Mortgages are considered to be relatively safe sources of financing precisely because they are backed by the value of the underlying property. That’s why they call it collateral. If a mortgage payment is not made, the lender has the right to seize the property to recoup the investment and avoid any losses.
The fact of the matter is that default doesn’t happen frequently — for a number of reasons. First, the borrower has a great incentive to keep making payments. The last thing he or she wants is to lose the underlying property, isn’t it.
In addition, the mortgage market is generally well regulated — even more so in Canada compared to other jurisdictions, including the United States. There are strict rules in place regarding exposure to risk, and the federal government often steps in to curtail housing bubbles or other risky market conditions.
However, despite the relatively low-risk nature of mortgages as a source of financing, the worst sometimes does happen. As with all investments, if there is no risk at all, there is usually not much return at all, either.
This principle certainly pertains to mortgages. Sometimes borrowers will default on their payments. Yet, as already alluded to, this is part of the attraction of mortgages as an investment vehicle. For, even if this worst-case scenario does occur, the investor isn’t left with nothing. This is where foreclosures come in.
More than just foreclosure
Foreclosure is the legal process a mortgage lender has at his or her disposal to recoup any remaining balance of a mortgage loan made to a mortgage borrower. Foreclosure involves a very structured court proceeding that involves a court order allowing the mortgage lender to seize property ownership from the mortgage borrower.
However, in Ontario, there is an alternative to foreclosure, known as power of sale, which serves to expedite the situation when a mortgage borrower is in default. Under a power of sale, ownership of the property does not change hands until the property is sold. As a result, the borrower gets to keep any surplus remaining after sale, or is responsible for any shortfall.
ASCEND MIC is a mortgage investment corporation that specializes in offering investors high returns at low risk in Canada’s mortgages market. Please contact us to learn more.