Alberta is one of only two provinces in Canada where residential mortgage holders can potentially walk away from mortgage debt with few, if any, financial repercussions. In 2018, one BC couple, formerly residents of Alberta, reluctantly decided to do just that.
This story is being written to show others who find themselves owing a similar debt how this system works and indeed, preparing them to know what to do when the market fails them.
The Bank of Nova Scotia appeared to think that using scare tactics was a better strategy rather than talking the whole scenario through and producing a win-win for both sides. The couple had not missed a payment nor were they just walking away. They offered a managed sale exit strategy rather than just giving the keys back to the bank. TD Bank had agreed to such an arrangement, recognizing that if the keys were just given back, the bank was going to have to go through the whole foreclosure process with increasing legal fees and serious costs to all.
Start at the beginning…
Paul Poulsen and Valerie Labrecque were both born and raised in Alberta but moved to Gibsons, BC in 2014. Between 2006 and 2007 and while still living in Edmonton, the pair bought a number of residential rental properties as long-term investments.
For many residents of Alberta the current economic road has been hard and scary. Homes have lost their value and jobs have disappeared.
To understand what this BC couple did, you must first know that mortgages are typically recourse loans everywhere in Canada other than Alberta and Saskatchewan. In these two provinces, non-recourse loans are available. A non-recourse mortgage requires at least a 20 per cent down payment and, as a result, is not insured through mortgage insurers like Canada Mortgage and Housing Corporation (CMHC).
In Alberta, these conventional mortgages are governed by the Law of Property Act where Section 40 explains that if the property owner falls into arrears, the lender can only come after the property as the security on the debt. The lender cannot come after the homeowners’ personal assets for any deficiency.
So walking away from a recourse mortgage (AKA high-ratio mortgage) is probably not a good idea. But with a non-recourse mortgage, the bank has no remedy beyond repossessing the property and damaging the borrower’s credit.
The Alberta advantage
For most Canadians, when the price of their home drops, they are still liable for the full amount owing even if the amount is more than the current market value. However, in Alberta and Saskatchewan and depending on the specific type of mortgage on a property, some owners may be able to default with liability limited to the home and a possible hit to their credit score.
Poulsen said that while some years were better than others, like most people in Alberta, they weren’t prepared for how bad things would get in 2017.
“We started to notice a big difference about a year-and-a-half ago,” he said. “There were more vacancies, rents started to drop, and mortgage rates started to climb. Within a few months, we were burning through thousands of dollars each month to subsidize our properties.”
Making matters worse, the value of their properties had collapsed and most were worth much less than what was owed on them.
“We weren’t short a few thousand dollars; we’re talking tens of thousands per property,” said Poulsen. “In 2007, we paid $200,000 for a condo in Edmonton’s north end and it still had a mortgage of $127,000. Last year it appraised in at $65,000.”
After reading a story about some Albertans mailing their keys to the bank and walking away from the mortgage (AKA – jingle mail), the couple sent their mortgage documents to their lawyer and discovered that some of their mortgages were considered non-recourse. What Poulsen and Labrecque realized was if they stopped making mortgage payments, the lenders could foreclose on the properties and damage their credit but that was it. The pair wouldn’t be liable for any monetary shortfall between the amount still owing on the mortgage and what that property was actually worth.
This is no secret to big banks. When these lenders realize what’s about to happen on a specific property with a specific borrower, some banks suddenly become very motivated to negotiate a positive outcome for both parties.
Negotiating with TD Canada Trust
Armed with this information, in the spring of 2018, they contacted TD Canada Trust which held three of their mortgages.
“Contacting the right person at the bank wasn’t easy and was very frustrating but after numerous phone calls, we found the right person and laid it all out for them,” said Labrecque. “The branch level won’t help you and they’ll tell you negotiating a short sale won’t work but you just need to press on and get to the right department. With TD, it was the Recovery Department in Ontario. We dealt with a specific person in that department via phone and email.”
“We were still making all our payments but we wouldn’t be able to keep up much longer. We offered to give them our properties if they’d agree to not damage our credit.”
That initial offer wasn’t accepted but TD did counter with a solution of its own.
“In the end, we agreed to hire a realtor to sell all three properties. When we received an offer, we would forward it to TD for them to accept or decline,” explained Labrecque. All three properties sold over the summer at less than the mortgages owing.
“My understanding is that it was to TD’s advantage to let us sell the properties on our own,” said Labrecque. “The properties never went into TD’s possession and could be sold at a higher value, with more potential buyers, than being sold with the stigma of being a foreclosed property. Also, the foreclosure process can be a drawn-out process that costs the lender additional legal fees.”
“TD wanted three things: the contract with the realtor showing minimal fees; comparables from the realtor to justify the listing price; and finally the purchase contract from a buyer,” says Labrecque. “They also wanted me to order an appraisal. I said an appraisal was fine but that TD would have to set it up and cover the cost itself.”
Included a seller’s condition
“We also added a seller’s condition to the purchase contract that said, ‘Subject to TD to agree to discharge the mortgage.’ We told TD that we needed this confirmation within 10 business days of the bank being presented with the offer,” shares Labrecque.
Once the purchase contracts were sent to TD to review, the bank then ordered an appraisal for each property (at its cost). Two of the properties’ values came in within 10 per cent of the purchase price but one was off by more.
“TD didn’t like that and wanted to refuse that offer but we pressured them by saying all three properties came as a package deal and if they declined one, there’d be no deal on any of the properties. For us, it had to be all or nothing. We also argued the valuation in the appraisal by using comparables provided by our realtor,” says Labrecque.
The couple operated with the belief that the lender does not want to end up with properties in their possession. Foreclosure properties turn into non-performing assets and can hurt a lender’s books (more on this later). The lender also must justify its actions to shareholders and regulators.
In the end TD, agreed to discharge the mortgages at a shortfall. All three properties were sold to third-party buyers.
Keeping an eye on credit reports
In the meantime, the couple had never missed a payment (mortgage, property tax, condo fees) and so their credit was not negatively affected.
“We checked our credit reports after the sales had gone through and noticed that TD had misreported foreclosure on the three mortgages/trade lines,” Labrecque said. “I contacted the TD lawyer and said these were not foreclosures, and that the whole point of us dealing with TD was to arrive at a settlement through short-sale. We never missed a payment. TD’s lawyer agreed that the mortgages had been misreported to Equifax and had the tradelines changed to ‘Account settled.’”
To date, Poulsen and Labrecque’s credit scores haven’t been impacted and the pair don’t anticipate the TD mortgages being an issue going forward.
Time and money lost
“It was tough to find the right person at TD, but in the end, the bank followed the rules of non-recourse mortgages. It’s a rotten situation all the way around but TD did see the benefit of avoiding foreclosure for both parties,” said Poulsen. “The bank was going to incur a loss either way but this was the best outcome for everyone.”
Labrecque adds, “We lost our initial down payment and 12 years of time, effort, and additional money through landlording and maintaining properties. In the end, everything we invested into these properties was for nothing. These were lost investments for us as well as the bank.”
The cost of foreclosure in Alberta
In Canada, when property owners default on their mortgage, the lender can foreclose on the property. While this is bad for the mortgagor, it’s arguably worse for the mortgagee.
According to a blog post on Edmonton lawyer Barry McGuire’s website, a lender’s legal bill for a basic, straightforward foreclosure could be $2,500 to $5,000. In Alberta, this money couldn’t be recovered from the mortgagor and would be an additional cost incurred by the bank. While one may assume that a bank would seize the opportunity to avoid that additional cost, McGuire’s blog post cautions that, “lenders often seem incapable of seeing what might be in their best interest.”
And as explained in an article on huffingtongpost.ca, mortgages that are 90 days in arrears are categorized as “non-performing assets” (NPA) which can affect a bank’s credit rating. By negotiating a successful outcome with Poulsen and Labrecque, TD was able to avoid these additional repercussions.
Scotiabank’s actions “defy logic”
Subsequent negotiations with other lenders haven’t been as fruitful. Emboldened by their settlement with TD Canada Trust, Poulsen and Labrecque contacted Bank of Nova Scotia to propose a similar settlement. They say that Bank of Nova Scotia has been more confrontational than TD.
“Scotiabank has been a nightmare,” said Poulsen. “Our mortgages at Scotiabank had a line-of-credit (LOC) component. While we believed the mortgage portion of the debts to be non-recourse, we assumed that we’d need to repay the LOC portion. We contacted our local branch and asked if Scotiabank would agree to short sales on the properties and give us a loan to pay back the lines-of-credit. We explained that we were already overextended and thought that Scotiabank would need to make an exception for us. Scotiabank suggested that we instead borrow money from our families to pay back the bank.”
The Bank of Nova Scotia’s response motivated the couple to re-examine their options. During the course of their research, they discovered that their lines-of-credit were, in fact, part and parcel of the original mortgages and as such, non-recourse rules applied to this debt as well.
Returning to Bank of Nova Scotia
Armed with this new information, they again contacted their local branch to negotiate short sales for their two properties. The branch said this was outside of its scope and told them to contact Bank of Nova Scotia via its 800-number.
“We called the number and got bounced around from person to person before being referred back to the branch,” explains Labrecque. “But then the branch again told us to call the 800-number. The 800-number insisted that we talk to the branch and again the branch instructed us to talk to the 800-number. It went around and around.”
Labrecque says that when she expressed frustration about the inefficiency of the process and the lack of direction being provided, she was told by a Bank of Nova Scotia representative that he wasn’t there to help; he was there to act as a roadblock.
Poulsen says that roadblocks are all the pair has experienced with Bank of Nova Scotia. “When you get a mortgage, the bank tells you that if you get into a tight spot, you should let it know so you can work something out and that’s what we did. Instead, we feel like Scotiabank did everything it could to avoid helping us, or itself, for that matter.”
Finally on the same page?
Following weeks of phone calls and emails, Labrecque finally spoke with the exceptions manager at Collections Canada, the Bank of Nova Scotia department that deals with foreclosures. After a series of phone calls, the manager confirmed with Poulsen and Labrecque that the mortgages as well as their line-of-credit components were non-recourse and said that should the properties go into foreclosure, there’d be no judgment against the couple.
“At this point, we feel like we’re finally on the same page as Scotiabank,” said Labrecque. “We said, ‘OK, great. We all understand that we won’t have to pay this debt in foreclosure so let’s figure out something less detrimental to both parties.’ To my surprise, Scotiabank insisted that any negotiation would require ‘proof of hardship’ on our part.”
Poulsen was equally shocked by the manager’s response. “It just shows you how tone-deaf Scotiabank is and how little thought the bank gives Alberta. Proof of hardship isn’t required but even if it was, Scotiabank should turn on a TV. It’ll see that all of Alberta is experiencing hardship. A thousand truckers don’t show up for a protest unless the entire province is neck-deep in hardship,” he said, referencing a number of recent rallies held throughout Alberta.
He said that after having lots of discussions that went nowhere, he and Labrecque decided that if Scotiabank wouldn’t provide them with a clear process to follow, they’d use the same system TD had given them. “We hired a realtor and listed the properties just as we had with TD. After a few weeks, we had an unconditional offer on one of the two Scotiabank properties and sent it to the Collections Canada exceptions manager for her approval,” he said.
If they were surprised by Bank of Nova Scotia original request for proof of hardship, the pair says they were astounded by Bank of Nova Scotia’s reply to the offer they presented.
“It was turned down flat,” said Labrecque. “The exceptions manager at Canada Collections didn’t even order an appraisal to see if the offer we presented was fair. She said that because we wouldn’t provide proof of hardship, there would be no negotiation on any sale.”
Poulsen says Scotiabank’s actions defy logic. “Scotiabank says we won’t have to pay these debts if the properties go to foreclosure but when we present a real, viable alternative that’s less detrimental to all parties, we get shut down.”
Bank of Nova Scotia says “No”
“At this point, I feel like Scotiabank was dealing in bad faith the entire time and has been trying to exhaust us into making the decision to go into foreclosure,” continued Poulsen. “We asked for an exception that would allow us to pay back the lines-of-credit but were instead instructed to borrow from our families. When we came back more well informed, we said we’d work with Scotiabank to sell the properties to a third-party but they said no. And even when we presented an unconditional offer on one of the two properties, Scotiabank said no. What am I supposed to believe other than Scotiabank has wanted to foreclose on these properties all along?”
With Bank of Nova Scotia seemingly unwilling to negotiate a short sale, the pair feel they’ve been forced to choose foreclosure.
“We’ve spoken to Scotiabank’s Edmonton lawyer, but we don’t really know what’ll happen next. We likely won’t know until later this month,” said Poulsen. “It’ll probably screw up our credit as well as Scotiabank’s credit but we feel like Scotiabank painted us into a corner to get what it wanted.”
In a phone call Friday afternoon, a representative from Scotiabank’s Office of the President said that he was unable to comment on this story.
Advice for those in a similar situation
When asked if they had advice for other Albertan property owners experiencing a similar rough patch, Poulsen and Labrecque suggested first talking to a lawyer about your specific situation and to keep making payments as long as you can.
“With TD, we feel like keeping the mortgages in good standing gave us more leverage for negotiations,” said Labrecque. Beyond that, they say to be patient and persistent.
“The squeaky wheel gets the grease,” said Labrecque. “Call the bank often and ask lots of questions. You need to be your own advocate and make your case again and again to different people in different departments until you get to the right person. It’s a huge time investment. Keep track of all your dealings; write notes, keep emails, and record phone conversations. Keep acting reasonably. If you end up in court, being the reasonable party only helps you.”
“Confide in your friends and family,” suggests Poulsen. “I think there are way more people in a similar situation than you can even begin to know. It’s isolating to feel like you’re the only one with this weight on you. It’s pretty clear there’s no help coming from the federal government or most of the banks so Albertans will have to do what Albertans have always done: pull together, rely on each other, and find our own solutions.”
Learn more about Alberta non-recourse mortgages
Visit this page for more information about non-recourse mortgages in Alberta, including contact numbers for TD Canada Trust and Bank of Nova Scotia.