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Lets say you are $150k into a $200k mortgage, then default. What prevents the bank from selling it at $50k, which is just enough to recover their principle?

cableshaft 6y ago
Good question. I assumed that's how foreclosures work, and why you can get such good prices on them.
- csomar 6y ago
  You get lower than market prices but there are some catches: The foreclosure is a long process because they need to wait for the highest bidder, you need to deposit something like 1/3 of the house price, you need to pay some other fees, etc...
csomar 6y ago
Nothing, in fact the bank might actually make more profits from fees (and they collect the interest in advance). So while you might get away with a few months of delinquencies, it's not a situation you might even want to be in.
voisin 6y ago
The sale process has to be publicized and transparent so that it reflects arm’s length, fair market value. If that’s $50k then the first owner was severely underwater in the first place.
taylodl 6y ago
Legally? Nothing. Practically? There's a whole bevy of reasons why this isn't done in practice but the bottom line is it's not in the bank's best interest: - The bank is likely mortgaging other properties in the area. They don't want the value of the housing going down. - The bank doesn't want to slow down real estate sales with people waiting on "deals" on foreclosures. They'd just as soon be issuing new mortgages which results in more money coming in the door. - The bank doesn't want to get a bad reputation. Look at the issues Wells Fargo is having. It's easy to lose your reputation, it's hard to get it back. In general what happens is the property goes to auction. Because the buyer has to either pay cash or secure their own financing and be able to take quick possession of the property the house will typically sell for 17%-20% below market value. In this example since you're $150K into a $200K mortgage let's say the house's market value is $300K. It would sell at auction for $240K. The bank will have $35K in expenses and fees and so will cut a check for $210K-$50K = $155K to the homeowner. In general it's in your best interest to sell the house yourself before the bank forecloses. Let's look at this example again. You sell the house for $300K. Say you have $24K in closing costs, plus there's the $50K you owe the bank. You'll net $226K. That's $71K more in your pocket than letting the bank foreclose.

cableshaft 6y ago

Good question. I assumed that's how foreclosures work, and why you can get such good prices on them.

csomar 6y ago
You get lower than market prices but there are some catches: The foreclosure is a long process because they need to wait for the highest bidder, you need to deposit something like 1/3 of the house price, you need to pay some other fees, etc...

csomar 6y ago

Nothing, in fact the bank might actually make more profits from fees (and they collect the interest in advance). So while you might get away with a few months of delinquencies, it's not a situation you might even want to be in.

voisin 6y ago

The sale process has to be publicized and transparent so that it reflects arm’s length, fair market value. If that’s $50k then the first owner was severely underwater in the first place.

taylodl 6y ago

Legally? Nothing. Practically? There's a whole bevy of reasons why this isn't done in practice but the bottom line is it's not in the bank's best interest: - The bank is likely mortgaging other properties in the area. They don't want the value of the housing going down. - The bank doesn't want to slow down real estate sales with people waiting on "deals" on foreclosures. They'd just as soon be issuing new mortgages which results in more money coming in the door. - The bank doesn't want to get a bad reputation. Look at the issues Wells Fargo is having. It's easy to lose your reputation, it's hard to get it back. In general what happens is the property goes to auction. Because the buyer has to either pay cash or secure their own financing and be able to take quick possession of the property the house will typically sell for 17%-20% below market value. In this example since you're $150K into a $200K mortgage let's say the house's market value is $300K. It would sell at auction for $240K. The bank will have $35K in expenses and fees and so will cut a check for $210K-$50K = $155K to the homeowner. In general it's in your best interest to sell the house yourself before the bank forecloses. Let's look at this example again. You sell the house for $300K. Say you have $24K in closing costs, plus there's the $50K you owe the bank. You'll net $226K. That's $71K more in your pocket than letting the bank foreclose.