Foreclosure by Power of Sale

Foreclosure by power of sale involves the sale of the mortgaged property by the mortgage holder (usually a bank or other lender), not through the supervision of a court. Where it is available, foreclosure by power of sale is generally a more expedient way of foreclosing on a property, when compared with foreclosure by judicial sale. The majority of states allow foreclosure by power of sale. Proceeds from the sale go first to the mortgage holder, then to other lien holders, and finally to the mortgagor. Foreclosure by the power of sale accomplishes the same thing as a judicial sale. However, there are also some difficulties associated with this method of foreclosure.

Availability of Foreclosure by Power of Sale

Today, 29 states (Alabama, Alaska, Arizona, California, Colorado, the District of Columbia, Georgia, Hawaii, Idaho, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming) allow foreclosure by the power of sale.

Advantages and Disadvantages

Some advantages and disadvantages of a foreclosure by power of sale include:

• While the process involves less court oversight than foreclosure by judicial sale, foreclosure by the power of sale is often subject to judicial review at some point, if issues about title need to be resolved by the court. These would include actual defects in the deed, and 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 the holder chooses to sell the property through extra-judicial means.
• The mortgage form itself must generally allow for the power of sale 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 of the mortgaged property. The trustee is generally instructed by the mortgage holder to foreclose on the mortgage and is under no obligation to determine whether this foreclosure is justified.

A deed of trust and trustee supervised foreclosure allows the mortgage holder to bid for the foreclosed property, provided the trustee and the mortgage holder are not closely associated. Otherwise, a mortgage holder cannot bid for the mortgaged property when the foreclosure is by power of sale.

Constitutional Issues

Foreclosure by power of sale requires notice of the sale to interested parties. Generally speaking, this is done by taking out an advertisement in a local newspaper in the jurisdiction in which the property is located. Many states also require notice 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. 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. However, 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. The case law on this issue is so far unsettled.