Consider these facts: We owe $870,000 on an interest-only first trust deed. Our best estimated market value is currently $600,000. It is highly unlikely that home prices in our area will rise sufficiently in the next decade to enable us to get out of the property at break-even. Consider also that our property needs a minimum of $200,000 in repairs which would be required if the property were placed on the market. With an interest-only mortgage payment equal to 200% of the estimated rent on an equivalent property, we are effectively renting our house for double what the rent should be. We would be willing to continue to own the home if PNC would lower our mortgage debt equivalent to the market value and reduce our interest to the prevailing rate. However, as many of you will be quick to point out, PNC would be loathe to do this, even knowing that they would recover less than our requested modified price should the property go to foreclosure. Considering lost interest, repair costs, etc., our estimate is that PNC might eventually recover only $350,000 to $400,000 of the amount of the original loan amount.
So why would we bid on our own property at auction? A better question might be: Why would PNC not see the fiscal relevancy of reducing our loan balance to $600,000 to avoid far greater losses should the property go into default? Further, why would PNC bid on a property that would only add to their excess inventory and lose an additional $200,000 to $250,000 in the process. However, to answer my initial question: 1) we have a wealthy relative willing to buy the property and rent back to us at the prevailing rent price, and 2) it is highly likely that, in the current economic climate, PNC would let the property go at less than the current market value. Also, as it is within our right to promulgate the true nature of the property's condition, I suspect that any other bidders would be willing to bid higher than market value, minus the cost to make the marketable.
The lesson here is that some property owners have been in the their homes for many years, don't wish to move, are less concerned about ownership when their landlord is a relative, and can't stomach the idea that they are paying double each month than what they could. Further, there is a lesson here for the banks who need to be more realistic in today's economic climate; if they are to remain solvent without tax-payer bailouts and if they are to be responsible to their stockholders, they need to negotiate better with home owners. It is a pipe dream to believe that banks will ever recover the massive losses from all the foreclosed properties they have purchased at inflated values. Eventually these properties will be sold at fire sale prices that will only act to keep home values depressed for decades to come.