What’s the Difference Between Foreclosure and Power of Sale?
For homeowners who find themselves in financial difficulty, it’s important to understand the difference between foreclosure and power of sale. Particularly advice from the US tends to focus on “foreclosure” as a blanket term, yet for Canadian homeowners the reality is that they will probably never hear the term “foreclosure” from their lender. Rather, the letter which should move any homeowner to action is the one threatening “power of sale.” Let’s look at the differences between the two — and why Power of Sale demands immediate action before it’s too late.
Foreclosure
Foreclosure is an older term, referring to a legal process by which the mortgage lender secures the right to sell the property in order to satisfy a loan which has gone into default. In the foreclosure process, the mortgage lender must formally sue the mortgage borrower in court before selling off the home.
The reason for this is, prior to a foreclosure action the borrower could be granted what is known as an “equitable right of redemption” — the right to hold on to the home and prevent its sale by repaying the debt in full. Provided this right exists, the home’s title is “clouded” and the lender can’t be sure that they will be able to successfully repossess the home.
In order to be able to sell the home, therefore, the lender must obtain a court ruling which terminates (or “forecloses”) the borrower’s “equitable right of redemption” and allows the lender to take title to the property.
Since any process involving the courts is expensive and time consuming, most lenders prefer to avoid foreclosure if at all possible. Rather, they prefer a “Power of Sale.”
Power of Sale
To avoid the foreclosure process, modern mortgages are structured so the lender can recoup their money without requiring a court order.
Instead of the borrower holding the property, a “deed of trust” is drawn up and legal title to the property is transferred to a trustee. In the event the borrower defaults, the trustee can handle the “foreclosure.” Rather than a court, the trustee (which holds legal title) simply mails the borrower certain required notices, and after the legal conditions are met the trustee holds a “trustee’s sale.” The money from this sale of the property is used to pay the outstanding debt.
From the perspective of a homeowner, a Power of Sale may take just weeks. There are none of the delays involved in a court process. Therefore, if a homeowner receives a letter threatening Power of Sale, it is critical to act fast if the homeowner wishes to keep their home.