Homeowners can use this knowledge when the attempting to negotiate with a lender for a short sale, mortgage modification, or any other solution. The point of loss mitigation, supposedly, is to reduce the loss on a defaulted loan by working with the borrowers to prevent it from going into foreclosure. Knowing how much foreclosure costs the lender is a powerful piece of information for homeowners.
But there is a big difference between paper losses and out of pocket expenses for lenders. Some of the losses on a foreclosure fall into one category, while the remaining fall into the other. Obviously, mortgage companies are concerned about out of pocket costs much more than paper losses that do not represent true outflows of money for the bank. So what costs are involved in a foreclosure?
Foreclosure sale fees. To initiate a lawsuit or begin a nonjudicial foreclosure, it costs the bank money for filing fees or newspaper publication of the sheriff sale. Many states require a lender publish a notice of default or notice of sale for 3-4 consecutive weeks, which the lenders have to pay for out of pocket.
Legal fees. Lenders always hire local attorneys to pursue foreclosure on a home, and attorneys, as most of us know, are not cheap. If the homeowners defend against the process for as long as possible, legal fees for the bank can run into the tens of thousands of dollars. While these are added to the total amount the homeowners owe, if the house is not saved, the bank ends up having to pay the attorneys out of pocket.
Eviction costs. The eviction process after a foreclosure and sheriff sale typically involves the bank initiating another lawsuit or paying the attorneys more to have the former owners removed from the house. Any of these costs, including any more filing fees or legal fees, will have to come out of the bank's pocket.
Damage to property during foreclosure. Unfortunately, once homeowners know they will be foreclosed on and that the bank will no longer work with them to resolve the situation, they may take out their frustration at the bank on the house itself. There are always new horror stories of properties being gutted, stripped, or vandalized by the former owners. Repairs will either need to be paid for out of the bank's pockets or taken as lower proceeds from a sale.
Damage to property after foreclosure. When properties sit abandoned, the best that happens is it falls into disrepair. Old conditions worsen and new ones appear due to deterioration and the effects of the weather. In the worst case, the home becomes a target for squatters who damage the property or thieves who strip it of its pipes, siding, and anything else of value. The bank will need to pay for repairs out of pocket or accept a lower sales price to compensate.
Property taxes. If the bank does not keep up with the local property taxes, it risks losing the house itself to a tax foreclosure. While taxes may be lower for non-owner occupied houses like those owned by mortgage companies, any taxes will need to be paid for each day that the bank owns the property. Once the property tax bill comes due, the lender will have to pay it out of its own pocket.
Homeowners insurance. Although banks may receive a far better deal for property insurance than what it forces homeowners to pay for through mortgage servicing fraud and other tactics, homeowners insurance will still need to be paid. This will come out of the bank's own pocket, although the lender may own another company that provides the insurance, keeping the cost in house.
Maintenance. Keeping the property cleaned and maintained is one cost that banks typically avoid. Instead, they will allow the house to fall into disrepair and simply take less in proceeds on a sale. Although this is a paper loss to the banks, the longer the house is empty and not taken care of, the more it will deteriorate and the further the sales price will need to be to motivate any buyer to purchase it.
Commissions on sale. When a bank ends up as the owner of a property after a sheriff sale, it will typically find a local real estate agent to list the property with. Once the house sells, the broker will have to be paid a commission, reducing the lender's proceeds from the sale.
When homeowners are negotiating for some solution to foreclosure, pointing out the vast costs to the bank may be one way to force the bank's hand and offer a plan instead of going through with foreclosure. Even a $20,000 loss on the loan due to a short sale could represent a savings of nearly $40,000 to the bank in the long run. Banks threaten the loss of the house to homeowners if they don't stop foreclosure - why can't homeowners threaten the loss of $60,000 to the banks?
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