It’s been interesting going to court and seeing the fallout continue from the recession. I have more mortgage files than previously and it is clear that the number of mortgage files on the court dockets has increased substantially.
I was asked a question recently about what could be done, if anything, where the mortgagee sold property under power of sale and the property sold for a substantial amount of money below the lowest possible market value. The answer is that it is possible that you might have a claim, but it’s far from a guarantee. Before we examine this further, I should explain that most of the time people are concerned about this because there is a shortfall after the sale of the property and the lender then looks to the borrower to pay the shortfall. Less common is the situation where the borrower believes that he/she/it should have received some surplus funds after the sale.
Firstly, what is the nature of the claim? It is a claim for “improvident realization”. Let me use an admittedly facetious example but it will illustrate the point. Suppose that your house is worth $550,000. You needed to borrow money quickly and got a loan for $50,000 that was secured with a mortgage. For some reason you default on the loan and the mortgagee starts power of sale proceedings. The house is then eventually sold for $55,000 – being only 10% of its value – and being exactly enough to pay off the mortgagee for the mortgage and its legal fees. In that instance, we would likely have an improvident realization. The mortgagee is required to not only take into account what it is owed on the mortgage in determining the sale price, but also what is fair to the mortgagor (you) as the owner of the property. If the sale price is too low, the Court can find that the sale was “improvident” and require the lender to pay the difference between what the property should have sold for and the actual sale price.
That’s the concept, but the practice is not as simple. What is a “reasonable sale price”? That can depend on numerous factors. For example, it is fairly standard practice for the mortgagee to obtain one (often two) appraisals to determine the value of the property. However, this will not be the market value but the “forced sale value”. If the ultimate sale price is in the neighborhood of this value, then it will be difficult to convince a court that the sale price was “improvident”.
It should also be noted that “market value” and “forced sale value” are very different. Why? Because if I sell you my house today I will make numerous promises, such as that there is no UFFI insulation in the home, that the fences are on the property lines in the proper locations, etc. If these turn out to be untrue, then you could subsequently sue me for not conveying the house that I said I was conveying (although, in fairness, this type of a lawsuit is enough for several blog posts, so this statement is an oversimplification). However, when a mortgagee is selling property under power of sale, the mortgagee often has absolutely no idea of whether the insulation is UFFI or otherwise, whether the fences are in their proper location, etc. And the costs for the mortgagee of determining all of this information isn’t worth it. So, the mortgagee sells the property on an “as is / where is” basis – in other words, you get what you see and you’re not getting any promises of any type. The buyer has to accept this term of sale, but in exchange for doing so, the buyer will greatly reduce the price from the market value to create a “hedge” or “buffer” in case it should turn out, for example, that the main floor is rotten and needs to be replaced.
So, comparison should be to the “forced sale value” as set out in the appraisal(s). But other factors will also be taken into account. For example, what is the condition of the house and, more importantly, is there anything about its condition that requires a sale to be made sooner rather than later – for example, the property is in Oakville and it is near a potential location for a garbage incinerator and it is important to sell the property now before it becomes widely known that the incinerator could be located next door (as opposed to waiting and if the information becomes well-known then nobody is going to buy the property). Another factor is how long the property has been listed for sale. For example, the appraisals say that the value of the house is $550,000. However, the property has been on the market for 6 months without a nibble at $525,000. Then it is reduced down to $500,000 and still no nibbles and then after 18 months it finally sells for $475,000. Looking solely at the comparison between the appraised value of $550,000 and the sale price of $475,000, one would have a question of whether there was an improvident realization because of the $75,000 difference since it is a significant amount of money. However, when you take into account the fact that the property sat around for 18 months and got no nibbles until it went down to $475,000, then the sale price doesn’t appear improvident at all. In a similar vein, the law does not require mortgagees to sit around and wait until housing markets go back up. If the market is in a free fall or is not likely to increase anytime soon, then mortgagees will not be faulted for selling while they could – and, to the contrary, they could be faulted for failing to mitigate their losses if they sat around and did nothing and the values continued to fall.
These are just some of the factors that are considered in determining whether a sale price from a power of sale is improvident. While there can be a claim against the mortgagee for improvident realization, it is not an easy claim to win.
Something to think about.