Defaulted Mortgage

[jima]

Happy Canada Day!

I thought I'd throw this questions out to change things up a bit. Do anyone have experience with buying a defaulted mortgage as a way of acquiring the property. It? seems like a risky proposition if the legal work isn?t done right. There might be a whole bunch of things that could come up, especially if the mortgage has somehow been paid out, but not discharged on title.

Any constructive opinions/ ideas on the subject would be appreciated.

Thanks

[Dave2]

Happy Canada Day!

I thought I'd throw this questions out to change things up a bit. Do anyone have experience with buying a defaulted mortgage as a way of acquiring the property. It? seems like a risky proposition if the legal work isn?t done right. There might be a whole bunch of things that could come up, especially if the mortgage has somehow been paid out, but not discharged on title.

Jima:

This is one of those areas that the devil is in the details.  The simple answer is maybe but remember the person that has gone into default can force you to sell the property even if you buy it.  see G2020's comments following which are not the situation I assumed you were referring to

This is more likely in a case where the value of the mortgage is substantially less then the value of the property which is the type of situation that would tempt you to buy the mortgage in the first place.

Note see changes from original post which G2020 has mentioned a case that I assumed you were not  mentioning. 

[g2020]

Sorry Dave2 but the simple answer is not yes. The simple answer is no, no, no! No, because it is illegal to buy and sell mortgages unless you are a mortgage broker or equivalent. To get a feeling of how easy it is to get in trouble as a tax sale newbee, go to CANLII and do a search of recent tax sale cases in Ontario. You will see the case where Craig Harvey was convicted for searching out and applying for excess proceeds of tax sale without being licensed to do so. All of us who are not lawyers should periodically review the tax sale case law. The second no is because if you acquire the mortgage you are required to get fair market value for the owner if you sell under power-of-sale, and foreclosure of a tax sale property is not an option. The third "no" is because if the person does not pay their taxes then they are not likely to either pay their mortgage, or take care of the property. I am all for buying mortgages through a mortgage broker or a lawyer - just not mortgages on property that is in tax arrears. So, no no no Dave2 since when I eventually meet you I want you on the street so that you can buy the beers you owe. Cheers!

[Dave2]

G2020:

I think we have two situations here.  Case one where the mortgage is in default but it has not reached the tax sale which was the case I assumed that Jima was referring to.  

In the case you referring to where the mortgage was in default and it was going through a tax sale as well because taxes had not been paid I agree with you.  I would not buy a mortgage on a tax sale because you have too much risk of seeing it extinguished

On liscencing agree with your basic logic if you are going to do a lot of them but on a single case or a couple every five or 10 years I have been told you do not have to be liscenced. I think the key here is like in real estate, if you own the property you can sell it but like in real estate the transaction has to handled by a lawyer for it to be registered properly.  Otherwise every person who gave a Vendor take back mortgage on a real estate sale could be charged.

The person who told me used the example of collecting HST on sales.  If you sell a single piece of land every 5 years you may avoid it.  Do it regularly and you have always charge it.  

In a tax sale case I also agree with you but for a different reason. Especially as you should not contact the mortgage holder because it is as bad or even worse as contacting the owner.    

Mortgages are bought and sold by lenders all the time.  It is called assignment of a mortgage. Note if you are the borrower and try to sell the mortgage you have to check the fine print.  The mortgage has to be "assumable" otherwise it cannot be sold.  

I am assuming Jima is refering to a private mortgage and would appreciate other comments

[brigg]

G2020:

I think we have two situations here.  Case one where the mortgage is in default but it has not reached the tax sale which was the case I assumed that Jima was referring to.  

In the case you referring to where the mortgage was in default and it was going through a tax sale as well because taxes had not been paid I agree with you.  I would not buy a mortgage on a tax sale because you have too much risk of seeing it extinguished

On licencing agree with your basic logic if you are going to do a lot of them but on a single case or a couple every five or 10 years I have been told you do not have to be licenced. I think the key here is like in real estate, if you own the property you can sell it but like in real estate the transaction has to handled by a lawyer for it to be registered properly.  Otherwise every person who gave a Vendor take back mortgage on a real estate sale could be charged.

The person who told me used the example of collecting HST on sales.  If you sell a single piece of land every 5 years you may avoid it.  Do it regularly and you have always charge it.  

In a tax sale case I also agree with you but for a different reason. Especially as you should not contact the mortgage holder because it is as bad or even worse as contacting the owner.    

Mortgages are bought and sold by lenders all the time.  It is called assignment of a mortgage. Note if you are the borrower and try to sell the mortgage you have to check the fine print.  The mortgage has to be "assumable" otherwise it cannot be sold.  

I am assuming Jima is refering to a private mortgage and would appreciate other comments

If you are purchasing someone else's mortgage there is no need to be licenced.  If you where selling someone else's mortgage to a third party and charging a fee you would require a mortgage agent's or mortgage broker's licence (at least in Ontario, not sure about other provinces). 

G2020 is right private mortgages are bought and sold on a regular basis.  Most private mortgage's have terms in the contract that state that the mortgagor must keep his property taxes paid up to date and if he does not the mortgage will be in default and the mortgagee will have the right to pay the taxes for the mortgagor and add that amount to the mortgage balance (typically a fee can be charged by the mortgagee for his troubles).  After the mortgage is in default the mortgagee will then have the right to start power of sale or foreclosure proceedings.

So if you where purchasing a mortgage with tax arrears your lawyer should let you know this after he searches title and will probably advise you to either not purchase the mortgage or to at least have the tax arrears paid off before your money changes hands to avoid having the property sold at a tax sale and you left holding the bag.

Since the foreclosure process is lengthy and expensive you would want to make sure there is enough equity in the property to make it worth your while.

[jima]

Thank you all for the replies.

Yes it would be a onetime thing- I'm just interested in this specific property.....no I won't divulge where it is no matter how many beers I'm offered. It's a rural piece of recreational property for hunting....no house or anything of real value.
The mortgage is currently in default to a private lender.
I would like to buy the mortgage and take the time to foreclose so I can secure the property (I realize that the mortgagor might pay it out but that's the chance I'll take)
If there were any taxes owing (I assume there might be some as they haven't paid the mortgage), can't they just be added to the mortgage statement to increase the amount owed?

How complicated would the "offer to purchase" the mortgage be? There must be a few pitfalls that one can fall into? Anything specific I should add/ look out for?

Thanks again.

[Frank]

You should do this one through a good lawyer....there may be other debts or obligations you would end up with....including tax arrears.

Thank you all for the replies.

Yes it would be a onetime thing- I'm just interested in this specific property.....no I won't divulge where it is no matter how many beers I'm offered. It's a rural piece of recreational property for hunting....no house or anything of real value.
The mortgage is currently in default to a private lender.
I would like to buy the mortgage and take the time to foreclose so I can secure the property (I realize that the mortgagor might pay it out but that's the chance I'll take)
If there were any taxes owing (I assume there might be some as they haven't paid the mortgage), can't they just be added to the mortgage statement to increase the amount owed?

How complicated would the "offer to purchase" the mortgage be? There must be a few pitfalls that one can fall into? Anything specific I should add/ look out for?

Thanks again.

[brigg]

Thank you all for the replies.

Yes it would be a onetime thing- I'm just interested in this specific property.....no I won't divulge where it is no matter how many beers I'm offered. It's a rural piece of recreational property for hunting....no house or anything of real value.
The mortgage is currently in default to a private lender.
I would like to buy the mortgage and take the time to foreclose so I can secure the property (I realize that the mortgagor might pay it out but that's the chance I'll take)
If there were any taxes owing (I assume there might be some as they haven't paid the mortgage), can't they just be added to the mortgage statement to increase the amount owed?

How complicated would the "offer to purchase" the mortgage be? There must be a few pitfalls that one can fall into? Anything specific I should add/ look out for?

Thanks again.

Yes most private mortgages will have a clause in the contract that says you can pay the taxes for the borrower and add the amount to the mortgage balance (but have your lawyer check to make sure).

I wouldn't think your offer to purchase would need to be complicated but have your own lawyer (not the seller's lawyer) prepare it for you.  Since the person selling the mortgage is probably happy to get a bad mortgage off his books you should ask him to pay for both his and your legal fee's in the transaction. 

Another option might be to offer the borrower a new mortgage to pay out his existing one instead of "buying" his current mortgage.  That way you could create a mortgage contract with your own terms. 

You should ask your lawyer what the timeline and costs to expect in a foreclosure to get an idea of what to expect as well you should tell him your intentions to foreclose and see if he thinks it's a good idea or not.

Best to get professional legal advice before proceeding.

Cheers

[Dave2]

You should do this one through a good lawyer....there may be other debts or obligations you would end up with....including tax arrears.

Definitely one for professional legal advice even if the lack of maintenance risk that G2020 mentioned with buildings does not apply in this specific case.  Be careful about you read on the Internet as most it applies to the United States and the rules here are much different.  (they sometimes call them preforeclosure properties.)

Not all of us can have the skills and experience like Frank or G2020 to pull a rabbit out of a hat, although even they have to be careful now in the United States with the new regulations as the following news article shows.


you know that the hoary old magician's stunt of pulling a rabbit out of a hat requires federal licensing and submission to regulations administered by the United States Department of Agriculture's Animal and Plant Health Inspection Service? No, neither did I. But the whole business is governed by Title 9, Chapter I, Subchapter A, Parts 1-4 of the Animal Welfare Act, which governs most commercial handling of animals, down to even trivial arrangements. And among those regulations is a new rule requiring animal handlers, including a magician with his bunny rabbit, "to develop a plan for how they are going to respond to and recover from emergencies most likely to happen to their facility, as well as train their employees on those plans." Which is a lead-in to the odd tale of a magician and his bunny and the detailed and extensive requirements sent their way by federal bureaucrats.

From the Heritage Foundation's Foundry:

With the July 29 compliance deadline looming, the USDA recently sent Marty the Magician (aka Marty Hahne of Springfield, Missouri) an eight-page communiqu? detailing requirements for the plan, which must:

Identify common emergencies most likely to occur,
Outline specific tasks required to be carried out in response to each of the identified emergencies,
Identify a chain of command and who (by name or by position title) will be responsible for fulfilling these tasks, and
Address how response and recovery will be handled in terms of materials, resources, and training needs.
All of which means that Marty must prepare for all the calamities that could possibly befall Casey the Rabbit while making the rounds of more than 150 performance venues he visits each year, including schools, libraries, churches, and homes.

This rule applies to people and businesses which have some sort of a commercial use for animals, rendering them reliant on the animals' well-being to begin with. That means that these people and businesses are either responsible and forward-thinking enough to take care of their own animals so that they can continue to operate, or else they're sufficiently boneheaded that a requirement to stand and deliver contingency plans to an APHIS inspector upon command is unlikely to preserve their menageries from the apocalypse. APHIS cites Hurricane Katrina (PDF) as an inspiration for the rule, although that's a great example of the failure of the federal government's own planning and the value of reacting dynamically to unanticipated scenarios.

And, for small operators like a magician and his bunny, complying with the intrusive details of the contingency rule is likely to be rather more burdensome than simply stuffing Casey into your jacket, if the shit hits the fan, and running like hell.
 
Still haven't figured if the new regulations apply to guys who specialize in two legged bunny's that a guy like Hugh Heffner used to have.    I might have to be careful if I bid on that Pool in Kawartha Lakes that Frank is trying to encourage me to do.  Knowing our esteemed government(s) in true Canadian fashion they will probably declare "beach bunnies" an endangered species come November and who knows what regulations I would face.

Of course now that Talisman is coming back on the tax sale market a big player could be surrounded with (ski) bunny's in winter as well.