In a foreclosure setting, “power of sale” refers to the sale of mortgaged property by the lending institution (usually a bank), rather than through the supervision of the court.
Because the court system is generally not involved, foreclosure by power of sale is usually accomplished more rapidly than court supervised sales (judicial sales). The terms of sale are sometimes indicated in the mortgage contract itself.
In a foreclosure by power of sale, the proceeds of the sales will first go to the mortgage lender, then to other lien holders (such asjunior mortgages). Lastly, if any proceeds are left over, these will be distributed to the mortgagor (the borrower); however, the proceeds are usually exhausted at this point.
Not all states allow for power of sales. The following states currently allow foreclosure through power of sale: AL, AK, AZ, CA, CO, GA, HI, ME, MD, MA, MI, MN, MS, MO, MT, NV, NH, NC, OR, RI, SD, TN, TX, UT, WA, WV, and WY.
In most jurisdictions, a foreclosure by power of sale can only occur if it is specifically allowed in the mortgage form itself. In a jurisdiction that does not allow for power of sales, foreclosure must occur by judicial sale.
There are numerous advantages and disadvantages associated with foreclosure by power of sales. Depending on your individual situation, some features of power of sales may work for you, while others may not be favorable for you.
Some of the pros and cons of power of sale foreclosures include:
- Involves little to no court intervention, which makes the process more expedient
- Terms of the sale can often be tailored and pre-negotiated between the lender and borrower in the mortgage contract
- Can sometimes result in all of the parties receiving proceeds from the sale
- The right to foreclosure by power of sale is not available in all states; some jurisdictions require that the right be stated in the mortgage agreement
- In some jurisdictions, a deficiency judgment is not available if the parties choose to foreclose outside of court proceedings
- Even though the court may not be involved at the outset, court intervention may still become necessary in the long run, for example if there are defects in the deed
As mentioned, power of sale may or may not be the right choice for you depending on your situation. If you have questions about whether to pursue foreclosure by power of sale or by other means, you may wish to speak with an attorney.
In many jurisdictions, a deed of trust is needed in order to execute a foreclosure through the power of sale.
A deed of trust is basically an agreement which transfers the property from the mortgage holder to a trustee, who will then hold the property in trust for the mortgage holder. When the time comes for a property sale, it is the trustee who will conduct the sale rather than the mortgage holder. Sometimes the lender is then allowed to bid on the property in order to reclaim ownership of the property.
If you are involved in foreclosure proceedings, a real estate lawyer can help you determine whether the power of sale is applicable in your jurisdiction. If so, your attorney can help guide through the process to ensure that your interests are represented and fully protected. Working with a lawyer may even be necessary for certain requirements, for example if your jurisdiction requires a deed of trust for the sale.