Foreclosed Home Sells Less Than The Owed Morgage What Happens To The Diffrence

Asked by bbkat41, Santa Rosa, CA Fri Aug 17, 2012

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CJ Holmes, Agent, Santa Rosa, CA
Fri Aug 17, 2012
Well, it really depends on what type of loan was foreclosed on. If the loan was a portfolio loan, one made by the lender's money and held by the lender for the payments (think credit union loan or private investor loaning someone some money), then that lender loses the difference between what was loaned out, and what was received back. It's a direct loss for that lender.

However, IF the foreclosure was for a loan that had been securitized, like most of the current foreclosures and short sales, then the bank MAKES money on the deal through many and various fees and provider agencies (asset management companies, field service companies, foreclosure trustee companies...), as the money loaned out was never the servicer's money to begin with. The money was from investors like our pension funds and Iceland that invested in these MBSs.

The banks sold Mortgage Backed Securities (MBSs) on wall street to investors (think our pension funds and Cal-pers), and these MBSs were insured (think Fannie Mae, Freddie Mac, AIG credit-default swaps). So when a loan defaults for 60 days, insurance is triggered to pay for that loan, many times IN FULL. (as an aside, this is why Fannie and Freddie always need more government bailout - to buy back these loans from the MBSs in full after a borrower defaults - borrowers who were no doubt told [illegally] by the servicer to default for 60 days. these servicers know that will trigger this insurance payout to the MBS and turn the servicer into a debt collector - both of which greatly benefit the servicers financially...)

It also turns out that when a loan is securitized, the Servicer NEVER had or has any authority to do either loan modifications or short sales or foreclosures, as these loans in teh MBSs are under the authority of NY State Security Laws and the "Pooling and Servicing Agreements" for the MBSs.

To "straddle this gap in authority" so servicers could foreclose, attorney firms forged documents giving servicers the "right" to foreclose. This rampant forgery has been termed "robo-signing", and NOBODY has been prosecuted to date for this theft our real estate, and some of these specific firms are currently attorneys-in-fact for Fannie Mae and Freddie Mac.

So in the case of a securitized loan, the loss between the short sale/foreclosed price and what was owed was either paid off by the taxpayer through bailing out Fannie, Freddie, or AIG, or a small percentage of the difference was lost by the investors in that specific MBS.

original securitized loan was $420,000
short sale/foreclosure net proceeds were $200,000
During the entire extended process the servicers racked up $50,000 in fees
(the longer a servicer can drag out the deal, the more fees they rack up)

Loan was in MBS with 15 classes or tranches.
loan defaults for 60 days, insurance paid 14 classes: $392,000 to MBS

MBS investors took a hit for 28,000 on that loan.
Insurer paid out 392,000, gets back 200,000 - 50,000 in fees.
insurer is out 242,000.

Personally, I've been so upset with discovering this fraud, I've founded Home Owners For Justice: Please join with me in efforts to prosecute the forgers, get restitution for owners cheated out of their homes, reform our mortgage laws, and save our economy and country.
1 vote
William Matz, , Windsor, CA
Sat Oct 20, 2012
Question is not clear. Are you asking about consequences to the borrower? In CA, anti-deficiency laws normally protect borrower from any further liability on loan. May be different if HELOC/2d.

For the owner of the loan/investor, the answer will depend upon many different factors. Insurance may cover the loss, Increasingly, owners (including FNMA/FHLMC) are making claims against the original lender for misrepresentations. so every case is different.
0 votes
Ron Thomas, Agent, Fresno, CA
Fri Aug 17, 2012
That answer can vary;
In some States, the Lender is allowed to pursue a Deficiency Judgement against the Homeowner:
We haven't heard too much about this, particularly here in California because we are a Non-Recourse State. But this situation is hanging like the sword of Damacles over a lot of people's heads.
Understand that there are basically three senarios that have lead to Foreclosure;
1. where the homeowner is destitue, (or close to it) because of UnEmployment, Hospital Bills, Death in the Family, etc.
2. where the Loan was written with a Variable Rate and/or a Balloon payment, and it has now come due.
3. where the homeowner realized that the house is Upside/Down; worth far less than they now owe.

If the Homeowner goes through the Foreclosure to "rub off" the house on the Bank, and they have hidden assets, the Bank can file a Deficiency Judgement. Don't ask me how long the Bank has got; it will vary from State to State.

So a Deficiency Judgement is one of the ways that the Bank can recover some of the lost money.
Another way is from PMI, (if the homeowner was paying for it), the Bank can recover some or all of the loss from the Insurance Company that wrote the PMI.
The third way is through Taxes, the Bank can recover a lot thru tax right-offs
The fourth is simply that the Bank takes it in the shorts.

I hope this helps.

Good luck and may God bless
0 votes
Question... we took out what we were told was a 3rd for our pool, through Greentree. The house foreclosed in 2013 and they are now sending us notices that they are going to come after us for the balance (we paid off $39,000 of the $55,000 in under 3 years.) Can they come after us or are these just scare tactics?
Flag Wed Jun 17, 2015
Eric H. Wong , Agent, Albany, CA
Fri Aug 17, 2012
Then lender writes it down in his loss column.
0 votes
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