Legalviews Personal

Odd and dramatic things have happened to the economy, and more may well be on the way. Many people may soon have trouble paying their mortgages, and the companies hired by mortgagees to “insure” payment of those mortgages may have trouble paying too. What will courts and governments do then?

It is useful to know what happened in previous similar situations in the 1930s and early 1980s. History does not always repeat itself, but the groups who try to influence events usually do repeat themselves. Important parts of this history are not written down, or are hard to find. My eminent sources are now dead, so I will repeat things they told me. (And a modern living expert has helped me.)

The early 1930s were notoriously hard times. Few people realize that for Alberta, the 1920s were sometimes and in some places worse. Current Alberta legislation which often confines the mortgagee to getting the land, and saves the borrower from a deficiency judgment, goes back only to 1939. Why? And still more curiously, the Alberta economy was much better by then. What happened in the meantime?

Mr. Justice Morrow’s father was also a lawyer, and acted in the 1930s for several Alberta individuals who had lent considerable sums on land mortgages. The Alberta government made many different attempts to bar creditors’ recourse to the Alberta courts, many of which ultimately were held unconstitutional. But one thing which lasted for years was a tribunal of lay persons called the Debt Adjustment Board, and Alberta legislation requiring that Board’s written permission, in order to start a mortgage foreclosure suit (See the footnote). Mr. Morrow Sr. was usually dealing with farm mortgagors.

The great majority of debtors were honest, and embarrassed that they were behind in their payments, but they just lacked money. The big insurance companies in central Canada, and similar lenders, tended to be inflexible, and would not negotiate, even when the mortgage’s interest rate was 8% and so about 5% above what Dominion government bonds then paid. Mr. Morrow Sr. would go out to the farm and talk to the mortgagor couple. His son William Jr. (later the judge) was then a high-school or university student. While his father talked to the farm couple in the kitchen, young Bill would look around the farm yard. Usually what the farmer told Mr. Morrow Sr. was confirmed by what young Bill saw on the premises. In such cases, Morrow Sr. would negotiate something with the mortgagors: more time, lower interest, crediting partial payments against principal, not against interest, or the like. So Morrow Sr. got payments toward the mortgages.

But occasionally young Bill would report to his father having seen sources of income which the obstinate farmer denied having. Then Morrow Sr. would appear before the Debt Adjustment Board. Big Toronto and Montreal lenders would also apply, in front of a gallery of watching farmers. The tribunal orally rejected all their applications. Then Morrow Sr. applied on behalf of one of his private Edmonton lender clients (one a well-known physician), and would tell about the concealed assets. The tribunal would say that its decision was reserved. On Monday morning, in the law office’s mail would be a signed small printed form, with no covering letter. It was the tribunal's permit to sue.

It was likely that this legislation about the Board was also unconstitutional. But Dean Wilbur Bowker told me that for years, the big lenders refused to challenge this statute in court. Finally, about 1938 an Edmonton man had bought a downtown house with a small down payment, the rest of the price being payable over time under a formal Agreement for Sale. He ran the house as a rooming house, did well, collected a considerable stream of cash, and never paid a dime under the Agreement for Sale. Milner Steer issued a statement of claim for the vendor, raising all the constitutional points. The Alberta government quickly introduced a Bill for the modern legislation we now have, under which the courts decide what relief the debtor will get, and usually preventing any personal liability for a deficiency. (The Bill passed in 1939.) I will not speculate why the government waited that long, though I can say the Edmonton economy was in far better shape by 1938.

But what was the effect of all this? In 1938 or 1939 my father had a vacant lot and wanted to get a mortgage to build a modest home. He consulted one of Edmonton’s best- known financiers, who told him that given Social Credit legislation, no one would lend on mortgage in Alberta. Period. (In 1939 it became possible to get a very small loan from a bank, guaranteed by the federal government, but the loan had to be proven to be strictly for improving an existing lived-in home, not building a new one.)

In 1982 and 1983, after over 40 years of prosperity, the Alberta economy and land prices both sank. Then quite a number of devious speculators bought land with a big mortgage but no personal liability, and squeezed every penny of cash out of the land that they could. Mortgage lenders and those who insured them on mortgages suffered badly. One mortgage insurer refused to cover any new Alberta mortgages. This was a crisis, reported in many media stories, based on 29 different interviews with a representative of the Mortgage Loans Association.

Maybe the moral is that in the short run, it is possible to square the circle. But not in the long run.

– Hon. J.E. Côté

Footnote: The Debt Adjustment Board went back at least to 1931, when the government was United Farmers, not Social Credit. Its Act was amended and consolidated several times, including 1933 c. 13 and 1936 2d c. 3, and the Debt Adjustment Act 1937.

WILL FORECLOSURE HISTORY REPEAT ITSELF?