LENDERS ADOPT NEW STRATEGY FOR FORECLOSURE BIDDING

Historically, mortgage holders have acted fairly consistently when bidding on their own properties under the foreclosure process. They have typically bid the amount of the unpaid mortgage loan balance at the sheriff’s sale.

Recently we have seen a trend whereby lenders are bidding substantially less than the outstanding loan balance. In many cases, the bids are 20-25% less than actual current market value, which could be as much as 50-60% less than the loan balance.

I will not speculate as to the reasons for this change in strategy, but there are at least two significant implications that are created as a result. First, unlike the former practice where the foreclosure bid is placed at the full amount of the loan balance and, therefore, satisfies the debt, the practice of bidding less than the loan balance creates a deficiency liability for the property owner. This deficiency liability can be pursued against the mortgagor for six years following the foreclosure.

The second implication of this strategy is that the reduced bid establishes a lower redemption amount for the property owner. In cases where the redemption amount is less than property’s current market value, the opportunity for a “pre-approved short sale” is created. Responsive property owners can become highly motivated sellers in these situations with the opportunity to capture and retain the difference between the reduced redemption amount and property’s current market value.

As previously mentioned, homeowners in this situation may be pursued later by their lender for the deficiency, but the lender’s decision to do so will most likely occur without regard to the homeowner’s ability to sell the property at a “gain” during the redemption period. In fact, a case could be made that the homeowner mitigates their net deficiency liability by maximizing a market value sale under their control as opposed to letting the property revert to the lender and be subsequently sold for much less on a distressed basis.

Weir Manuel sales professionals are encouraged to be vigilant for these opportunities on behalf of their clients and provide them with the trusted advice needed to guide our buyers and sellers through this market.