Posted almost 7 years ago

The Power of the Power of Sale Clause

We are finding out the hard way in a Contract for Deed we purchased in Alabama about the Power of the Power of Sale Clause. The Power of Sale clause is one of may clauses written into most mortgages which will allow the lender or owner of the mortgage the power to sell the property in the event of a default by the homeowner, in order to pay off the mortgage debt. It is for all purposes the equivalent of a foreclosure, without having to foreclose judicially in non-judicial States.

The clause pre-authorizes the sale of the property when the homeowner defaults, and each State has its own procedures for this. They typically call for a limited notice of foreclosure such as mailing, posting the notice on the property, or publishing it in the newspaper. Then the trustee can sell the property at a foreclosure sale. The process much follow the timeline and waiting periods set by the State when completing the Power of Sale foreclosure.

As of today, 30 states allow for a foreclosure by the Power of sale, and for the borrowers, it has some advantages. The first is you can not seek a deficiency judgment in some states. This means that if they owe $100,000.00, and the house sells for $80,000.00, there is still $20,000.00 still owed.

Lenders typically file a deficiency judgment against the person that is a unsecured lien that needs to be taken care of before they can finance anything in the future like a car or new home. Also, if the borrower files a lawsuit, it will need to be reviewed judicially, or in court.

The disadvantages for the homeowner are the process is much faster, and less costly to the lender than foreclosing on the property. So they can lose their house quicker. Foreclosures in NY or NJ could be 5-7 years and reach $5,000.00 to $10,000.00+.

Also, there is no judicial review unless they file a lawsuit. They can not plead their case to a judge unless they file a lawsuit, which includes paying the court and attorney fees. Difficult if they are not even able to pay the loan.

And even with the Power of Sale Clause, some lenders decide to pursue a judicial foreclosure if there are some title issues, flaws in the document, as we found out, or if they want to pursue the deficiency judgment since some states will not let them have the deficiency judgment unless they judicially foreclose.



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