Why do repossessions (foreclosures) almost invariably end up costing the one time owner large sums of money? It’s unusual for the property (I’m thinking particularly of mortgages on houses) to have significantly decreased in value, so why not , given that the owners cannot continue to pay their mortgage, sell the house by mutual agreement in the normal way (presumably with sometime limit of, say, 3 months agreed)?
This would surely raise more money than an auction.
If in this situation, is it possible to contact the banks insurers/underwriters to arrive at such an arrangement?
Why do banks pursue this practice? Is it a last resort for banks? Is it a way of penalising defaulters? It doesn’t seem like anybody wins. What have I missed?
The option of selling your house should have already occurred to the owner. By the time a bank goes for repossession the owner has had PLENTY of warning. Their is too much room for an owner to drag things out in an ‘agreement’ to sell the house. They could put their $100,000 house on the market for $200,000 and then indefinitely tell the bank that their trying but for some reason no one is buying. In the end the bank doesn’t want to deal with all that. If it comes to selling to collect the bank will do it itself.
Once the bank repossess they sell the property and any money over what is owed to the bank (plus penalties and what not) reverts to the owner. However, the bank wants to sell fast so the bank usually sells low to recover their costs quickly and the owner gets screwed.
By the time people are missing payments on a house and on the cusp of losing their place to live a host of other generally unpleasant things are often trailing along in the wake of these scenarios.
Re the “not decreased in value” notion this is not always the case. One unfortunate side effect as a result of the borrowers not having cash to pay their mortgage is that the property is often neglected. There are residential agents in my firm (I’m on the commercial side) that specialize in handling bank repos and the repo’d houses are often in terrible shape (even the better houses) because of lack of preventative maintence and general upkeep (God… the stories I’ve heard) which is generally related in some fashion to whatever unfortunate vortex of circumstances caused the default in the first place.
As noted by another poster by the time reposession is being pursued the stressed borrowers are not in “let’s work with the bank” mode anyway but are thinking up delay strategems to enable them to hang on prior to formulating an exit strategy and many (unfortunately human nature being what it is)) would likely use a holdover grace period to make alternative housing arrangements instead of pursuing a sale in good faith.
Lastly selling and closing on a house sale “in the normal way” can take from a month to a year + depending on the market and the asking price. The price required to obtain a ratified contract and close in 90 days (a fairly speedy total sale time all things considered) is not that different from an auction price to the extent that it would compel a bank to pursue your strategy.
While there are usually few “winners” in a default (there is a class of scummy financial loan predators that make defaults much more likely) the auction is the least risky and cleanest route for a bank to take in most circumstances.
I had a client who worked not with houses, but with other property. They always made every attempt to restructure the loan, work out a reduced payment schedule, etc. By the time it got to repossession/foreclosure, the owner’s position had usually become “if you forgive half the loan I’ll do my best to pay off the other half.”
Agreed with the earlier posters – foreclosure is the last resort.
First, lets get the terminology down. You FORECLOSE on real estate. You REPOSSESS chattel.
Second, the process. The auction you refer to is a sheriff’s sale. This is not where the lender recoups its money. This is how they get title of the property into their name so they can sell it on the open market to get some of their money back. Rarely does anyone other than the lenders involved attend the sheriff’s sale.
Now, most real estate loans that go into foreclosure tend to be young loans, 10 years or less. To that point, most of the payments are going towards interest, so the principal balance is not being dimished hardly at all. If the loan is going into the foreclosure process, the debtor is probably at least 4 payments past due. Tha means that in addition to paying off the principal balance, they owe 4 months worth of interst (and may owe money to their escrow account if the bank advanced funds for insurance or taxes). It’s very possible the payoff on a young loan will be more than they originally borrowed.
If they want to sell, we need to add additional costs. Realtor commissions (now averaging 7% of the sale price), title insurance, recording fees, closing agent fees, etc. It adds up.
All that being said, would I as a bank rather entertain a third party sale by the borrower than foreclose, even if if the sale is not enough to pay off the loan completely? You bet your ass. As long as the sale price/offer they have is a true “market value” offer, I will most definitely consider it. The reason? If it will cost $60k to pay off the loan, but based on fair market value, after costs I will only net $50k, I’m going to take a $10k hit. If I foreclose, I now have to pay my attorney $4k-6k, AND pay insurance, maintenance, and marketing costs. Then, when I sell it, I still only net $50k on the sale but because of the added costs, I now take a hit of $16-18k.
If someone you know is in a situation like this that made you bring up the OP, have them contact the Loss Mitigation Department of their lender. There are always options if the bank can save money.
Terminology: In the UK, repossession, in the US, forclosure. We’re not all Americans;).
BTW, it was just a hypothetical question. I don’t know anyone in this situation at the moment anyway.
Hmm, sorry, I didn’t even consider the possibility that the terminology would be different in the UK (since our legal terms generally come from British common law). However, now that you mention the UK, I would like to state that the information above is based on US foreclosures. Procedures and such may differ dramatically in the UK for all I know.
>> We’re not all Americans
Is that good or bad?
I couldn’t possibly comment.
Something else to consider…once a house is in foreclosure, the owner (borrower) is probably several months in arrears, and may be deep in denial over what the lender’s next step will be. It’s pretty common that they take the ‘ostrich’ approach.
Not here in Florida. 10 days after a foreclosure Final Judgment has been entered (and a Notice of Public Sale has been advertised in the local paper), a public auction takes place on the courtroom steps. The sheriff has nothing to do with it. If there are no other bidders, the foreclosing mortgage holder will have a document filed in the public records placing the real property title into their name, whereupon they will put that property up for sale.
Someone who attends the auction and bids on the property will be successful if they can pay the amount of the Final Judgment, which includes the amount due on the mortgage, interest, any liens which have been placed on the property (the lienholders having also been named defendants in the original foreclosure suit), court costs and attorney’s fees, as well as they must also pay the sale fee and costs (approximately $150). Quite a few properties I have foreclosed on have been bid on at auction and not titled back to the original mortgage holder.
On rare occassions, the mortgage holder will also enter into a Deed in Lieu of Foreclosure where the deed is signed back to the mortgage holder and the mortgagee walks away, losing whatever equity they may have had in the property.
Deeds in lieu of foreclosure are becoming more and more common actually. It saves the money of having to pay the lawyers and the court costs when both the bank and the debtor know foreclosure is imminent. One problem to them is that the title needs to be free of other liens (at least under our policy) in order for us to accept the deed (we don’t want to get title to an encumbered property).
As to the sale, Sheriff Sales and Public Sales are pretty much terms for the same activity, it just depends on who runs them and where they are held. Occasionally someone other than the mortgage holder will bid, but it’s not very common in my experience. Junior lienholders will often be there to bid so that there interest isn’t foreclosed out, but they would fall into the “lender” category. The bank is, of course, happy as can be when someone bids an amount greater than the judgment because it means they get all there money now and don’t have to sell the property on their own.
It’s rare for outside bidders to enter the picture, because in most foreclosures there is no equity. Obviously, if you had equity in your home but couldn’t bring your loan current you would sell the property, pay off the loan and walk with the profits. Or, if you wanted to keep the home, anyone with equity in their house can generally get loan, albeit at outrageos rates if your credit is iffy.
Well, your profile doesn’t indicate where you live, but here in Florida “Sheriff Sales” and “Public Sales” (foreclosure sales) are two totally different activities. Sheriff Sales normally take place when personal property, nor real property, has been “repossessed” and offered at auction.
Not trying to argue about it. I’m just saying we are both describing the same step in the foreclosure process.