A deed of trust is a borrowing agreement between three parties: the lender, the borrower, and the third-party trustee. Although the word “mortgage” is sometimes used in place of all lending agreements with real property as collateral, truthfully, a deed of trust is different from a mortgage. In the case of foreclosure, the main difference between a mortgage and a deed of trust is that mortgages must be foreclosed judicially, or with the interference of the county or state court, whereas deeds of trust can be foreclosed nonjudicially. This is due mainly to the Power of Sale clause present in every deed of trust.
What is a Power of Sale Clause in a Trust Deed?
Power of Sales clauses include language in the deed of trust which states that the lender has the power to sell the real property that secures the agreement should the borrower breach their contract. Deeds of Trusts with Power of Sale clauses attached give lenders the right to foreclose the property nonjudicially.
Power of sales clauses work because in a borrower agreement, the deed of trust is held by the third-party trustee instead of the lender. In the event of a foreclosure, the trustee is the party that actually enacts the foreclosure process. This allows the lender to buy back the property themselves should they be unable to find a buyer immediately.
In return for the lender having the power to sell the property, the Power of Sale clause protects the borrower by stating that when the lender sells the property, the lender may not hold the borrower liable for any cost not covered by the sale unless the lender is able to obtain a deficiency judgment in their favor, which is not allowed in most states and unusual in the remaining states.
Borrowers may prefer having this clause in their contract because it bars lenders from suing them should they default on their loan. Lenders may prefer having this clause in their contract because it allows them to foreclose nonjudicially, which is often faster, easier, and cheaper than foreclosing judicially.
Pros and Cons of the Power of Sale Clause
The cons of a power of sale clause for borrowers are that it can expedite the foreclosure process, whereas judicial foreclosures may give borrowers additional time to cure the default or craft alternative resolutions. Lenders may dislike the power of sale arrangement because it typically rebukes lenders from getting a deficiency payment, meaning they will likely lose money on a foreclosure.
Lenders may wait months or even years after a default to enact a foreclosure, repealed by the complicated foreclosure process. However, the sooner a lender enacts their foreclosure, the more likely they are to protect their assets and the less investment they are likely to lose. At Total Lender Solutions, we help lenders maximize recoveries on defaulted loans. Our team of highly experienced real estate professionals and legal experts create clear solutions for lenders. Contact us today to get the maximum recovery of your investment.
