Editor’s note: This project is the result of months of interviewing, data gathering, and data analysis by students in the investigative workshop and MJ program at the school of journalism at the University of King’s College. The reporting and writing team is made up of MJ student Bethanee Diamond, and workshop students Ava Coulter, Ian Gibb, Piper MacDougall, Isabel Ruitenbeek, Julia-Simone Rutgers, Jane Sangster, and Stacey Seward. The faculty advisor and project editor is Fred Vallance-Jones. Advocate Media Inc. is proud to be a publishing partner on the project, helping to spread the investigative work of this team across the province.
HALIFAX: Up on the third floor of the law courts building in Halifax, down a long corridor from the elevator, is Room 314. It’s an unremarkable space, across the hall from one of the courtrooms. There are a couple of cheap office desks, a few mismatched chairs and an old green filing cabinet. A window looks out over a courtyard toward Upper Water Street.
It’s 9:30 in the morning in early February.
Two lawyers are seated at the desks, having a chat about the family history site Ancestry.ca.
The sound of a flushing toilet is heard from the washroom next door.
No one else is here except a King’s journalism student.
Soon enough, one of the lawyers hands the other a cheque.
It’s already filled out.
It has the feeling of a quick business meeting, but this was actually a public auction of a foreclosed property.
The owner of a house in Fall River had fallen behind on their mortgage and the lender took them to court.
Both lawyers practice foreclosure law in Nova Scotia. One was acting as the court-appointed auctioneer. The other was the one and only bidder, representing the lender.
In just a few minutes, the deal is done, and the Fall River couple has lost their home. The lawyers pack up their briefcases and leave Room 314 together. They’ve done this many times.
The primary purpose of any foreclosure process is to allow lenders to recover money they have lent through mortgage loans when borrowers don’t live up to the terms. This lets lenders provide money at interest rates that make property ownership affordable.
Foreclosure is unlikely to be a happy process for those losing their properties. The best they can hope for is to come through with their dignity intact, and if their property is worth more than they owe to the lender, maybe get some of that leftover money back once the debt has been paid and the costs of the sale process covered.
An investigation by journalism students at the University of King’s College has found a Nova Scotia foreclosure system that still relies on the 18th century idea of publicly auctioning properties of those who have fallen behind in mortgage payments, but which rarely obtains anything like market value for them.
Instead of being able to simply sell a property in the normal real estate market, lenders need to take borrowers to court to get an order that the property be sold by the court. It’s a process that runs up thousands of dollars in lawyers’ fees and expenses, all to be borne by the borrower, by the time the sale is scheduled. The result is most often auctions like the one in early February: the lender ends up buying the property, and then needs to spend even more to resell it in the normal market.
King’s students built a database tracking about 500 foreclosure auctions advertised in 2017, through the court process and on to the final sale of the property. It revealed that if they can’t sell or arrange with their lender to catch up on payments, before the auction sale, borrowers have little chance of recovering any of the value in excess of what they owe.
More than 20 years ago, the Law Reform Commission of Nova Scotia recommended the province move to a simpler power of sale process that saves costs and time and returns any excess funds to borrowers, but elected officials failed to act. So, the system keeps on going through the motions of selling properties though auctions, even though few bidders show up.
“Thirty, 40 years ago, foreclosure sales were held by the sheriff for Halifax in his office…It was huge and the office would often be packed with people there for a sale, and there’d be a real auction,” said Justice Gerald Moir, a Supreme Court judge who heads up the court’s foreclosure committee.
“If you read [court] decisions from the ‘50s and ‘60s, they just assume that if you have sold the property after advertising, you got market value and they were probably pretty close to the truth then.” But today, “These are not generating real auctions anymore.”
There are many reasons why, including that the sales are barely advertised.
No on-line ads
Two notices are published, one at least 15 days before the sale and one in the week before, each in a daily or weekly paper that circulates in the area where the property is located. The Chronicle Herald’s provincial edition is used frequently. The notices also appear in replica “e-editions” of the newspapers, but even though fewer and fewer people read newspapers, there is no other advertising.
There’s a bulletin board on the first floor of the Halifax courthouse where paper notices are pinned, but most people will never go there.
Even the advertising that does exist gives little information about the properties, basically just the date and place of the sale, the address, and sometimes the mortgage date.
All prospective buyers can do is drive by the property and have a look.
A successful bidder also must pay 10 per cent of the bid amount in a certified cheque or cash at the auction and be ready to pay the full amount about two weeks later.
Moir believes the lack of bidders may also have to do with the rise of mortgages with low or no down payments, which means much less might be paid off. The result of all this is that when people do show up, they’re not your typical homebuyers used to online listings and ample property information. Instead, many are experienced bargain hunters, looking to snag a choice property, perhaps to rent, or as Merv Edinger, an associate broker with RE/MAX nova said, to pick up as a “fix and flip.”
“It’s a risky business because you don’t know anything about the property beyond the door,” said Brian DeCoste, who with his son purchases one or two properties at foreclosure sales each year, mostly in Halifax and Bedford.
How the process works
Before a property gets to a public auction, there has been a court process that has lasted for weeks. The lender needs to sue the property owner who has fallen behind in payments or failed to meet some other term of the mortgage contract. The lender’s lawyer prepares evidence, and a hearing is held in the Supreme Court at which a judge examines the lender’s case to ensure everything it claims is fair. Throughout it all, the cash-strapped borrower is usually unrepresented, and there is generally no valid defence to the suit anyway.
Once the court issues an order for foreclosure and sale, the auction is scheduled, and anyone else who has an interest in the property, such as another creditor with a judgment against the property owner, is notified because like the borrower they lose all their rights once the property is sold at the auction.
The two notices are printed, and one of the other foreclosure lawyers, one who doesn’t act for the lender in question, runs the sale.
The only bidder who is guaranteed to show up is the lender’s lawyer.
The lender as bidder
Some might question why the lender is even allowed to bid at a sale that results from its own court action, but in Nova Scotia that has long been the accepted practice and one of the few aspects of foreclosure law actually contained in legislation.
One of the peculiarities of Nova Scotia’s foreclosure system is there is no reserve bid tied to the actual value of the asset being sold. Instead, bidding starts at a price equal to the sum of the auctioneer’s fee, usually $500 or $1,000, and any unpaid property taxes. Lawyers who represent lenders say one benefit of having the lender bid is a third party who shows up at the auction can’t buy the property for that trivial amount with none of the debt being paid off. Yet partly because there are so few outsiders who do show up, the lender ends up buying the property most of the time.
According to the King’s students’ database, the foreclosing lender purchased the property at auction more than eight times out of 10.
“Lenders aren’t in the business of owning property,” said Nicholas Mott, a leading foreclosure lawyer with Cox & Palmer in Halifax. “They do it because they are begrudgingly protecting their debt.”
When the lender buys, no matter whether there were other bidders or it is the only bidder, it gets the property for the minimum bid amount.
This results in seemingly absurd outcomes such as a 6,000 sq. ft. home in Chester, assessed for taxes at $1.2 million, selling at an auction in Bridgewater for $5,495.45.
Later, the lender resells in the market.
When third parties other than the lender buy, they pay whatever they actually bid. The lender’s lawyer also bids to ensure a third party never pays less than either the outstanding debt, or the appraised value of the house, whichever is lower.
“If I’m owed a hundred, but the property is worth 50, on my appraisal, it’s not good for me to bid up to $75,000 or $80,000,” said Stephen Kingston, one of the longest-serving foreclosure lawyers in Nova Scotia. “If it’s worth 50 and someone is prepared to bid 51, he’s got it. “If you’re only owed 50, but it’s worth a hundred, you want to make sure you get your debt plus interest plus allowable costs.”
At one auction at the Halifax Law Courts, witnessed by King’s students in late February, a house was for sale with an assessed value for taxes of about $183,000. There were two bidders, the lender’s lawyer, Ian Brown, and one third party bidder. The bidding went back and forth until Brown stopped at $165,000, a few thousand more than was owed to the lender according to the court’s order for foreclosure and sale. The man then bid $165,500 and got the house. He paid the deposit with $100 bills he’d brought in a brown envelope.
In another case in early 2017, a house in Deep Brook, between Annapolis Royal and Digby, was sold at a foreclosure auction in Annapolis Royal for $60,000, considerably less than the nearly $100,000 owed. The owner, Beverley Mosher, said she tried without success to sell the house before the lender foreclosed and the auction price still grates her to this day.
“To me, they gave it away.”
Only if there are multiple, competitive bidders is the price pushed much higher than the lender’s pre-determined maximum bid.
All these things together, few buyers, the lender buying most of the time, and little incentive to push prices beyond the debt owed, means borrowers have little chance at seeing excess money at the end of the process.
The lender buys most of the time
In the most common scenario, in which the lender buys, the borrower is quickly left on the sidelines.
Because the lender pays the minimum price of the auctioneer’s fee and property taxes, the sale doesn’t generate enough money to pay off the debt. Even so, it has the same legal weight as a sale at a much higher price; the court still regards the auction as validly extinguishing the foreclosed property owner’s rights to the property.
If the lender resells for a profit, it is not accountable to the borrower for that money.
Philip Girard sees a problem with that. Girard is a noted legal historian and was legal research counsel for the law reform commission when it did its study on foreclosures in the late ‘90s. Today, he is a faculty member at the Osgoode Hall Law School in Toronto.
While the analysis of foreclosure sales by King’s students found that most of the time, lender resales don’t produce enough to pay off the debt, public records suggest there is a profit in a small minority of cases.
In about six per cent of resales, the lender would likely have made money, even accounting for a six per cent real estate commission and $10,000 in costs for the court case, auction, and property management fees.
In two per cent, the potential profit was in the tens of thousands.
Girard thinks such surplus value should go to the borrower.
“So, I think in the lender’s own mind, this all kind of evens out in the end…but that’s not really fair from the point of view of the individual borrower,” he said.
“If the individual borrower would have got a surplus out of it, and some surplus would have been returned to them, then it should be returned to them. It’s just as simple as that.”
But those involved in Nova Scotia’s system say that’s not how it works.
“My understanding of the law is that the lender is entitled to keep that money, the same as any other homeowner,” Kingston said.
And said Justice Moir, “The [lender] is a speculator at that point. If you go and buy the property at the auction and you buy it for $20,000 and then you sell it for $30,000, you’ve made a $10,000 profit,” Moir said. “Should you have to pay that surplus to somebody else? Same thing for a mortgage company.”
Of note, while the borrower has no right to any profit after a resale, if the resale doesn’t generate enough to cover the debt and costs, the lender can ask the court to determine how much the borrower still owes, and in theory can pursue that “deficiency” for up to 20 years. In reality, lenders sometimes don’t pursue deficiencies, and even when they do, borrowers may not be able to pay, or may go bankrupt and be discharged of the debt anyway.
“Nine out of 10 deficiency judgment applications are a waste of money,” Moir said. “You’re never going to recover from these poor folks.”
A small chance for the borrower
The only time the borrower has any right to excess proceeds in a foreclosure is if the property sells at the auction sale for more than what is owed the lender and the costs of the court process.
The trouble is, with relatively few bidders, there’s little impetus for the price to be pushed up for the benefit of the borrower.
Third-party buyers know the lender will stop bidding at a price not much higher than what it is owed. Those properties worth considerably more than what is owed become attractive because buyers can turn a profit on the difference between what they need to bid to get the property, and what they can resell it for.
Brian DeCoste looks for properties worth at least $50,000 more than the amount owed to the lender, to account for possible repairs and the time he may have to hold it. How much the lender is owed is in the order for foreclosure and sale, a public document, and a property’s value can be estimated from the assessed value for taxes, which is supposed to reflect market prices.
Andrew MacRae of Dartmouth, another repeat bidder, uses a similar strategy, looking for properties with older mortgages that likely have more paid off, and in the cases of borrowers in bankruptcy, looking up what they owe in public records.
“So, you know exactly what you have to bid,” he said.
“The only chance of [the borrower] getting something back is if there is a bidding war at the auction, where two people want it, and it gets bid above what the foreclosed amount was,” MacRae said.
In those cases, any excess sum will be paid into the court, and the borrower, at least theoretically, can ask the court for it, once anyone else with an interest in the property, such as another creditor or second mortgage company, has been paid out.
The King’s investigation found such surpluses are rare, and borrowers getting any piece of such a surplus is even rarer.
After the auction
King’s students found that in a little more than half of the third party purchases at auctions advertised in 2017, the winning bid was not enough to cover the debt owed by the borrower plus $5,000 in costs for the foreclosure process ($5,000 is an estimate, based on the review of court files, of legal and auctioneer fees, plus costs).
As with resales, the lender can pursue a deficiency if there is a shortfall at the auction.
In the remaining auctions where third parties bought, the proceeds exceeded the debt and estimated costs.
The students scoured detailed court files in Halifax and Kentville and found six cases in which there was money left over after other creditors were paid. In all cases, the money was sitting at the courthouse unclaimed. In another, nearly $39,000 remained after the auction, and the borrowers had made what is called a consumer proposal, an alternative to bankruptcy in which creditors receive partial payment. The court ordered the couple receive the surplus money if they lived up to the terms of the proposal.
Most of the six unclaimed amounts found by King’s students were a few thousand dollars, but in one case involving a borrower who had previously gone bankrupt, $30,000 remained long after the bankruptcy was settled, and in another, a little more than $18,000 was unclaimed by anyone.
After five years, unclaimed surpluses from foreclosures go to the provincial treasury, though someone can still make a claim for them. In 2016, a modest $4,025.18 in unclaimed surpluses from foreclosure sales went to the province, but in 2017 $174,197.06 was transferred.
One possible reason why the money remains unclaimed is that borrowers don’t know it’s there. But Moir said they should have been informed by the lenders’ lawyers.
“…The rule says that the surplus stands in the place of the equity (the excess of the property’s value over what is owed) and has to be distributed according to the order of people who have an interest in the equity. And that would include the borrower,” he said. A court spokesperson said Moir later followed up with the lawyers on the cases identified during the interview for this story.
Another explanation for unclaimed surpluses is borrowers may not bother pursuing the funds because getting them requires spending money, something you don’t have when you’re broke.
“If you’re going to hire a lawyer to make that application for you, it’s probably going to cost you a couple of thousand bucks and do people have that ready cash to spend to try to get whatever amount of money back?” said Kingston. “And how does that compare with [the amount being held by the] court?”
Searches through court files turned up only one instance in which the file showed a borrower had taken the step of asking for the surplus, and getting the money.
Seeking a surplus
A student reached out to the borrower, who lived in Truro at the time of her foreclosure. The borrower asked that her name not be disclosed because few know details of what happened to her. Key information was confirmed on the public record.
The former homeowner owed about $40,000 to the lender when her house went into foreclosure. It had an assessed value of $106,000. She saw most of the money she might have got in a normal sale vanish in the foreclosure process, in which her house was auctioned off for $54,500.
“As I understand it, the amount of my mortgage and a few legal fees were covered and that was it. I lost a great deal of equity in the house,” she said. “It’s quite painful to talk about.”
A little more than $1,400 remained and was paid to the prothonotary, a courthouse official who handles such accounts.
The borrower said she found out about the surplus after the people who bought the property at the auction showed up at her house and she found a lawyer in Truro who looked into the details for her at no cost.
The lawyer said she had to file an application to the court for the surplus and that would start the process, but, “The papers that were given to me were absolutely unintelligible.”
The lawyer assigned the case to a paralegal.
She said it took months, court appearances, and two trips to Halifax, to get the money.
Even after the payment was approved, she ran into court bureaucracy.
She called the court office in Halifax and was told cheques were issued once a month and the next date wasn’t for two weeks. The woman was moving and would not be in the province by then.
“I basically begged, and the lady was like ‘well, I suppose I could consider this special circumstances’ and she issued the cheque. I was able to pick it up three days before I left town. And again, all of this fuss, for $1,400,” she said, “which is nothing compared to the amount I lost.”
Justice Moir said it should not have been this difficult to make an application, and that someone can ask to file papers to a judge by correspondence, which wouldn’t require going to court. Nonetheless, it would still require hiring a lawyer.
Power of sale
Given that there are few valid defences to a foreclosure lawsuit and the only real way to stop the process is to make an arrangement with the lender to pay, some might wonder why bother with an expensive court proceeding, and auction sales that are mere formalities more than eight times out of 10, merely to enforce what are in essence contracts between lenders and borrowers.
Just as it is ultimately less painful to yank a bandage off the skin quickly than to slowly pull it away, might there be a less painful way to accomplish the same goals, and maybe let the borrower keep some of the property’s value that exceeds what is owed?
The Law Reform Commission of Nova Scotia thought so.
In a 1998 report, which seems to have been widely disregarded by the courts, lawyers, and elected government officials, the commission (an arms-length body that provided independent advice to government) recommended Nova Scotia move to a system called power of sale, with additional rights for borrowers.
Variations of power of sale are used in all the other Atlantic provinces, and perhaps most notably in Ontario, the country’s largest real estate and mortgage market.
“It’s better for the creditor and it’s better for the debtor if we get the maximum price the property could get and the reason you get that better price is because the sale is treated in the same way as any other sale of property,” said Girard, the former Law Reform Commission researcher. “You have real estate agents and advertising and it’s just normalized.”
The Ontario and P.E.I. power of sale systems contrast with the assumptions in Nova Scotia’s court-heavy process, which lacks a requirement that fair market value be obtained and has no straightforward mechanism for ensuring borrowers are paid any money left over after the lender’s debt and the costs of the process have been paid.
Moving to power of sale in Nova Scotia and making the system fairer to borrowers would require legislation. That’s something the Law Reform Commission recognized in its 1998 report.
“I guess the overriding theme is that the judges felt, ‘listen, there’s only so much we can do. If we’re going to have an important change in this system, that needs to come from legislation,’” Girard said.
Moir echoes that today.
“It’s not for us to do,” he said. “We couldn’t do it,” noting an early 20th century Nova Scotia court decision that effectively put an end to an early attempt to write a power-of-sale provision into a mortgage.
He said he’s not certain it’s the right solution anyway.
“[The current system is] not really very functional today,” said Moir. “But I don’t know what would be preferable and I don’t necessarily think that power of sale would be (it), but if they want to bring it in, I certainly wouldn’t be opposed. And I would only be too pleased with the workload being reduced over here.”
Kingston said power of sale would have advantages, being cheaper and being “less lawyer and court intensive,” yet he maintains the fact the court has to approve lenders’ claims is a protection for borrowers. Mott echoed the view that borrowers are protected by the court.
But the fact remains, the auction system is failing to produce anything like what properties are really worth.
“The norm needs to be the establishment of a market value,” Moir said. “We are concerned about it.”
The King’s Signal publication requested an interview with the minister of justice, Mark Furey, but instead a spokesperson provided a statement attributed to the minister.
“Since the 1998 Law Reform Commission report, the Nova Scotia Supreme Court has made several changes to civil procedure rules, including issuance of new practice memoranda in respect of foreclosure and property law cases, to streamline the process and reduce costs. No further changes are being considered by government at this time.”
A spokesperson for the Progressive Conservatives said justice critic Tim Halman would not comment at all. She gave no reason why.
The NDP justice critic, Claudia Chender, wants to dig further into the issue and is urging the government to do the same.
“I think your story raises a lot of troubling issues that are worth further investigation and…I am hopeful that the Department of Justice will undergo that,” she said. “If they determine, based on the kind of now somewhat stale-dated law reform commission recommendations and now this article, that they are not going to move ahead with changes, then I think we deserve to know why.”
Chender said there are important questions as to whether the current system is a good use of court resources, and while she isn’t questioning the right of banks to recover unpaid mortgage loans through foreclosure, there is a question of fairness with regard to excess value a property might have beyond what is owed.
“For the people who for one reason or another have run into trouble and owe a relatively small proportion of the value of the home as debt, and then they lose that home, one would hope that if the lender was repaid and if the creditors were repaid, that there would be a way that people could realize some of that equity back, if it’s there. If it’s not there, it’s not there, but we have a system that makes it almost impossible to get that back.”
If elected officials don’t act, there are further things the court could do on its own.
Easiest might be advertising the auctions better, to try to bring out more buyers and perhaps have more properties sell at auction to third parties, pushing up prices and giving borrowers a better shot at recovering some value, or at least reducing what they still owe the lender.
“It would be nice for the court to establish a website, for example. I mean, let’s go online,” Kingston said.
Moir said court-ordered sales could also be done via real estate agents instead of by auction, without any new court rules being required. Exposure to a wider market of buyers could increase prices obtained, and increase the opportunity for borrowers to recover some money.
Mott has been experimenting with what he calls simple foreclosures, in which there is no auction sale and the lender is given title to the property, after which it can resell it.
“This is an old, old remedy, as old as mortgage law,” Mott said. “A simple foreclosure can be done with less cost incurred by the lender and then less cost claimed against the borrower with what is often exactly the same outcome as a would have happened in a foreclosure, sale, and possession.”
At the urging of the court, Mott now includes a clause in the order confirming the foreclosure that requires that if the lender sells the property for more than the debt, interest, and costs, that profit must be paid into the court. This is in marked contrast to resales after the auctions, and opens the possibility for a foreclosed property owner to get some money back after a sale in the real property market.
Mott said the wording of the mortgage documents needs to allow this approach, and so far, he has used it with CIBC mortgages and estimates he has done about 20 foreclosures this way. The court’s foreclosure committee has been discussing rules for this kind of proceeding and Mott said he is not aware of any other lawyer using the method.
“Typically, my client would prefer to see it go to public auction,” Kingston said, “because there is the off chance it might have sold there, and they can avoid the cost and inconvenience of dealing with the property afterwards.”
Girard said that part of the problem with reform is that nobody is actively lobbying for change, and those most affected, the borrowers, are unable to speak up.
“I think historically in our culture there’s shame around being foreclosed against,” he said. “It’s like, you haven’t made it; you haven’t been able to pay your debt… and you’ve been kicked out of your home.”
That shame, and the silence that flows from it, means it’s hard to create momentum for change.
“The whole problem with the foreclosure system is that it’s kind of a classic instance where anybody who is disadvantaged by the system, they don’t know other people who are disadvantaged by the system,” Girard said.
“Typically, in our society when we get changes like Me Too or anything, it’s people coming together to try to make a point about something and trying to lobby for change.”
Indeed, most people who had gone through the foreclosure process who were contacted by King’s students either did not respond, or asked they not be publicly identified, fearful of harm to their reputations.
One woman who faced foreclosure in Halifax said it was a draining process.
“People look at this as a financial thing. But it’s more than financial; it takes an emotional toll. And even physical health for some people. The stress level is huge.”
The woman has lived in her West End Halifax house for more than three decades, and asked that her name not be used because of concerns of what wider knowledge would mean for her and her family. King’s students confirmed key details of her case in public records.
The woman was able to keep her home by borrowing money from a friend, and selling her car to her children, to catch up on her mortgage.
“Everyone always thinks this isn’t going to happen to me. But very easily, it can happen to anybody. Most people are just one paycheque away from disaster. Ours was business that did us in [but] it could be all of a sudden someone’s health, an accident or you have a financial burden because you have to take care of somebody else,” she said.
Based on her experience, she has simple advice for those facing the same situation.
“Before it gets ugly, sell. Sell as quick as you can. But it depends on where you are; if you’re fortunate, you’re in a desirable area.”
There’s no question some kind of process is needed to allow lenders to realize their security, when they lend large sums to buy property. For borrowers, the best option is to avoid foreclosure altogether. Kingston believes that if a property is worth substantially more than what is owed, the owner will likely have been able to sell before a foreclosure auction happens. Many people who end up going through foreclosure are deeply in debt or haven’t maintained their properties.
Moir points out that property owners do have a right to “redeem” the mortgage by paying what is owed and that provides protection for the value that has built up in excess of the debt. Technically, that right exists only until the court issues an order for foreclosure, though lawyers say banks will accept payment right up to the time the auction is held.
But for those who can’t pay and go through the process, Girard said there needs to be fairness.
“If somebody loses their job and they can’t make their payments anymore, it’s not really up to the lender to fix that problem,” he said.
“I’m not saying that the foreclosure process itself or those kinds of remedies are inherently unfair; in our system there has to be something like that, but it should nonetheless be something that respects the interests of the borrower as much as it is possible to do.”
He doesn’t buy the argument that Nova Scotia’s system is fair because the courts require the lenders to justify all their claims.
“The odd thing if you compare (the Nova Scotia system) to other provinces, say Ontario, is that in theory power of sale operates outside of court scrutiny and yet is a much fairer process than the Nova Scotia process, which operates supposedly under court scrutiny,” Girard said.
“So, the whole thing about court scrutiny is that it should not be touted as an advantage of the Nova Scotian system, because it’s only scrutiny in the most formal way; it doesn’t really amount to anything.”