Foreclosure by Power of Sale
Foreclosure is a legal process that occurs when a borrower defaults on their mortgage payments. Foreclosure by power of sale, otherwise known as nonjudicial foreclosure, involves the sale of the mortgaged property by the mortgage holder without the supervision of a court.
Foreclosure by power of sale is generally a more expedient way of foreclosing on a property than foreclosure by judicial sale. The majority of states allow foreclosure by power of sale. Proceeds from a power of sale foreclosure proceeding go first to the mortgage lender, then to other lien holders, and finally to the mortgagor. Foreclosure by power of sale accomplishes the same thing as a judicial sale. However, there are also some difficulties associated with the power of sale foreclosure process.
Availability of Foreclosure by Power of Sale
Currently, there are 30 states with state laws that allow foreclosure by the power of sale:
- District of Columbia
- New Hampshire
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
Advantages and Disadvantages
Some advantages and disadvantages of foreclosure by power of sale include:
- A mortgage holder must strictly follow state laws and provide a valid notice of default, an appropriate pre-foreclosure waiting period, and a notice of sale to the homeowner before starting the foreclosure-by-sale process.
- Foreclosure by power of sale is often subject to judicial review if title issues need to be resolved by the court. This includes actual defects in the deed and disputes regarding the priority of various lien holders and lessees on the property.
- In many jurisdictions, the mortgage holder is prohibited from seeking a deficiency judgment if they sell the property through extrajudicial means.
- The mortgage loan document itself must include a power of sale clause in order for this type of foreclosure to take place.
- A foreclosure by the power of sale cannot take place if the mortgage is in the form of an absolute deed.
Deed of Trust and Foreclosure by Power of Sale
In many jurisdictions, a deed of trust is required in order to conduct a foreclosure by the power of sale. A deed of trust conveys the property from the mortgage holder to the trustee, who holds the property in trust for the mortgage holder. In the instance of foreclosure, the trustee, not the mortgage holder, conducts the sale or foreclosure auction of the mortgaged property. The mortgage holder generally instructs the trustee to foreclose on the mortgage and is under no obligation to determine whether the foreclosure is justified.
A deed of trust and trustee-supervised foreclosure allows the mortgage holder to bid for the foreclosed property at the public auction, provided the trustee and the mortgage holder are not closely associated. Otherwise, a mortgage holder cannot bid for the mortgaged real estate when the foreclosure is by the power of sale.
It is important to note that if the mortgage document contains a right of redemption clause, the borrower has the right to reclaim the property before the foreclosure sale by paying off the mortgage.
Foreclosure by power of sale requires notice of the sale to interested parties. Generally speaking, this is done by taking out an advertisement in the local legal newspaper in the jurisdiction in which the property is located. Many states also require notice to be given to the mortgagor.
This procedure has resulted in some constitutional controversy. It has been argued in several cases that foreclosure by power of sale legislation fails to comply with the notice and hearing requirements of the Fourteenth Amendment of the U. S. Constitution. However, courts have consistently rejected this theory when it comes to private foreclosure actions with no public official conducting the foreclosure sale, ruling that there is no state action necessary to invoke the terms of the Fourteenth Amendment. But there have been rulings indicating that if the mortgage holder is a government entity or if a public official conducts the foreclosure sale the Fourteenth Amendment might be invoked, and stricter notice requirements might apply.
Speak to a Foreclosure Attorney Today
No one should have to face foreclosure alone. It can be both frustrating and intimidating to deal with. If you are facing foreclosure, consider speaking with a foreclosure attorney to ensure that your rights are protected during the process.
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