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How Much Loss will Bank Accrue after Foreclosure
After a bank forecloses on a home and lists it for sale, what percentage of loss will it normally accrue before auctioning the home or reducing the price?
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We are not aware of any common numbers on a bank's loss after foreclosure, and we don't believe there is any recognized percentage of loss before a sale is attempted.
The typical process is that a bank establishes the loss at the time the foreclosure happens. The loan balance, including interest owed, attorneys expenses and other collection costs plus insurance and taxes are totaled. The bank can bid a price for the property at foreclosure. That bid amount is credited to the total amount owed and the bank now owns the property. If that bid amount doesn't pay the loan and all the fees off, and it usually doesn't, that deficit is still owed by the borrower(s).
Banks do not want to be landlords. They need to establish a fair market value of the property and place it for sale, or have a plan on when to best sell it, and how. Banks are not allowed to own property for indefinite periods of time. They will try to sell it within five years. Extensions after that are possible, but this is reviewed by the bank's regulators. The bank knows that the carrying costs generally exceed the income a property can produce so they are motivated to sell it.
There is no standard loss that is acceptable, or that will trigger a fire sale of a property. It depends on the property, the market at the time, the predictions for the market, how long a property has been held, if it was for sale prior to foreclosure and many other factors.
Published on BankingQuestions.com 1/23/08
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