The substantial rise in bank foreclosures in the past few years has been a major contributing factor to the economic meltdown. Anyone who watches the local news channel or reads their daily paper may be easily overwhelmed by stories about the mortgage loan crisis and the rate of bank foreclosures.
Bank foreclosures have certainly become an epidemic, as the rate of mortgage delinquencies surged past 9.2% in May 2010. In addition, during the first half of 2010, over 500,000 homes nationwide became victims of bank foreclosure. These foreclosures are experienced by people in all income levels ― from lower-income families to the wealthy.
So What Exactly Is a Bank Foreclosure?
When an individual takes out a mortgage loan, the underlying property represents the collateral on the loan. The borrower signs a promissory note, which is a contractual obligation to make payments to the lending institution until the mortgage loan is repaid in full.
In general, if a borrower misses two months of mortgage payments, their loan is considered to be in default (or delinquent). The mortgage lender will contact the homeowner to determine why the payments weren’t made, and to get them current on their mortgage loan. If the borrower does not catch up on their missed payments in a timely manner (usually within 30 days) and get back-on-track with their loan, the lending institution may begin foreclosure proceedings and later reclaim the property.
If the borrower is unable to make their loan payments, their lender (typically a bank) will file a public “Notice of Default” announcing that the property is now in the process of being foreclosed. The bank will also hire a prosecuting attorney to represent them, and to ensure that the foreclosure process is handled properly.
When the foreclosure process is complete, the bank usually sells the property and uses the proceeds to pay off the remainder of the borrower’s mortgage loan, as well as any related legal costs that were incurred. If the sale of the property does not generate enough money to satisfy the balance on the mortgage (and related expenses), the bank may seek a “Deficiency Judgment” ― which is a court order allowing the lender to collect the amount of debt that is still unpaid on the mortgage loan. This means that the borrower could still owe money to the bank, if the bank cannot recover all the costs associated with their loan default. Additionally, other creditors may file suit against the borrower for non-payment of taxes, insurance, or Homeowners Association fees.
Unfortunately, home values have plummeted in the past few years due to a number of economic factors, including unemployment, slowing productivity, and rising inflation. As a result, borrowers have seen their home values drop below what they originally paid for the property, and even below what they owe the bank on their mortgage. Many homeowners and investors have elected to simply walk away from their mortgage loan obligations, because they fear that the value of their property may never recover, or they are unable/unwilling to continue making payments on an “upside-down” mortgage. When the homeowner walks away, it allows the bank (or other mortgage lender) to foreclose on the property.
Like an up-and-down stock market, bank foreclosures can be devastating for some ― but for others, bank foreclosures have created incredible homebuying opportunities and rock-bottom home sale prices.