How Does a Foreclosure Affect a Bank?

by admin on September 13, 2010

Question:

How Does a Foreclosure Affect a Bank?

Answer:

As grave as the effects of a foreclosure may be to the homeowner or borrower, the bank or lender also experiences negative effects. This is why as much as possible, banks work out agreements with their lenders just to avoid the foreclosure process. If a property is foreclosed on by the bank, the bank experiences a lowered income or loses money. This is because the homeowner is not able to make his mortgage payments.

In addition to this, the bank will also lose interests payments which are important because they represent income. Public auctions or foreclosure sales also give additional work to the bank employees. Therefore, the employees cannot concentrate on running the normal bank operations and approving customers for the bank’s products and services. If the property was not sold during the public auction, the home become a bank-owned or real estate owned property (REO).

This means that the bank must look for a real estate agent to sell the home in the open market. Surely, the bank has to make repairs for the property to be sold, making them spend more money. However, if the house was sold during the auction, the proceeds of the sale is not even enough to pay off the mortgage. If this happens, the bank is forced to seek payment from the previous homeowner. After the auction, the new owner has the right to repossess the property. If the previous homeowner is still staying in the area, the bank request for eviction proceedings which are very costly and time consuming.

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