Power of Sale
What is 'Power of Sale'
Power of sale is a clause written into a mortgage authorizing the mortgagee to sell the property in the event of default in order to repay the mortgage debt. Power of sale is permitted in many states as part of a lender's rights to seek a foreclosure.
BREAKING DOWN 'Power of Sale'
Power of sale is language added to a mortgage document that allows the lender to sell the property if the mortgage payments are not met. The clause allows the lender to repay the mortgage debt by selling the property to recoup what was owed. A property that is foreclosed is sold by the lender in order to recover losses incurred by the loan default.
Power of sale also refers to the power expressed or implied in a trust agreement permitting the trustee to sell the investments comprising the trust.
How Power of Sale Is Applied Without Court Proceedings
More than half of all states allow power-of-sale clauses to be used to enact foreclosures without judicial review. The lender must follow specific guidelines and procedures to take action. After the borrower defaults on the mortgage, the lender typically must give notice of the pending foreclosure. This could be in the form of a letter to the borrower as well as public notice that the property will be up for sale. The lender might need to use a third party to take charge of conducting the foreclosure sale. Each state that allows power of sale terms in mortgages might set minimum requirements for giving notice of foreclosure. It is possible that the borrower will have little warning after a default that a power of sale clause has been implemented and the property will be sold.
Mortgages that include a power-of-sale clause can put the borrower in a position of facing a speedy foreclosure process if they lapse into default. The borrower might be able to compel a judicial review of a foreclosure that was allowed under power of sale. They typically must file litigation to bring the case to court.
A lender who uses a power of sale clause to foreclose on a property in some states might be prevented from seeking a deficiency judgment against the borrower. When a property is sold through a foreclosure auction, it is possible the sale will net proceeds in excess of the debt that was owed on the real estate. The lender and any lien holders must be compensated first. If any funds remain after all debts are cleared, the excess will go to the borrower.