What Happens After A Foreclosure

Q: You might want to check on what happens with a bank after a foreclosure. My son takes care of foreclosures in Nevada. After the foreclosure, the Department of Housing and Urban Development (HUD) sends the bank money. It’s more profitable than trying to help the homeowner. I’m sure you have access to resources I don’t. It might be interesting.

A: You’re right. The market may have created incentives that may not seem to work with all of the programs in place by the Obama administration. Some community organizations have complained that lenders still have an incentive to work to foreclose on homes rather than help borrowers out.

Certainly, if a lender files to foreclose on a home and the borrower ultimately finds the money and brings the loan current, the lender will be better off than if the lender goes all the way through the foreclosure. It does not seem logical that a lender would be better off with a foreclosure that may give the bank 30 to 40 cents on the dollar but some lenders are going down that road.

The Obama administration has in place various plans to help homeowners by prompting lenders to refinance loans (under the Home Affordability Mortgage Program – HAMP) or modify loans under HAMP. While it appears that borrowers have been able to refinance their loans under HAMP, those borrowers that need the most help and need loan modifications do not seem able to get the help they need.

Only a fraction of the borrowers applying for loan modifications have received permanent loan modifications.

Loan servicers get bonuses from the federal government for doing short sales and loan modifications. None of these bonuses are paid out until the short sales close or the loans have been modified.

But at a recent conference at the Federal Reserve Bank that I attended, some of the speakers questioned whether the incentives to banks were enough to make them grant more permanent loan modifications. These speakers talked about the underlying nature of bankers to wait and see if borrowers would bring their loans current rather than modify their loans. The speaker talked about the natural instinct of homeowners to protect their homes and keep their homes. And if they try to keep their homes and do, the lender is better off waiting and seeing if the borrower brings the loan current

When HUD homes (a HUD home is a foreclosed home with an FHA loan) are sold, the loan is paid off and anything that’s left is sent to the loan servicer. After any fees are stripped out, the investor is paid off.

Servicers do make additional money on fees that they charge against the foreclosure and these are paid in advance of FHA (or the other lender) getting its share, I believe[ST1] .

With the many diverse interests in the mortgage market, it’s not surprising to see interesting things develop when it comes to foreclosures. Some people have geared up for these foreclosures and have found ways to make money from them.