Default is most frequently referenced in
relation to mortgages and the failure to
fulfill obligations under a mortgage. A
mortgagor would be in default if he/she
failed to satisfy any of the covenants, but
most defaults specifically arise from
failure to make the mortgage payments. When
default does occur, it is uncommon for the
mortgagee to seek legal action immediately.
The mortgagee will normally weigh practical
considerations and attempt to remedy the
situation through personal contact with the
mortgagor. Normally, once these personal
negotiations have broken down, the mortgagee
will seek legal action.
If the default situation has become
untenable and all practical alternatives
have been explored, a mortgagee will
normally seek professional counseling, as a
variety of possible remedies are available
to him or her. Some remedies require court
action while others are authorized by the
mortgage agreement. Default procedures are
subject to provincial legislation.
Example of Default
Buyer acquires a home at 123 Main Street
for $200,000 with a $150,000 first mortgage
and monthly payments of $1,423 PIT. Within
three months of buying the property, his
employment is terminated and he is unable to
maintain the payments. The first payment
missed was the May 1st remittance, only five
months following closing. At that point,
Buyer Jones is legally in default.
Default is a failure to fulfill
obligations under the terms of an agreement.
In mortgages, default is not specific only
to payments, but can relate to other
obligations such as taxes, requirement to
pay common expenses in a condominium, or to
keep property in a good state of repair.
If a default occurs, legal action can be
commenced in line with appropriate remedies.
Remedies are available assuming that the
mortgagee has direct control over the loan
and can act at will to enforce the document.
If Canada Mortgage and Housing Corporation
(CMHC) insures the loan, procedures must be
in accordance with that organization.
When default occurs, it is uncommon for
the mortgagee to immediately seek legal
recourse for practical reasons. The lender
is not normally in the real estate business
and does not want to dedicate personnel to
manage property. Further, legal disputes can
be costly.
Payment problems may reflect financial
management difficulties that are best
corrected in a positive fashion, e.g.,
reorganizing debt load and restructuring
payments. Most lending institutions have
policies concerning delinquency. Regardless,
mortgage documents and provincial
legislation set out legal remedies that can
be pursued by the mortgagor including power
of sale and foreclosure. While the mortgagor
may seek to resolve default issues through
non-legal means, legal remedies may be taken
immediately.
Example of Default Remedies
5–10 days following default: form
letter requesting payment within five
days.
20 days following default: second
letter or call to request payment and/or
interview regarding status of account.
35–45 days following default:
registered letter concerning pending
legal action.
50–55 days following default:
documents forwarded for legal action.
Time frames and procedures vary, based
on market conditions, history of the
mortgagor, and condition of the property.
Further, various non-legal actions may be
taken to remedy the default at the point of
an interview between customer and lender.
This could involve a payment grace period, a
re-negotiation of the loan amount, or the
consolidation/re-amortization of debt.
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