Negotiating a Payment Plan on a Foreclosure

Negotiating a Payment Plan on a Foreclosure

Be Cautious of Negotiated Payment Plans

Lets say a homeowner has unfortunately gotten behind on their mortgage payments due to a short term financial pothole, but soon find a way to dig themselves out and make additional catch-up payments and get their account in good standing once again. Youd think that any self-respecting good-Samaritan Banker would be happy to comply, allowing the needed flexibility and time for their indebted to catch up on amounts owning.

But our self-respecting good-Samaritan Banker is caught at a crossroads. Once a mortgage goes into default, he is literally in a race with time to ensure he recovers his due recourse in its entirety. The issue against our homeowner is mortgage insurance. Where mortgages are insured under the National Housing Act by Canada Mortgage and Housing Corporation (CMHC), lenders tend to avoid committing to seemingly acceptable payback plans with their clients.

Our Bankers dilemma is purely a financial one. Lest he trusts you on your word and you dont fulfill your promise to make up the over-due payments, he may find his own job on the chopping block.

The reasons are two-fold. Specifically, although our borrower has the best intentions, his re-payment plans sometimes get derailed by unexpected financial challenges, leaving our Banker left holding the (some-what empty) bag. At this point, the lender has lost valuable time in recovering his debts. Moreover, and more importantly, CMHC usually rewards a lender who has executed a quick foreclosure action by full reimbursement of all outstanding principle, fees and interest charges accumulated during the proceedings.

There are policies and guidelines that govern and limit a lenders ability to recover lost interest charges and fee payments through foreclosure insurance claims. Once a foreclosure action is completed and a lender submits a claim to CMHC for any shortfall in dispersements, CMHC can reject the full claim and reduce the total amount awarded if they determine that the foreclosure took too long to complete.

In the end, there is no real incentive for our Banker to try to work out an orderly re-payment schedule with their clients. Since the lender will recover the principal, interest and other accumulated charges by pursuing a quick foreclosure action, there is no incentive to extend time to our borrower for consolation payments.

This is not always true, however. In circumstances where there is little or no equity in the property, an uninsured mortgage company may be more inclined to work out a deal which affords the borrowers an opportunity to redeem their outstanding debts. Without CMHC to back them up, it is in the lenders best interest to agree to a quick solution with a default borrower before the foreclosure action proceeds too far and the legal costs alone make redemption impractical.

The caution here is to realize that if you have a CHMC insured mortgage, your lender may not be willing to play ball with your wishes to structure a re-payment plan, especially if its unrealistic in its ability to quickly get you out of arrears. If you have a conventional (uninsured) mortgage, your lender is more likely going to be willing to meet you half-way and negotiate a fair repayment plan with you.

[First National Financial Corp. v. Engleman, 2001]

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