Mar 07, 2021
THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part XL of a Series – Forbearance Agreements
My last 5 blog posts (Parts XXXV to XXXIX inclusive) have examined fees, charges and penalties that mortgagees like to add to their mortgage discharge statements (after default or after issuing power of sale). The Courts in Ontario are consistently disallowing mortgagees to charge these extra amounts (over and above principle and interest) even when the wording of the mortgage contract clearly sets out the mortgagor's agreement to pay these amounts.
What I’ve recently seen in my practice is a very nice work-around for mortgagees. While they cannot enforce (in Court) these types of penalties when the mortgagor wants to discharge the charge, they can – and are – using their position of power to force their mortgagors to enter into often very short term forbearance agreements; the main purpose of which appears to be simply to add demonstrably unfair – but clearly legal and enforceable – post-default fees and penalties on top of the mortgage debt.
A forbearance agreement is a contract that mortgage lenders are using more and more frequently. When a mortgage first goes into default, the mortgagee notionally sits down with the mortgagor to discuss the situation including the likelihood and timing of repayment. The mortgagor almost always needs 'a little more time'. So the mortgagee agrees to give more time for the mortgagor to repay – often as little as 3 or 4 months. And in exchange, the mortgagee’s lawyer drafts up a forbearance agreement in which the mortgagee agrees to (i) stop its power of sale or foreclosure proceeding for the forebearance period and to (ii) stop any litigation for the agreed upon forbearance period. The mortgagor in return agrees to do one or more (and often most) of the following:
- pay an increase rate of interest
- pay quite large fees (sometimes advanced by the mortgagee and sometimes due on repayment)
- pay the mortgagees legal costs
- repay the mortgage at the end of the forbearance period
As started earlier, if these add-on costs and additional fees had been set out in the mortgage itself, most if not all of them would have been unenforceable. But by including them in a forbearance agreement, the courts allow them to be charged and they can legally be enforced by the mortgagee against the mortgagor.
The next post will move on to a new power of sale and mortgage remedy topic, the statement of claim. This blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and power of sale team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.