Foreclosure v.s. Power of Sale
Tuesday Dec 27th, 2016
In the unfortunate circumstance that a homeowner is past-due on their monthly mortgage payments, they pave the way for a “foreclosure” on their property. In today’s market, banks and other lenders do not turn to foreclosure to take away the homes of homeowners who are in arrears. Instead, they perform a "Power of Sale" which is wholly different from a Foreclosure.
What is a Foreclosure?
Foreclosures are laborious, grueling, and costly to both the lender and the homeowner and often take over a year to complete. Due to the inefficiencies associated with the Foreclosure process (e.g. court process), lenders invariably lose money. This is because any Foreclosure requires the lender to sue the homeowner in court, and then await court processing to issue judgement. It requires the legal process of "foreclosing" on the homeowners right to sell their home in order to pay off their mortgage.
What is a Power of Sale?
To avoid this problem, lenders have restructured their mortgage contracts to eliminate the inefficient court process in the event that the homeowner is in arrears. The newly structured mortgage sets the lenders as a "Trustee" with the right to sell off the property - thus, they have the Power of Sale. Nevertheless, there are certain contractual limitations on when they can do this. Under the Power of Sale system, in other words, the role that the courts used to play has been largely replaced by the trustee. All the lender needs to do is inform the trustee that the borrower (the homeowner) has defaulted on their mortgage. The trustee then uses the Power of Sale to sell off the home, and recover the lender’s money. In short, a Power of Sale can be very fast. Often, the home may be sold within weeks and this often presents a great investment opportunity as these properties are usually sold below market value.
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