Why would a bank not evict after a foreclosure and collect insurance?

October 12, 2019 3:01 AM

I am trying to help a friend figure out their housing situation. Her home has been foreclosed on and the bank was the winning bidder at the Sheriff’s auction, which in our state means the bank is essentially the owner of the home. As I understand it, they should be able to evict them and file an insurance claim on the mortgage covering the unpaid balance of the mortgage plus legal expenses and Sheriff’s fees, but they are not and are trying to sell the house at a private auction. Why?

My friend has been negotiation with the bank through a third party who appears to be either a state or county agency connected to a housing authority. The last they heard they still had some time to reinstate the mortgage, but from what I know of the foreclosure process, that time has past. In believe they are telling them there is still time before a formal eviction process begins, which will also take time.
My friend had only had the mortgage for less than a year and had a very small down payment, so the bank had made little profit from the mortgage and had little room to negotiate a short sale. My friend says the loan was FHA compliant and was paying PMI, but not sure if it was actually FHA insured. Regardless, I assume the bank could file a claim and the property would become someone else’s problem. Instead, they tried to auction the property although the reserve was not met. They have another auction pending. The auction terms state the home is occupied and it will be the buyer’s responsibility to evict the occupants.
So why would this be. Three possibilities I could think of is that the insurance will not cover all the bank’s damages, that filing a claim would make insurance required for their loans more expensive, or that they are willing to take a hit on the mortgage rather than going through the eviction process and any bad PR that may bring them. A small part of me hopes they are going through this auction process to give my friend more time to come up with the missed payments, but that seems unlikely. Any insights?

posted by Short End Of A Wishbone to Home & Garden (6 answers total)

Seems to me that time spent on working out why tf a bank ever does anything is time that could be better spent working out ways to take advantage of the resulting situation.

Is the reserve that wasn't met at the first auction less than the amount your friend still owed on the mortgage at the time of the foreclosure? If so, what about looking for finance at a different bank or (preferably) credit union, and actually bidding on the place at the next auction? She might end up having to evict herself before she can move in, but I'm sure she'd be able to work that out quite amicably.
posted by flabdablet at 3:52 AM on October 12, 2019 [2 favorites]

Evictions are expensive and lengthy. Its cheaper to just get rid of it at auction , and then it's someone else's problem. And there is the unknown about what condition the property will be in after eviction, because people being evicted sometimes damage homes. If the damage hasn't happened, the selling price can be higher .
posted by AlexiaSky at 4:28 AM on October 12, 2019 [3 favorites]

Unoccupied houses are more at risk of being damaged and come with more maintenance costs and probably higher insurance costs. An eviction costs money - which they may not feel they could recoup from your friend so they may figure it’s financially easier to allow your friend to stay.
posted by SpaceWarp13 at 6:56 AM on October 12, 2019 [4 favorites]

Banks are not in the business of property management, they are in the business of lending money. The only thing they are interested in is recovering their cash with as little effort as possible by selling the house ASAP. They probably have requirements in their insurance policies to minimise losses by taking certain steps to try to achieve a reasonable selling price, such as setting a reasonable reserve and making x attempts to sell. There is probably a price difference between an empty property and one that requires eviction of an occupant. But the bank has no interest in going through that process and wait for its money and is willing to accept that means a lower price.

Has your friend sought advice about their rights at this point? What were they advised do? It may well be time to start to focus on sorting out their living situation for when they are evicted.
posted by koahiatamadl at 7:36 AM on October 12, 2019 [4 favorites]

FHA has a specific program that allows banks to sell foreclosed properties to third party bidders rather than convey back to a FHA. Whether the bank uses it typically depends on where the property is located, its condition, and how long thinks it will take to to evict & resell the property. Mostly these homes are bought by professional REO companies who can turn them quickly. Unfortunately the eviction process will start (and move quickly) as soon as a buyer meets the mandatory selling price.
posted by tinymojo at 1:50 PM on October 12, 2019

> Unfortunately the eviction process will start (and move quickly) as soon as a buyer meets the mandatory selling price.

Yes, please make sure your friend understands this. I bought a house through a short sale, and it took about six months of nothing happening and then a few weeks of things suddenly happening very quickly (including the former owners moving out).
posted by The corpse in the library at 5:33 PM on October 12, 2019 [1 favorite]