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: http://www.HOFJ.org.
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.