kombat wrote:
If you default in Canada, the bank forecloses and sells the home. If the proceeds of the sale are insufficient to clear the mortgage, then they sue you for the difference (and win). You either pay, or declare bankruptcy. If you declare bankruptcy, then your eligible assets are sold off to pay your creditors (meaning you can't just say you're bankrupt to get out of it - you have to actually be bankrupt). Finally, if all that isn't enough to cover the outstanding balance due, a claim is filed with CMHC to cover the remaining shortfall.
This is correct. However, to an unemployed person who is $200-$300k underwater (ie: GTA or GVR owner after a crash), spending a year or two as a first-time bankrupt, paying a minimal amount of non-exempt income into the estate, is a rather minimal burden compared to actually spending the next 10-15 years earning enough to make up the equity deficiency.
I personally believe that banks themselves will be counselling their CMHC-insured clients who are severely underwater, simply to file for bankruptcy. Implicitly promising them that once they go through bankruptcy, the bank will be glad to work with them and their cleaned-up balance sheets. After all, its much easier for a bank to extract fees from clients who have positive net worth, than those that have negative net worth over the long run.
AFAIK, the bank itself doesn't have to chase the borrower into bankruptcy. Once the note is defaulted on, the bank sells the house, files the deficiency claim with the CMHC, and the CMHC can then proceed with legal action against the borrower for the deficiency if the CMHC believes there are assets available to satisfy the claim. For most Canadians in the situation of defaulting, any assets are likely to be trivial (ie: clothing, personal items, etc.), exempt (ie: tools of a trade, certain equity in a vehicle, etc.), secured by liens (ie: leased cars, etc.), or sheltered (ie: RRSPs, life insurance, pensions). This system guarantees a rapid liquidation of the inventory in Canada which should help assist in fairly rapid price discovery once things get rolling downwards in earnest.