Here's how it works.
Banks typically spend money only on investments that will earn a cash $$ return (profit) to them quickly (no later than the end of their current fiscal year).
Furthermore banks don’t spend real cash $$ money on anything (except where there’s an almost immediate guaranteed return). Selling an REO is neither a guaranteed nor an immediate return on investment.
In the case of an underwater 2[SUP]nd[/SUP], the lender (bank) would need to spend real cash (as opposed to credit) to acquire an asset that’s worth less than their cost to acquire it. A bank would do this only if they’ve mistakenly overvalued the property.
To earn a profit on the foreclosure of a loan, the bank will need to get paid real money (cash) by re-selling that REO property to a buyer on the open market for at least a price certain.
Needless to say, the net proceeds of that sale needs to be greater than the total cost of paying off senior loans plus all the bank's costs of FCing and re-selling the REO, to include carrying costs, i.e. interest, taxes, insurance, HOA fees and utilities, presale fix-up costs, and marketing and selling costs (typically 8 - 10 percent of a property's selling price).
Those resale costs average about $50K; the costs are higher for more expensive properties.
The 2nd lender will make certain the selling price will yield the necessary net sales proceeds. In other words, the lender will ascertain the 2nd loan is clearly "in-the-money". If the loan isn't clearly "in-the-money," the lender most likely won't foreclose.
In order for a borrower to calculate the status of their 2nd loan, a current property valuation is essential.
From that valuation, the borrower subtracts the loan balance of the 1st, the loan balance of the 2nd, and $50K costs. If the remainder is negative, the 2nd is underwater. If the remainder is positive, the 2nd is "in-the-money."
Banks typically spend money only on investments that will earn a cash $$ return (profit) to them quickly (no later than the end of their current fiscal year).
Furthermore banks don’t spend real cash $$ money on anything (except where there’s an almost immediate guaranteed return). Selling an REO is neither a guaranteed nor an immediate return on investment.
In the case of an underwater 2[SUP]nd[/SUP], the lender (bank) would need to spend real cash (as opposed to credit) to acquire an asset that’s worth less than their cost to acquire it. A bank would do this only if they’ve mistakenly overvalued the property.
To earn a profit on the foreclosure of a loan, the bank will need to get paid real money (cash) by re-selling that REO property to a buyer on the open market for at least a price certain.
Needless to say, the net proceeds of that sale needs to be greater than the total cost of paying off senior loans plus all the bank's costs of FCing and re-selling the REO, to include carrying costs, i.e. interest, taxes, insurance, HOA fees and utilities, presale fix-up costs, and marketing and selling costs (typically 8 - 10 percent of a property's selling price).
Those resale costs average about $50K; the costs are higher for more expensive properties.
The 2nd lender will make certain the selling price will yield the necessary net sales proceeds. In other words, the lender will ascertain the 2nd loan is clearly "in-the-money". If the loan isn't clearly "in-the-money," the lender most likely won't foreclose.
In order for a borrower to calculate the status of their 2nd loan, a current property valuation is essential.
From that valuation, the borrower subtracts the loan balance of the 1st, the loan balance of the 2nd, and $50K costs. If the remainder is negative, the 2nd is underwater. If the remainder is positive, the 2nd is "in-the-money."
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