Ontario power of sales surge as desperate homeowners run out of runway

A power of sale is when a borrower defaults on their mortgage and the lender takes over the home to sell it and recoup what they are owed.

Jonathan Alphonso, principal broker at Mortgage Broker Store and real estate agent with Royal LePage Terrequity, put together a site called Power of Sale Listings that collects and organizes all publicly declared power of sale listings by scanning public listings and flagging anything that indicates a property is a forced sale (within what’s allowed to be disclosed).

But the data collected is just “the tip of the iceberg,” Alphonso said, as he can only capture listings that disclose the power of sale, which many banks don’t do. 

“I’d say, I’m maybe capturing 25 to 30 per cent of all power of sales,” he said. “We’re seeing a ton of power of sales and a lot more severe power of sales because many people owe more than the property is worth.” 

So far, the GTA’s spring market has seen marginal sale improvements over last year but is still well below historic sales norms while prices have dropped more than 20 per cent since the February 2022 peak. That’s left a growing number of desperate homeowners with underwater mortgages, where they owe more than the property’s current market value. 

While homeowners would rather sell the property on their own before the bank steps in, the lack of buyers in the market makes that difficult and lenders are under pressure to sell quickly as prices continue to drop, with the majority of forced sales occurring in the private lending space. 

“We’re in a depressed real estate market, so it’s not like there’s this sideline of buyers, right?” said Graeme Hamilton, a licensed insolvency trustee at Spergel.

“I think it’s just one of those perfect storms, unfortunately.”

The most vulnerable homeowners 

Experts said that struggling homeowners either can’t pay their monthly mortgage payments (as unemployment and consumer debt rises), can’t pay their mortgage at renewal (likely because they bought at the peak when interest rates were at ultra lows), or can’t close on their preconstruction unit as it nears completion, Hamilton said.

“We’re getting new calls every week from people that have a home underwater and are falling behind on their mortgage payments,” he said. “For those who bought preconstruction condos, we’re hearing that one in five aren’t able to close right now. It’s a really tough conversation.” 

In a power of sale, the bank takes the property back and lists it for sale, with the homeowner on the hook for any shortfall between the sale price and what they owe. If homeowners can’t make up the difference, they typically file for bankruptcy, Hamilton said.

Over the last 12 months the top five cities with the highest number of power of sales are Toronto, followed by Brampton, London, New Tecumseth and Markham, according to data from Power of Sale Listings. 

In Toronto, presales for new-build condos soared during the pandemic, but now many of those buyers can’t close and the unit are being put up for a power of sale. In some of the other cities, like Brampton, the same thing is happening but with new-build single-family homes.

Investors who also dove into the market during the pandemic frenzy and bought multiple properties over-leveraged themselves and are facing tough financial choices.

“Investor buyers, they only bought because they thought they could rent it out to make a profit on it — those people are in particular trouble,” Alphonso said. 

Private lenders dominate 

Alphonso’s data collection indicates that roughly one third of the power of sales are from major banks and lenders while the rest are from alternative and private lending, which have higher interest rates than the major banks and aren’t as heavily regulated.

But even major banks and lenders are seeing a significant uptick in mortgages in arrears in Ontario — late payments by three or more months — which reached 0.30 per cent for those lenders in February, a number not seen since 2011. Mortgages in arrears reached a low of 0.06 per cent in 2022, according to the Canadian Bankers Association. 

Real estate lawyer Matthew Gibson has had to turn down a lot of power of sale cases due to his practice being “maxed out” by the work.

Dealing primarily with mortgage investment corporations and private lenders, Gibson sees firsthand the significant increase in homeowners who can’t afford to keep their property. 

While not common, Gibson has seen an increase in individuals with a vendor take-back mortgage, which is when the seller of the home lends money to the buyer, essentially acting as a bank by allowing the homebuyer to borrow money in order to purchase the seller’s home. The loan is typically offered for one or two years and can cover part or all of the purchase. 

“What we’re seeing now is that property values have dropped and the larger systemic issues people are having financially, many of those mortgages come due, the seller wants their money back, but the buyer is unable to pay it,” he said. 

“Now we’re seeing an increase in people who are not experienced mortgage lenders, and so we’re having to educate more people on what this process looks like and hold their hand through it.”