at mortgage renewal time?

It is interesting to watch the reactions of the average Canadian when you raise the topic of US subprime mortgages.

They know very little about what a US subprime mortgage is.

In the United States, it is common for people with mortgages to have a 30 year term at the same interest rate for all 30 years.

Subprime mortgages were for those for didn't qualify for these type of mortgages.  Subprime mortgages were for shorter terms (1 - 7 years) with teaser rates that would expire. Basically subprime mortgages were mortgages that had an interest rate that would 'reset' after a few years and the mortgage holders had to go out and get a new mortgage.

Once this is explained to them the average Canadian's brow furrows, the head cocks, and you can almost smell the wood burning as the realization dawns.

Virtually every single Canadian has a 1, 3 or 5 year mortgage with an interest rate that 'resets' at current market rates at the end of the 1, 3 or 5 year mortgage term.  And by 'reset' we mean a brand new mortgage is issued to the mortgage holder.

Virtually every single Canadian mortgage is just like an American subprime mortgage.

In the United States, as the housing bubble burst and property values began to collapse, many subprime mortgage holders were forced to renew mortgages at substantially higher interest rates. Many faced significant interest rate hikes because of their risky status and the underwater state of their mortgage vs their property value.

In Canada the situation is somewhat different with the CMHC but what will happen in Greater Vancouver to a Lower Mainland homeowner who has a $500,000 mortgage with no equity (because of HELOC withdrawals) and has seen the 'value' of their property drop 12% - 15% (or as some are predicting - 30%).

A 15% drop in 'value' means you are asking for a new mortgage that is now $75,000 greater than the appraised value of the property. 

A 30% drop could leave people underwater by as much as $150,000. (We won't even begin to factor in the situation faced by the 0/40 crowd whose 5 year terms are coming due just as the Conservatives ponder reducing mortgage terms to 25 years next March).

Will the bank renew these mortgages?

Most people assume they will.

But some people to question is this is, in fact, the case. Over on the blog, Vancouver Condo Info, one contributor noted the following this morning:

"Recently I had an informal talk with a friend who works at one of the big Canadian banks. I asked him if he noticed any changes in the mortgage business. He said it’s still going strong. Interestingly though he also mentioned that he noticed an interesting phenomenon... if the mortgage was $600k or higher (most of the time this resulted from clients rolling in other kind of debt into their mortgage payments) the principal appears to have remained at the same level for the last 2-3 years. He noted that these $600k+ clients appear to be paying the principal over the years but after a while they ask that some line of credit with $30k-60k on it be rolled in the mortgage which bumps the principal back to previous years’ values. I asked what would happen if the clients can’t pay… does the bank take the property into foreclosure? The way he answered caught me a little off guard. It felt like he never quiet thought the process through. He said that the bank will work quite hard to 'help' the client continue paying. He seemed to think that the foreclosure procedure was the solution of last resort."

What I find striking is that I have also raised this point with colleagues who work at some of the big banks and I get a similar, perplexing response.

No one really seems to know for sure because no one has really addressed this question. 

Everyone assumes that banks won't be foreclosing because it is assumed the banks won't gain by foreclosing. That to do so (foreclose) wouldn't be in the bank's interests because it would cause a glut of inventory that will crash the housing market.

But will this stop the banks?

One thing we know for sure is that there are foreclosures happening in BC and elsewhere in the country. Did the banks avoid foreclosing on these people?

Nope.

So why do you think they will avoid foreclosing on you when the time comes?

Remember... the vast majority of these mortgages carry CMHC insurance (which is why the banks were willing to make these stupid loans in the first place).  If the banks foreclose, they don't lose a penny on the loan.  They could flood the market with properties, drive market prices dramatically downward, and they won't care.

They could sell the $500,000 house to anyone who will give them anything - say $200,000 - and all the bank does is turn around and hold out their hand to CMHC for the $300,000 they lost on the transaction.

If we were to have a rash of people caught in large underwater positions on their mortgages, what is the incentive for the banks to avoid the foreclosure process (and as you rationalize why they will do this - ask yourself why they didn't do it to the people who are currently being foreclosed on)?

As it is, the foreclosure process in BC is already long and arduous (taking over a year plus to complete). Banks have a responsibility first and foremost to their shareholders. It you are in a financial bind, why will banks make it worse by renewing bad loans?

Yet the vast majority of people you talk to are convinced the banks will "work very hard to make sure you keep your property" and will utilize foreclosure as a last resort. They are also convinced that the government will step in if these conditions evolve and pressure the banks not to foreclose to protect the economy. Many are convinced CMHC will be instructed to guarantee underwater mortgage renewals so long as they are renewals.

I suspect a great many homeowners in Greater Vancouver are going to be supremely shocked at the difference between the bank's definition of 'last resort' and their own.

I further suspect they will be stunned at the indifference of government to the financial hardships caused by a collapsing real estate market when CMHC offers no such support for massive underwater mortgage renewals.

Whocouldaknown?

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.