Foreclosure by Power of Sale

Foreclosure by power of sale may be preferable

California allows foreclosure by the power of sale which is generally a more expedient way of foreclosing on a property, when compared with foreclosure by judicial sale. Foreclosure by power of sale involves the sale of the mortgaged property by the mortgage holder (usually a bank or other lender), rather than a sale supervised by the court. As it reduces the time spent in selling a foreclosed property considerably, foreclosure by power of sale may be preferable.

The majority of states allow foreclosure by power of sale. After the sale, proceeds go first to the mortgage holder. If there is any money left over, it will go to those who are holding liens on the property and then to the borrowers. Foreclosure by the power of sale accomplishes the same thing as a judicial sale.

When a “power-of-sale” clause is included in a deed of trust or mortgage, the borrower pre-authorizes the sale of the property to pay off the balance on a loan if the borrower defaults (fails to make the loan payment when due).

The power given to sell the property is generally given to the trustee who acts on behalf of the beneficiary (lender) by recording and sending Notice of Default and Notice of Sale.

However, there are some legal questions associated with this method of foreclosure.

Foreclosure when the mortgage holder is a government entity

Some state “power of sale” laws have resulted in questions of constitutionality. 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 when there is no public official conducting the foreclosure sale. With no public official present, 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.

DiJulio Law Group