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View Full Version : Foreclosed home sold at auction - to mortgaging bank?


Napier
07-05-2012, 09:19 PM
So, I know somebody whose house was foreclosed and put up for auction after long nonpayment of the mortgage. At the auction, the house sold for exactly the outstanding balance, and the buyer was the bank that held the mortgage.

We are confused as to what this means. Does it mean that, since the house sold for the entire amount owed, there is therefore no deficiency left? And (given that this isn't a "no recourse" state) there is no possibility of a deficiency judgement against the former mortgagee? Why would the bank sell the house to itself, and preclude the option of pursuing a deficiency?

Thanks!

UltraVires
07-05-2012, 10:17 PM
No. The bank (or anyone else) can bid on the house at the foreclosure sale. I've seen banks buy homes for $100 at the sale. And before you think that they are getting a windfall, they are still on the hook for the outstanding loan, they just can now do what they want with it.

But..if it sold for the full amount of the mortgage, then I can't see how there is a deficiency. Why? Maybe there was another bidder. Maybe the bank didn't want to pursue a deficiency judgment and named that amount to facilitate the foreclosure (since the money just goes right back to them, why not?) IANAL, YMMV.

md2000
07-07-2012, 12:04 PM
It prevents them selling a house for $100 and then having to chase a houseless penniless mortgager. They get the house, and instead of having to sell it to someone on the day of the auction for whatever the offer, they can now attempt to sell it, taking their time, via conventional MLS means.

Perhaps this means that auctions are not producing a good price. Perhaps the bank is deliberately not advertising the auctions well, so they can take the house for the minimum price / reserve bid.

Perhaps the bank was obliged to sell at auction to saitsfy the foreclosure rules.

Perhaps they think they can get more than the mortgage balance, given time - so why not do this? Why not collect all the profits themselves?

Presumably, if someone, even the same someone, buys the house for the value of the mortgage, then all that's left for the previous owner is if there are any additional charges associated with the sale and process...

barbitu8
07-07-2012, 04:12 PM
I see the term "auction" often used, but this was actually through a public sale (which is an auction) pursuant to a decree in a foreclosure suit. The bank brings the action to foreclose and must make all persons of interest parties. For example, there may be junior liens, such as condominium unpaid regime fees, second mortgages, etc. The bank will usually bid the outstanding balance of the loan. If any junior lienholder wants to get its money, it will have to outbid the mortgagee, take title to the property, and sell it. The bank doesn't care if it is outbid, as the outstanding balance of the mortgage must be paid or the successful bidder takes subject to the mortgage.

UltraVires
07-07-2012, 04:45 PM
Perhaps this means that auctions are not producing a good price. Perhaps the bank is deliberately not advertising the auctions well, so they can take the house for the minimum price / reserve bid.

Perhaps the bank was obliged to sell at auction to saitsfy the foreclosure rules.



This is also part of the reason. When you (the general you) sell a home, how do you do it? You hire a realtor who takes beautiful color pictures of your home and advertises it on the internet and in magazines and invites people into your home (which you've cleaned up) and describes the wonderful charm that it has.

At a foreclosure sale, it is advertised in those tiny legal ads in the back of the newspaper that only wackos read. The sale is done on the courthouse steps, usually with an attorney whispering and acting as auctioneer.

As you can imagine, the latter method yields fire sale prices and the bank realizes that more money can be had via the former method.

Plus, say the home is worth $100k and the bank has a $90k mortgage that is being foreclosed. Would the bank let some guy buy it for $100? For $80k? Why would they? They can bid $90k and that money will go right back to them (as the creditor) They essentially and actually pay zero for the property up to the balance of their mortgage.

Zulema
07-07-2012, 06:51 PM
That is what happens at virtually every sheriff sale in my county. Normally the amount owed on the house is more than it's currently worth or the owners would just sell. The only reason I can imagine is that legally it's easier for the bank to get it back in their ownership, clean up any liens and back taxes then sell it. They're not going to get anyone bidding over them in most cases. The house then usually sells for less than was owed.

bizerta
07-07-2012, 09:01 PM
First, the bank has a fiduciary duty to the borrower to get as much as can reasonably be expected. Banks can't bid $100 for a $165,000 house unless that house is really worth $100.

Secondly, if the mortgage is $165,000, then the book value of the loan is $165,000. If the bank bids $125,000 and wins the auction, they have an instant $40,000 loss on their books. By bidding $165,000, they have postponed the loss until the property is actually sold.

Auction prices are typically 70% to 80% of true market value. It's a distress sale. There are no contingencies. No house inspection. No mortgage contingency. No "subject to my wife's approval". Bidders must do their due diligence (e.g. title search) and incur expenses even if you're not the high bidder.

I bought a house at auction once and had to pay three years of back taxes in addition to the high bid. But because I had done (and paid for) a title search, I took that into consideration when I bid. My bid was about 85% of market value. The bank took the bird-in-the-hand approach and let it go.

Napier
07-07-2012, 11:05 PM
So, there's now no chance of a deficiency judgement? Or could one occur for some kinds of costs associated with the whole foreclosure and auction process?

barbitu8
07-08-2012, 04:55 AM
That is what happens at virtually every sheriff sale in my county. Normally the amount owed on the house is more than it's currently worth or the owners would just sell. The only reason I can imagine is that legally it's easier for the bank to get it back in their ownership, clean up any liens and back taxes then sell it. They're not going to get anyone bidding over them in most cases. The house then usually sells for less than was owed.

The foreclosure proceedings would eliminate all junior liens, and the lender would not have loaned the money with superior liens outstanding, except for taxes. So, yeah, they would have to "clean up" the taxes, but that's about it.

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