18th October 2009

Why Banks Aren’t Foreclosing on Schedule

posted in Real Estate Investing |

In the past, when a person stopped making payments on their home, it generally took 3 months before they were foreclosed upon by the bank and evicted from the property.big bank building

These days, as any real estate agent will tell you, it could take the better part of a year for the process to come to a close. In the past I have made posts detailing some of the completely unprofessional behavior exhibited by the banks during the “short sale” process.

For the uninitiated, a “short sale” is when the bank agrees to discount the loan amount due on a property usually due to some financial hardship on the part of the borrower. Whereas, a foreclosure is when the bank takes possession of a property and evicts the previous owner with the intention of selling it at market price to re-coup its losses.

I have also heard stories of people basically squatting in homes where they live there but are only paying utilities and not rent or a mortgage payment. In this case, if the property is actually foreclosed on, they will be given 30-days notice to vacate the property. Not a bad deal for a short time anyway.

Recently, I heard an interesting news report about why the banks are doing everything in their power to delay a short sale or foreclosure. Surprise! It’s for their own benefit, of course.

Basically, when a bank forecloses on a property, they typically take some kind of financial loss which affects the bank’s balance sheet. This is not usually a problem for the bank if it’s a few hundred properties.  However, when the number of foreclosures is in the millions (like is happening today) it causes a big problem for the banks in that those losses are large enough to affect the bank’s stock price which in turn affects their market capitalization.

Suddenly they’re not so rich and can’t operate like they used to. So, their answer is to delay, delay, delay so as to spread the losses over time which in turn reduces the hit to their stock price.

Take a look at this interesting interview of former bank regulator William Black, author of The Best Way to Rob a Bank Is to Own One.

Comments are closed.

  • Categories

  • Post Archive