One of the unfortunate circumstances of defaulting on mortgage obligations is the possibility of foreclosure or power of sale. These terms are often, but incorrectly, used interchangeably. Both foreclosure and power of sale result in repossession and sale of the home, but the manner in which the repossession occurs differs depending on which process is used.
Power of Sale
A power of sale is the most common forced sale process. A power of sale occurs when the mortgagee (the lender), obtains the legal right to evict the occupants of a property due to a default in their mortgage payment. The mortgagee then sells the property to recover any funds owing.
The power of sale process begins with the issuance of a Notice of Sale by the mortgagee. Once that is granted, there is a 35-day redemption period in which the mortgagor (the borrower), can bring mortgage arrears current.
If the mortgagor is unable to pay the arrears, the mortgagee will receive an issuance of judgment by the court. At that point, the mortgagee can obtain a Writ of Possession and proceed to sell the home.
Foreclosure
In a foreclosure, the mortgagee takes the legal title to the property. In other words, the mortgagee has complete ownership and control over the property and can sell the property as they see fit. Foreclosures may be preferable to lenders when the real estate market is down, and the value of the property is not currently high enough to repay the mortgage debt.
To commence an action for foreclosure, the mortgagee files a Notice of Intention to Redeem. Upon receiving a final order of foreclosure, the mortgagee is free to deal with the property however they want.
This process is lengthier and typically does not begin until several months of missed payments.
A court of equity is willing to hear a meritorious application for relief and set aside a final order of foreclosure. Banbury v Tahir outlined five requirements that must be satisfied:
- reasonable promptness on the part of the applicant;
- reasonable prospect of payment at once or in a short period of time;
- activity on the part of the applicant to raise the money necessary to redeem on time;
- the applicant must have a substantial interest in the property; and
- where the property has been sold after foreclosure, the rights of the purchase will not be unduly prejudiced.
Below is a list of key differences between the two terms.
| FORECLOSURE | POWER OF SALE |
| Mortgagee obtains legal title or ownership | Mortgagee obtains a right to sell |
| Typically occurs 4 months after missed payments | Typically occurs as soon as 15 days after missed payments |
| Redemption period is typically 60 days | Redemption period is 35 days |
| Mortgagee has no obligation when selling property | Mortgagee must sell at fair market value |
| Equity or profit from the sale kept by the mortgagee | Equity or profit from the sale is paid to the mortgagor |
| Mortgagee loses the right to sue for any shortfall | Mortgagee can sue for any shortfall |
This blog was co-authored by summer law student, Barbara Attia.
