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“The risk of a non-payments and financial issues is much higher and repossessions will be higher.” Increased risk does not benefit the lender. Lenders do not

“The risk of a non-payments and financial issues is much higher and repossessions will be higher.” Increased risk does not benefit the lender. Lenders do not want real estate, or the work it takes to get it. They want regular payments.

have_faith 8y ago
In hindsight (classic) this makes sense. I guess I was imagining a scenario where the house debt is already mostly paid off but not fully, the house is repossessed and the lender has the debt mostly already paid and now owns the property. I don't own any property and so I'm trying to build a mental model of all the moving parts.
- cortesoft 8y ago
  If the house is worth a lot more than the debt, you don’t see many foreclosures. An owner could simply sell their house and keep the profit, or take out a HELOC. Foreclosures are much more common when the debt level is high and/or the house is under water.
  - mikefivedeuce 8y ago
    It's also dependent on the jurisdiction. In some cases the lender doesn't actually have a right to proceeds in excess of their loan amount (plus interest, penalties and fees).
    - verelo 8y ago
      One other thing to consider is brand reputation. Most lenders, big bank lenders at least, don’t want their brand being the one that took a family home away. Often before things get real bad they will offer to break the term and let you refinance somewhere else.
      - wbl 8y ago
        In the US 30 fixed have no prepayment penalty.
        verelo 8y ago
        That's a good deal! In Canada pre-payments often result in fees, which isn't ideal. Good(ish?) news is the banks will let you transfer out with no fee (or a reduced fee) if they want to remove your risk from their portfolio.
- telchar 8y ago
  Historically[0] that was a profit center for contract lenders which people living in redlined neighborhoods (i.e. mostly black Americans) had to resort to if they wanted to buy a house before the reforms of the 1960's. These people would lend money for a house with very predatory terms. It was apparently common for a borrower to have their house foreclosed on for minor missed payments and the contract lender would simply repossess the house so they would have the house and all the payments they collected. The borrowers couldn't easily refinance since the neighborhood was redlined and there were few to no regulations on the contract provisions so a mostly paid off house could still be repossessed with no reimbursement. This was one of the major ways the black middle class was hollowed out since homeownership was one of the major sources of middle class wealth gain. [0] https://www.chicagoreader.com/chicago/contract-selling-redlining-housing-discrimination/Content?oid=25705647 https://www.chicagoreader.com/chicago/contract-selling-redli...
  - dsfyu404ed 8y ago
    You're describing the "buy here pay here" used car lot model but for houses.
- johngalt 8y ago
  Foreclosure doesn't provide the entire value of the property to the lender. But it does allow the home to be sold at auction in order to recover the money owed. Any remainder is given to the home owner. That said it would be an exception to foreclose/auction a home with significant equity. Major underwriters want regular payments. If they wanted market value property, they would invest in that instead. If banks wanted to foreclose property, why wasn't 2008 a winning year for banks?
clairity 8y ago
your sentiment is directionally correct but the details are more complicated... a lender’s job is to price default risk. if they could do this properly (pricing at a premium), they’d prefer higher risk because it would net them more profits (this is supposed to be reigned in by regulations on risk exposure but we saw how effective that was a decade ago). so higher risk does generally benefit the lender. however, lenders are horrible at being real estate investors and property owners/managers, so they’d rather avoid (most) foreclosures as it’s less profitable to them. they’ve even gotten out of managing the loans in many cases, preferring to sell them off and reinvesting the money in new loans instead. it’s specialization at work.
- pertymcpert 8y ago
  Does any of this matter? Higher default risk means the rate of defaults is higher, so the costs of foreclosure and repossession will be higher. If the market is competitive, they should be making the same amount of money on average as low risk. Low risk by definition is going to have lower repossession costs. This changes when banks exploit mispricing or miscalculation of risk by other lenders, to undercut them or to buy low risk debt at high risk prices.

have_faith 8y ago

In hindsight (classic) this makes sense. I guess I was imagining a scenario where the house debt is already mostly paid off but not fully, the house is repossessed and the lender has the debt mostly already paid and now owns the property. I don't own any property and so I'm trying to build a mental model of all the moving parts.

cortesoft 8y ago
If the house is worth a lot more than the debt, you don’t see many foreclosures. An owner could simply sell their house and keep the profit, or take out a HELOC. Foreclosures are much more common when the debt level is high and/or the house is under water.
- mikefivedeuce 8y ago
  It's also dependent on the jurisdiction. In some cases the lender doesn't actually have a right to proceeds in excess of their loan amount (plus interest, penalties and fees).
  - verelo 8y ago
    One other thing to consider is brand reputation. Most lenders, big bank lenders at least, don’t want their brand being the one that took a family home away. Often before things get real bad they will offer to break the term and let you refinance somewhere else.
    - wbl 8y ago
      In the US 30 fixed have no prepayment penalty.
      - verelo 8y ago
        That's a good deal! In Canada pre-payments often result in fees, which isn't ideal. Good(ish?) news is the banks will let you transfer out with no fee (or a reduced fee) if they want to remove your risk from their portfolio.
telchar 8y ago
Historically[0] that was a profit center for contract lenders which people living in redlined neighborhoods (i.e. mostly black Americans) had to resort to if they wanted to buy a house before the reforms of the 1960's. These people would lend money for a house with very predatory terms. It was apparently common for a borrower to have their house foreclosed on for minor missed payments and the contract lender would simply repossess the house so they would have the house and all the payments they collected. The borrowers couldn't easily refinance since the neighborhood was redlined and there were few to no regulations on the contract provisions so a mostly paid off house could still be repossessed with no reimbursement. This was one of the major ways the black middle class was hollowed out since homeownership was one of the major sources of middle class wealth gain. [0] https://www.chicagoreader.com/chicago/contract-selling-redlining-housing-discrimination/Content?oid=25705647 https://www.chicagoreader.com/chicago/contract-selling-redli...
- dsfyu404ed 8y ago
  You're describing the "buy here pay here" used car lot model but for houses.
johngalt 8y ago
Foreclosure doesn't provide the entire value of the property to the lender. But it does allow the home to be sold at auction in order to recover the money owed. Any remainder is given to the home owner. That said it would be an exception to foreclose/auction a home with significant equity. Major underwriters want regular payments. If they wanted market value property, they would invest in that instead. If banks wanted to foreclose property, why wasn't 2008 a winning year for banks?

clairity 8y ago

your sentiment is directionally correct but the details are more complicated... a lender’s job is to price default risk. if they could do this properly (pricing at a premium), they’d prefer higher risk because it would net them more profits (this is supposed to be reigned in by regulations on risk exposure but we saw how effective that was a decade ago). so higher risk does generally benefit the lender. however, lenders are horrible at being real estate investors and property owners/managers, so they’d rather avoid (most) foreclosures as it’s less profitable to them. they’ve even gotten out of managing the loans in many cases, preferring to sell them off and reinvesting the money in new loans instead. it’s specialization at work.

pertymcpert 8y ago
Does any of this matter? Higher default risk means the rate of defaults is higher, so the costs of foreclosure and repossession will be higher. If the market is competitive, they should be making the same amount of money on average as low risk. Low risk by definition is going to have lower repossession costs. This changes when banks exploit mispricing or miscalculation of risk by other lenders, to undercut them or to buy low risk debt at high risk prices.