Financial facts: First mortgage equals "protection from creditors"?

[Greymatters]

On TV today an American show talked about mortgages and the different rights between first and second mortgages that owners have.

Situation:  According to laws in most (but not all) US states, those who own their residence by way of a first mortgage have some protection from creditors in that the creditor cannot force the owner to sell their house in order to pay off a debt.  However, if the owner has a second mortgage, the residence owner loses this protection, and creditors can force the owners to sell their property/residence in order to collect on owed money.

Question: Is this true in Canada as well?  Does someone have some insight into this protection or lack thereof?

Context: Although Ive been a homeowner for almost 20 years, Ive never heard of this 'protection'.  It seems to me that if homeowners in Canada do have this protection, then many people are unaware that consolidating your assets and organizing your finances by using a second mortgage actually make a person more vulnerable to hostile credit actions.

Ive tried the same search phrases for Canadian law examples, but dont get any results close to a satisfactory answer.  Does someone here have some knowledge of the subject and can confirm/deny whether Canadian homeowners have this protection or if its just centric to the US? 

 

[Wookilar]

The only situation I know of where a homehomer can be forced to sell is during a personal bankruptcy.

Yes, the house is protected (as are cars) UNLESS there is sufficient equity built up in the house to cover a large part of the debt owed. It is basically a decision that the Trustee will make inside the guidlines set out by.....some arm of the Federal Court that approves the discharge from the state of bankruptcy (whose name escapes me.....that class was a few years ago now  ;D)

There may be other situations, never heard of the 1st vs 2nd mortgage up here (mind you, never looked into a 2nd mortgage either).

Wook

 

[GAP]

Someone taking out a second mortgage is borrowing against the equity of the house....the holder of the second mortgage can force the forclosure to retrieve their money, with the understanding that the owner of the first mortgage has first priority out of any sale....so they forclose if they think they can satisfy the first mortgage holder, and recoup/write off their debt all or a portion of the amount of the second mortgage....

It is alive and well in both Canada and the US and causes hundreds if not thousands of people to lose their homes annually.

 

[Wookilar]

So..if I'm understanding this right, the holder of the 2nd mortgage can trigger this whenever they want?

I know that in my current mortgage there is a clause in there that the lender may demand repayment before the term is up, but only if a couple of conditions are fulfilled (which I can't emember). Seems to me that there was a personal loan a few years ago that had the same kind of language in it...

interesting....(in a scary kind of way, really)

Wook

 

[GAP]

So..if I'm understanding this right, the holder of the 2nd mortgage can trigger this whenever they want?

I know that in my current mortgage there is a clause in there that the lender may demand repayment before the term is up, but only if a couple of conditions are fulfilled (which I can't emember). Seems to me that there was a personal loan a few years ago that had the same kind of language in it...

interesting....(in a scary kind of way, really)

Wook

All it takes is one late payment....they can work on that

 

[Greymatters]

All it takes is one late payment....they can work on that

Fortunately Ive never had the problem, but it is sounds like an important element of information that people arent being told.  Sure "ignorance of the law is no excuse", and granted every one should know every law possible, but its impossible to know every single law ever passed, and its difficult to look up a law you arent aware of.  Every statement or spokeperson Ive ever heard of related to getting second mortagages as a means of consolidating debt or sorting out finances, none of them ever mentioned this vulnerability.

 

[retiredgrunt45]

Obtaining a second mortgage is the worst decision a home owner can make. Not only are you losing the leverage you have on your home, but now if you are late paying your payments or can't make both payments you may lose your house. Because now if the lender holding the second mortgage finds out the primary lender is demanding payment in full, they will also come after you and most often the only way out is to declare bankruptcy, because if you don't and after the second mortgage holder has to pay of the first or lose it's security, in the case of a forclosure or a forced sale by the first mortgage lender. The second mortgage holder can now come after you and sue you for the full amount owing on the second mortgage. Now not only have you lost your home, but now your also being sued to pay back the money you borrowed from the second mortgage. In this scenario you have placed yourself in a revolving door and your the one stuck on the inside going around in circles, unless of course you decide to declare bankruptcy, either way your pretty much screwed. These laws differ a bit from province to province, but they are all pretty much say the same thing.

This is a worst case scenario, but again why would someone place themselves in this situation when they could just as easily get a low interest line of credit or hold of for a while buying that "thing" until you've built up some equity. I've seen people sell the equity in their homes to take a 10 day cruise, reality sets in, in a hurry when the payments come due and the high from that cruise wears off.

The second point is to make sure you read the "fine print" on the back of your contract with the lender "Magnifying glass required". Or ask lots of questions before signing your John Henry on the dotted line.

 

[Greymatters]

Retiredgrunt45, do you have a web page link or legal identification code I can use to read that info at its source?

 

[retiredgrunt45]

Heres the link to the Canadian Bar Association BC branch on mortgages and second mortages, forclosures and power of sales. Its a good read for homeowners.

http://www.cba.org/bc/public_media/housing/415.aspx

 

[Wookilar]

Retiredgrunt, excellent link. Thanks for the info.

Wook

 

[Greymatters]

Info on link is very well explained, thanks.