You might have seen power of sale listed on mortgage documents and other legal papers that you might have thought was legal language that only lawyers can be bothered to read. However, if you have a mortgage, or have any dealings with a bank in a lender-borrower role, knowing what power of sale is and how it works is very important and you should be able to understand what it means. Lets try and understand what power of sale is by making it simple enough for everybody to know what it is and how it works.
What exactly is a power of sale?
Power of sale, simply put, is the authority and the legitimacy of the lender to take over and sell a property against which the borrower has failed to pay. Used commonly in mortgage cases, power of sale is usually enacted when a borrower defaults on their mortgage payments, at which point, the bank or the lender usually steps in and sells the property to recoup and recover the losses that may have been incurred. It’s a fairly simple concept that keeps most borrowers on their toes.
Explaining the power of sale with an example
Power of sale in a mortgage happens when, for example, John mortgaged a property of his. While John has been paying his monthly premiums for the past few weeks, unfortunately, he skips out on three payments in a row, kicking in a clause in the agreement that grants the bank power of sale. Since John hasn’t paid his mortgage, the bank now has the legal right to take the property off of John and sell it to recover their losses. While some details may vary, this is the absolute simplest example that explains the power of sale.
The basics of the process of power of sale
The process of power of sales includes in it some legal steps that the lender or the bank is supposed to take proper to actually enforcing power of sale. We’ll look at the process of power of sale in detail below.
Issuance of notice
The first step in the process of power of sale, as mandated by the law, is the issuance of a notice of power of sale from the lender to the borrower. As stated beforehand, this is mandated by the law; banks are supposed to inform the borrower ahead of time when and why the power of sale is being invoked. During this period, not much can be done, since the mortgage arrears by then are usually piling up high and the bank gets ready to start the process.
After the notice has been issued, the law stipulates that the lender allow a period of time for the borrower to come clean and clear their arrears. This is done in order not to force a power of sale transaction, and allow the borrower a chance to pay off the outstanding. This period usually varies from 30 to 40 days. It is the only period in the entire process of power of sale during which the bank extends an offer to the borrower to clear their debts. Should this period not be taken advantage of, at the end of the 40th day, the bank will automatically move on to the next stage of the process, which then involves the courts of law to give legitimacy to the power of sale, as determined by the law.
After the grace period has passed, the banks will then proceed to approach the court with the relevant case, at which point, the outcome is pretty much clear to both parties. Since the borrower failed to make use of the grace period to try and pay the amount and clear the dues, the court will then issue a judgement that will essentially legitimise the power of sale, based on the law and the due process which has taken its course, resulting in non-compliance from the borrower. The court will then issue its judgement, allowing the lender to go ahead with the power of sale and supplement it with a Writ of Possession.
Writ of Possession
The final step in the process of power of sale is the Writ of Possession, issued by the court, which gives the lender the right to use force to evict the occupants of the property and sell the property. This stage in the power of sale means that the person has essentially lost the property; however, all is not lost, since in the power of sale, there is still the matter of actually selling the property, which also has its set of rules and regulations to ensure that the borrower does not end up destitute because of this.
Now, we will look at what happens after the power of sale has been exercised and the property has gone back to the lender, or in many cases, the bank.
Post-power of sale process
Power of sale can be a double-edged sword for both the lender and the borrower. Why is that? Because after the aforementioned process has been completed, the lender now has the property, but is also bound by the law to sell it as soon as possible at a fair market value. This fiduciary duty is where it can go either way. Let’s look at it in detail.
What happens when the disputed property is sold?
Since its the fiduciary responsibility of the bank or lender to sell the property at a fair market value, here is the point where power of sale will sometimes, benefit the borrower. Should the price of the property be more than the mortgage debt that needs to be paid off, the difference, as per the law, will go to the homeowner, so as to ensure all isn’t gone for the borrower. The law protects the homeowner in this case: should the lender make a discount on the property for a quick sale, the borrower reserves the right to take the lender to court over unpaid equity, that they stood to receive had the property been sold at the proper value.
On the other hand, the lender is also secured in a power of sale. Should the due process in selling the property be followed and still, an unequal amount is recovered from the transaction that does not cover the cost of legal fee, costs and the mortgage, the lender will then sue the borrower. However, its then an unsecured claim because the lender does not have any property to secure the amount against.
This is why power of sale can be a double-edged sword, which can benefit both the lender and the borrower.
What to do to avoid a forced power of sale?
As inevitable as finances can get, it is understandable with all the other debts an average household has to contend with that at some point, that mortgage payments might get missed. This isn’t all that worrisome; banks understand this and have clauses that protect the borrower should they be going through something unprecedented. However, sometimes, that may not be the case, and to avoid a forced power of sale of your greatest asset, your house, here are some tips to ensure you never experience something like that.
Review, revisit your budget
Is your car loan, credit card debt interfering with your ability to pay your mortgage? Then you need to reconsider and revisit your budgeting if you want to avoid a power of sale. Cut some unnecessary expenses, throw out the luxury expenses and try your best to retain your house. Its the greatest asset and purchase you can have, and a forced power of sale can take it away from you.
Refinance: get a second mortgage
In order to get away from a forced power of sale, one of the more common options is to refinance and get a second mortgage. This gives the borrower some breathing room and allows them to consolidate their debts into one at a much lower rate, so they end up paying less. This way, you get to avoid power of sale, keep the house and still be able to make monthly payments if the rate is reduced and is much more favourable now.
Clean your debts, and sell the house yourself
A last resort to avoid a power of sale is to clean up your other debts and ensure that the house does not get repossessed or goes through a forced power of sale. Rather, you can exercise the option of selling it yourself and paying off the mortgage. This keeps you from the troublesome process of power of sale, and you can get rid of the house should you be not keen on keeping it.
Stay ahead of the curve with Siddiqui Law
At Siddiqui Law, we believe that the law is your friend, here to protect you and your interests. The law is designed for the people to be safeguarded from the malevolent forces beyond their control, and Siddiqui Law will ensure that not only are all your rights protected, but you get the best legal advice and representation that keeps you and your interests ahead of everything else. As with power of sale, this is something that troubles most households, since a house is the biggest purchase and investment which can get repossessed, unfortunately. Siddiqui Law, keeping your interests first, will ensure you get the best way out of any such situation, all the whole staying within the bounds of the law. The law is here to help you, and Siddiqui Law is here to ensure that the law runs its due course for you.