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Saint Cad
01-26-2016, 11:20 AM
I know the basics. Mortgagee doesn't pay so you foreclose. You sell the house/property making sure you do your fiduciary duty to get the most you can for the property and take out what you are still owed. If there is money left over the mortgagee keeps it and if there is a shortfall you get a judgement against the mortgagee and try to collect.

But I was thinking that with the collapse of or realty prices it might make sense to hold on to the property until prices rebound. Take a house with a $200,000 mortgage. Buyer pays a total of $25,000 then defaults and house can only sell for $150,000. Good luck trying to collect the $25,000 shortfall from the buyer - it's a loss. But had the property been held onto for let's say a year, the value of the house may have gone up so that the lender is not losing any money.

So is it legal to have in the contract the option that if the property is foreclosed the property reverts back to the lender that the lender is not obliged to sell off the property, the buyer forfeits any right to the money already paid in and the lender agrees to not seek a judgement or collect on the difference between the money owed and the value of the property?




Please no hijacks about short sales. I know what they are but it is not the same thing. In my question, the lender holds the property counting on appreciation.

Xema
01-26-2016, 11:32 AM
Note that what you are describing amounts to the same thing as the bank buying the house at auction for $150,000, anticipating that it will appreciate.

Most banks are probably reluctant to get into the business of owning vacant (and perhaps occupied) property, with the various hassles and risks that entails. They instead prefer to be in the business of loaning money to homeowners or landlords who own that property.

Omar Little
01-26-2016, 11:44 AM
Many banks have REO (http://www.investopedia.com/terms/r/realestateowned.asp) (Real Estate Owned) portfolios that they are holding for investment purposes, for the very reasons stated in the OP, believing that they will appreciate to the point of not having to take a loss.

In most cases, why would the bank agree not to seek judgment against the borrower for shortfall, especially if the mortgage included a personal guaranty by the borrower?

ftg
01-26-2016, 12:58 PM
Not sure what the OP is proposing.

The foreclosure means the owner's relationship to the house is gone. At that point the bank (almost always) owns the house. What the bank does after that point has no effect on the original owner.

Is the OP asking about the bank setting up some sort of pre-foreclosure deal with the owner?

(Having delinquent accounts on the books look really bad, accounting-wise. Hence the rush to foreclose. It took some doing to get some small postponement systems implemented.)

Note that in most states, the bank cannot go after the owner for any losses on a mortgage. And the states where it's possible, it isn't that common. Most such homeowners would just make it an official bankruptcy at that point.

(Some banks, BofA is notorious in this regard, sat on empty foreclosed houses for a long time for accounting appearances. Waiting for the market to recover was never on their mind.)

Saint Cad
01-26-2016, 01:45 PM
I thought the lender, whether bank or private, had an obligation to sell the house/property to pay off the buyers debt. Is that not true?

Saint Cad
01-26-2016, 02:52 PM
You know what - I just thought of a better way to phase the question but I still want to see if it is legal. Can the lender (may be private) "buy" the house/property at auction for what is due on it? In effect taking back the property with the borrowing losing all of the money they've paid into it? If so, does the lender owe the borrower anything if they sell it later at a private sale (I would think not)?

HoneyBadgerDC
01-26-2016, 03:34 PM
The larger lending outfits limit the amount of inventory available to keep prices up if too may foreclosures are availble in an area. They will simply only put so many up for sale at a time. In most cases the buyer was upside down on the home anyway and the bank will owe them nothing when it sells. If it sells for more it might lower the judgement against them at best.

barbitu8
01-26-2016, 03:55 PM
You know what - I just thought of a better way to phase the question but I still want to see if it is legal. Can the lender (may be private) "buy" the house/property at auction for what is due on it? In effect taking back the property with the borrowing losing all of the money they've paid into it? If so, does the lender owe the borrower anything if they sell it later at a private sale (I would think not)?

This is what is done at a foreclosure sale. The lender (if he holds a first mortgage and a lien prior to all others - except taxes, mechanics' liens, and federal liens -) bids the amount due to him. The lender will then sell the property at a profit. A junior lien holder (such as a second mortgagee) must bid the amount owed the prior lienholder plus to be the successful bidder.

Kimballkid
01-26-2016, 04:19 PM
Mortgagee doesn't pay so you foreclose.

Just a minor nitpick, but since I had my insurance declarations page right here, the mortgagee is the lender. The mortgagor is the borrower/homeowner.

Some Call Me... Tim
01-26-2016, 04:45 PM
This is what is done at a foreclosure sale. The lender (if he holds a first mortgage and a lien prior to all others - except taxes, mechanics' liens, and federal liens -) bids the amount due to him. The lender will then sell the property at a profit. A junior lien holder (such as a second mortgagee) must bid the amount owed the prior lienholder plus to be the successful bidder.

Not always.

So, A few things: all of this is based on state law, so many of these details vary from state to state.

Either the first or the second (or third, etc.) lien holder may foreclose. Usually as part of that process they'll schedule a public auction.

This auction is exactly that, there's an auctioneer and anyone may bid. However, you're typically required to present the auctioneer with sufficient cash or cashier's checks in order to bid. (Exception: the foreclosing bank may bid up to the amount owed on the loan being foreclosed without any such presentation.)

In most states the foreclosing bank could in theory bid higher than the amount they're owed, but as far as I know this never happens, and they would theoretically have to present funds to the auctioneer to do this. In most states anyone can bid, though in some but not all states the person being foreclosed on cannot, and sometimes other entities involved with the foreclosure can't.

It is quite common for banks to bid less than they're owed. Sometimes they'll start with a low opening bid and leave instructions to bid competitively up to a point, then let the hoped-for competitor have it. Other times they will bid much less than they're owed hoping to unload it at a loss (but not have to deal with owning it.)

A junior lien holder can also foreclose - but the winning bidder would get a property with an obligation to pay the senior mortgage. (in addition to the aforementioned taxes, mechanics' liens, and federal liens...)

Bidding at foreclosure auctions is just about the most buyer beware scenario I can think of. You must pay cash and if you mess up (like not finding out that there was a senior mortgage that you'll have to pay) or if there are other problems (the former owners poured cement down all of their pipes and set fire to their house an hour before the sale) you own them. This is why houses at foreclosure auctions can appear 'cheap' - it's just so very risky!

Oh, and one more thing - in many states (most of the ones I used to work in, actually) once the bank forecloses they can't also sue you for the rest of the principal on the same loan. This can lead to banks deciding to sue on the note rather than foreclose on the property, but only if the owner has deep pockets. Oregon even had a rule that if the same bank had two mortgages on a property they couldn't foreclose on one and sue on the other.

Doctor Jackson
01-26-2016, 05:05 PM
Oh, and one more thing - in many states (most of the ones I used to work in, actually) once the bank forecloses they can't also sue you for the rest of the principal on the same loan. This can lead to banks deciding to sue on the note rather than foreclose on the property, but only if the owner has deep pockets. Oregon even had a rule that if the same bank had two mortgages on a property they couldn't foreclose on one and sue on the other.

Good explanation, but there is one "gotcha" - the former owner may well owe taxes on the amount of the loan forgiven (the unpaid balance). The IRS (https://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation) considers debt cancellation to be income, not just for mortgages but pretty much any loan:
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

It's not cut-and-dry, but many people got hit with surprise tax bills after a foreclosure.

Snnipe 70E
01-26-2016, 07:52 PM
I thought the lender, whether bank or private, had an obligation to sell the house/property to pay off the buyers debt. Is that not true?

No. If the borrower is not paying the mortgage, then the lender forecloses on the property. The borrower no longer has an interest in the property. If the lender keeps the property then the lender is in the clear. But if the property is worth less than the loan the lender may be able to get a claim against the borrower. The lender either has to have the property properly apprised or put the property on the market for sale. The lender has to sell the property for the going market rate. The lender can not just sale the property for $1 to his friend and use that as the market rate.

Saint Cad
01-26-2016, 08:05 PM
This auction is exactly that, there's an auctioneer and anyone may bid. However, you're typically required to present the auctioneer with sufficient cash or cashier's checks in order to bid. (Exception: the foreclosing bank may bid up to the amount owed on the loan being foreclosed without any such presentation.)


So let's say I sold a house (with owner carry) and foreclosed on it with $50,000 still owing. Are you saying that I as the lender could bid up to $50,000 and never have to give cash/check to the public trustee? What if I wanted to bid $60,000? Would I have to give the public trustee $10,000? And if so who gets that money?

the_diego
01-26-2016, 08:14 PM
Different laws and corporate policies may come into play. Some countries require a 1-year redemption period for the buyer after foreclosure, so you can't sell to anyone else at the price you want. Some require that you give back the monthly amortization payments the buyer has been paying past one year from down payment.

Now if you're the bank, you protect yourself from deficiencies by lending an amount way below the appraised value (realizable value) of the property.

Some Call Me... Tim
01-26-2016, 08:52 PM
So let's say I sold a house (with owner carry) and foreclosed on it with $50,000 still owing. Are you saying that I as the lender could bid up to $50,000 and never have to give cash/check to the public trustee? What if I wanted to bid $60,000? Would I have to give the public trustee $10,000? And if so who gets that money?

I'm not exactly sure what you mean by 'sold the house (with owner carry)'.

In the public auction that concludes the foreclosure, the outstanding balance on the loan (which includes everything they can justify, by the way, not just the principal - the late fees, the cost of the foreclosure itself, forced placed insurance, etc.) represents what they're giving up by doing this foreclosure auction, so they get that full amount as credit toward their bids in the auction.

No matter who is bidding on the auction (and I've never ever seen a bank bid more than what they're owed, banks are generally ecstatic to get all their money back with fees in an auction and don't really want to do REO) any money bid that is in excess of the total amount owed to the foreclosing bank is basically put into a pot of 'excess funds'. The details of who is responsible for it vary widely state to state, but in general the money is divvied out first to junior lien-holders (If they had a second mortgage that bank would be paid here, HOA liens may or may not be paid here depending on the state, etc.) After everyone else with a legitimate lien on the property is paid the now-former owner would get the remainder.

In practice this is rare because if you want to get a good price for a property, a foreclosure sale is about the worst possible way to get it. It's risky and potentially unpleasant for the buyer, and potential buyers have buy it mostly sight unseen. So, if the property is worth significantly more than is owed, a rational owner would sell it before the foreclosure sale for more than is owed and just pay off the lender in whole. (Not a short sale, a sale sale with a full payoff.)

Only if there's some major malfunction preventing the owner from making the obvious, rational choice and selling the property instead of going to a foreclosure sale does this happen; acrimonious divorces or the property having passed to multiple heirs who absolutely cannot agree on anything, for example.

All of the above is assuming no redemption period, which are uncommon for non-judicial foreclosures but more common for judicial foreclosures, in my limited experience, and again can vary a lot by state. I can't speak outside for the law outside the US at all. Oh, and there are some weird rules involving federal tax liens that can impact any state.

Saint Cad
01-26-2016, 10:17 PM
So I think I get it. The lender forecloses and puts in a bid at the auction which is in effect the lowest amount they will accept.* As part of that the lender does not have to put up any money - it's more of a reserve price than an actual money bid. If no one bids more than the lender's bid, the property simply reverts back to the lender.

Am I even close?


* It doesn't make sense to set the bid higher than the balance since that money goes to the deadbeat.

Some Call Me... Tim
01-26-2016, 11:33 PM
That's a good approximation. Banks will complicate it a bit by starting out low and bidding competitively, but this is basically a psychological tactic. The thinking is that once people start bidding they'll tend to go higher than they would have if they were simply asked for a higher price out of the gate.

So, a bank that's owed $400k and thinks the property is worth $300k in REO might give instructions to start the bidding at 200k, but compete to the next $10k until they hit 300k. Some banks think that this leads to auctions that go over $300k more often than just starting at $300k.

Another bank in the same situation in the same county might just start and end their bidding at $300k. Totally their choice.

barbitu8
01-27-2016, 09:44 AM
The sale has to be a "judicial" sale; I.e., pursuant to a court order. The mortgage is actually a lien that has to be foreclosed. State laws vary and there is a type of mortgage called a "deed of trust" wherein the title is conveyed (state laws vary) but even then there must be a foreclosure sale although the period of redemption may be shorter. I do not know how the mortgage can be foreclosed through a non-judicial sale.

barbitu8
01-27-2016, 10:19 AM
In some states any mortgage does convey title but judicial foreclosure of the equity still must be had.

Some Call Me... Tim
01-27-2016, 10:37 PM
The sale has to be a "judicial" sale; I.e., pursuant to a court order. The mortgage is actually a lien that has to be foreclosed. State laws vary and there is a type of mortgage called a "deed of trust" wherein the title is conveyed (state laws vary) but even then there must be a foreclosure sale although the period of redemption may be shorter. I do not know how the mortgage can be foreclosed through a non-judicial sale.

This is correct in theory; Deeds of Trust and Mortgages are technically different things. Most of the western US only has Deeds of Trust but everyone still calls them 'mortgages' in spite of that label being technically incorrect.

There are few western states that even allow mortgages; I've seen an actual Montana mortgage, for example, and I think they're possible in Arizona, but the rest of the west is all Deeds of Trust. That's where I have experience; my understanding is that it's reversed in the midwest and eastern US and most states are mortgage only.

This was one of the reasons that at the height of the crisis it took years to foreclose in Florida - they all had to go through a courtroom.

simster
01-27-2016, 11:16 PM
Good explanation, but there is one "gotcha" - the former owner may well owe taxes on the amount of the loan forgiven (the unpaid balance). The IRS (https://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation) considers debt cancellation to be income, not just for mortgages but pretty much any loan:


It's not cut-and-dry, but many people got hit with surprise tax bills after a foreclosure.

On the gotcha - in that case, assuming the former owner is insovlent or even just 'upside down a bit' - all they have to do is provide notification and some level of proof to the IRS and that tax is wiped out.

barbitu8
01-28-2016, 03:01 PM
This is correct in theory; Deeds of Trust and Mortgages are technically different things. Most of the western US only has Deeds of Trust but everyone still calls them 'mortgages' in spite of that label being technically incorrect.

There are few western states that even allow mortgages; I've seen an actual Montana mortgage, for example, and I think they're possible in Arizona, but the rest of the west is all Deeds of Trust. That's where I have experience; my understanding is that it's reversed in the midwest and eastern US and most states are mortgage only.

This was one of the reasons that at the height of the crisis it took years to foreclose in Florida - they all had to go through a courtroom.

Deeds of trust in Illinois (which I am most familiar with) are used when there are multiple bondholders for shopping centers, high rises, and other properties that run into much money. A bank is usually the trustee and the property is conveyed to the trustee (using the words "convey and warrant" - mortgages say "convey and mortgage") to secure the indebtedness, which are actually held by other parties. When the bonds or notes are satisfied, a "release deed" is issued to the mortgagor (trustor). When the note(s) of a mortgage are satisfied, a "satisfaction piece" is issued because the mortgagee did not receive title. However, in practice they are treated alike. In Illinois a full foreclosure and a full period of redemption is present. In some Midwestern states, there are truncated proceedings and the period of redemption is shorter for the deed of trust. After the decree of foreclosure by the court, a certificate of sale is issued to the successful bidder, and the mortgagor has a substantial time to redeem.

elfkin477
01-30-2016, 11:43 AM
Note that what you are describing amounts to the same thing as the bank buying the house at auction for $150,000, anticipating that it will appreciate.

Most banks are probably reluctant to get into the business of owning vacant (and perhaps occupied) property, with the various hassles and risks that entails. They instead prefer to be in the business of loaning money to homeowners or landlords who own that property.

There are lots of bank owned properties that aren't on the market (for example, one down the street from me was foreclosed and vacated more than 18 months before it was put up for sale), so they're not that reluctant. The explanation I was given was that they don't want to force down prices in a city/town by putting them all on the market at once.