Foreclosure vs Power of Sale

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 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 risk losing money as the property is most times sold below market value.  This is because any Foreclosure requires the lender to sue the homeowner in court, and then await court processing to issue judgment.  It requires the legal process of "foreclosing" on the homeowners right to sell their home in order to pay off their mortgages.

Note: In Canada the Foreclosure process is typically not used.  This type of sale is more common in the USA. 

What is 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 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.  This type of sale is governed in a way that the lender has a duty to present the property for sale in the efforts to obtain fair market value.  Once the property has been sold the lender has the first right to collect all monies owed to them including interest and additional cost associated with the Power of Sale and any excess funds are to go back to the original home owner.

When a homeowner experiences a change in their finances that will affect their inability to meet their monthly obligation, it may be a good time for them to be pro-active and contact the lender to work out a short-term or long-term plan.

Lenders are not in the market to hold Real Estate; their business model is to lend money that is secured by Real Estate.  They want you to keep your house and will usually work with you whenever possible.

For more information on this subject contact Giosetta Belperio, Real Estate Broker