Case 1
What Lenders Do

Property purchased for $472,000 in late 2005.  Bank makes a first loan for $377,600 (80% Loan-to-Value) and a second for $70,800 - total loans are $448,400.  Late '06, it goes on the market at $399,900.  No showings so we get an appraisal done.  The appraisal comes in at $240,000 and we price it to $239,900.  Three offers come in from separate sources between $160,000 and $170,000.  All offers submitted, banks file foreclosure and after continued calls for some sort of answer, they eventually foreclose on the property ignoring the offers.    Several months later, the bank lists the home for $109,900 and the home sells to one of the original offers (from months back at $160,000) and is purchased for $109,000.

How can selling the home for $109,000 be better for the bank than $160,000?  the $160,000 offer was cash with a two week close yet the bank refused it.  Here is the math.

Sales Price of $160,000 vs. the foreclosure price of $109,000.

The original first loan was for $377,000.  Assuming a 25% payout of Credit Default Swap money this would be $94,400.  The bank sells for $109,900 and also a payment of $94,400 which totals $203,400.  It's already better than the $160,000.  Here is the "beautiful" thing for the bank, they can either charge off the loss and take a tax deduction (an unknown amount) OR they can choose to hang on to the deficiency judgment (to be enforced later) of $339,400 (original loan amount less the sale at foreclosure).  Rest assured, if the later of the two options is chosen, that $339,400 is accumulating interest.  What really stinks is if this loan was placed into Mortgage Backed Securities, the invertors (the real "person" that put up the money for the loan) only get the $109,000 less fees....always fees.

So for making a loan to a borrower with someone else's money, the bank (in addition to the fees to make the loan in the first place) has pocketed $94,400 in a CDS payout.  The also have a deficiency judgment against a borrower who thinks the foreclosure ended it.  Yes, they are aware of this potential.  We hope this borrower gets a 1099 which would end it.

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For illustrative purposes only.  Amounts are changed on a consistent percentage basis.  Do your own research and consult experts who can advise you in legal and tax matters.