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 involves the sale of the mortgaged property by the mortgage holder (lender) without the supervision of a court.

If the bank threatens to sell your house to make up for unpaid mortgage payments, get legal advice promptly. A foreclosure attorney can help you assess your options. Sometimes, it’s possible to avoid foreclosure altogether. A lawyer can also support you during the forclosure process.

What Is Foreclosure by Power of Sale?

When a mortgage lender (or trustee) has the power of sale, it can foreclose on a home by selling it to settle unpaid debt. Foreclosure by power of sale is known as nonjudicial foreclosure. This process doesn’t require a lawsuit.

Proceeds from a power of sale foreclosure proceeding go first to the mortgage lender then to other lien holders. Finally, any remaining surplus funds from the sale go to the mortgagor (borrower).

Foreclosure by power of sale is generally a more expedient way of foreclosing on a property than foreclosure by judicial sale. Since the court doesn’t supervise the sale, the financial institution can operate on its own timeline.

Both types of foreclosure accomplish the same thing. However, there are also some difficulties associated with the power of sale foreclosure process.

State Laws Allowing Foreclosure by Power of Sale

The majority of states allow foreclosure by power of sale. Currently, there are 30 states with state laws that allow foreclosure by the power of sale.

These states include:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• District of Columbia
• Georgia
• Hawaii
• Idaho
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• North Carolina
• Oregon
• Rhode Island
• South Dakota
• Tennessee
• Texas
• Utah
• Washington
• West Virginia
• Wyoming

Power of Sale Foreclosure Rules and Homeowners’ Rights

To ensure fairness for homeowners and borrowers without a court’s oversight, this type of foreclosure carries many limitations and requirements, such as:

• 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.
• Under federal law, this process usually can’t begin until the borrower has fallen behind on mortgage payments for at least 120 days.
• 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.
• 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.

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.

Notice Requirements Before a Power of Sale Foreclosure

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.

Before starting the foreclosure-by-sale process, a mortgage holder must strictly follow state laws and provide the following:

• A valid notice of default to the borrower
• An appropriate pre-foreclosure waiting period
• A notice of sale to the homeowner

The Foreclosure by Power of Sale Process

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.

Is a Foreclosure by Power of Sale Unconstitutional?

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.

But courts have consistently rejected this theory when it comes to private foreclosure actions with no public official conducting the foreclosure sale. They have ruled that there is no state action necessary to invoke the terms of the Fourteenth Amendment.

Yet, 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. In that case, 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.