The housing market crash of 2007 caused falls in property value for countless homeowners. In actuality, some homeowners own properties worth many tens of thousands of dollars less than they owe on their mortgage loans. Naturally, when you have a house worth less than you owe you begin to wonder what your lender might do on it, including foreclosing on it. Luckily, lenders won’t foreclose your mortgage if your house is worth less than you owe, mainly because it costs them a lot of money.
Mortgages secured by properties worth less than is owed to these loans are known as “underwater mortgages” or “underwater properties” A lender with a underwater mortgage has a problem, but it’s the lender’s problem simply. A bank’s underwater mortgages have been carried on its balance sheet as “negative equity,” that affects its own financial wellbeing. Apart; exterior of specific home loan clauses linked to defaults and transfer or sales of properties, lenders can not just randomly foreclose underwater mortgages.
The average price to your lender to foreclose a home is $50,000, with $40,000 of that being cash. Insert a bank’s $50,000 foreclosure price to the loss it would take in selling a devalued property and its costs are significant. In actuality, if lenders went around foreclosing properties using underwater mortgages they would drown in a sea of red ink. In fact, lenders generally attempt to do whatever they reasonably can to avoid foreclosing any property, let alone a submerged one.
Bank Foreclosure Avoidance
According to RealtyTrac, more than 1.52 million houses were foreclosed and up for sale as of September 2012 with many more sitting in “ghost inventories.” In real estate, ghost inventories are foreclosed houses not yet up for sale in addition to those anticipating sale dates. In other words, the supply of residences outnumbers the available demand for them in many markets. Lenders do not want more foreclosed houses, especially if they’ve dropped worth but their homeowners have been faithfully paying their mortgages.
Reducing Mortgage Balances
The mortgage giants Fannie Mae and Freddie Mac actually own about 60 percent of all U.S. mortgages. Fannie and Freddie are participants in applications to assist underwater homeowners reduce or refinance their mortgage balances, thus lowering mortgage payments. For example, the national government’s Making Home Affordable program offers loan modification and refinancing programs for Fannie and Freddie-owned mortgages. Many private lenders take part in Hope Today, which also seeks to assist their own underwater homeowners reduce mortgage accounts.