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How Much Will the Bank Bid if There is a Foreclosure?

Posted by 15789465 on

Someone told me yesterday they planned to let their bank foreclose on their property for 80% of its appraised value, and then negotiate a workout on the balance due on the promissory note.  Let's call this person "Jim." According to Jim's lawyer, that would stop the interest accruing on at least 80% of the debt, and represented a positive move.  The lawyer said the bank was required, by law, to bid at least 80% of the appraisal.  Jim was worn out with worry about trying to sell his property, trying to negotiate with his bank, and trying to keep a positive attitude for his family. He just wanted the pressure to stop! I was shocked!  There were so many pieces of misinformation and bad advice in this, it was hard to know where to begin.  Jim's troubles were not going to stop after a foreclosure. First, the bank is not required by law to bid ANY particular amount--at least, not in Alabama.  The rule, simply, is that the bid price must not be so low that it will shock the conscience.  I'm here to tell you, people's consciences are not easily shocked these days. For you lawyers out there, read the case of Hayden v. Smith.  You can read the whole opinion on my website by clicking on the case name. Here are the relevant points:
  • “The general rule is that where the price realized at the (foreclosure) sale is so inadequate as to shock the conscience, it may itself raise a presumption of fraud, trickery, unfairness, or culpable mismanagement, and therefore be sufficient ground for setting the sale aside.”
  • “And, although mere inadequacy of price is not sufficient to that end, it is always a circumstance to be considered in connection with other grounds of objection to the sale, and will be sufficient to justify setting the sale aside, when coupled with any other circumstances showing unfairness, misconduct, fraud or even stupid management, resulting in the sacrifice of the property.”
Second, Jim was mixing up the loan balance and the appraisal. The bid price is based on the appraisal, not on the loan balance.  The only exception is when the loan balance is LESS than the appraisal. That rarely happens any more. Third, the appraisal will probably come in at a very low amount.  That's because of little things like a depressed real estate market, long time periods on the market before sale, post-foreclosure rights of redemption that will depress the value, and the possibility of tenants depressing value under the Protecting Tenants at Foreclosure Act. Fourth, the bid price will start with the appraisal, and then will deduct amounts for foreclosure expenses, marketing expenses, real estate commissions, holding costs (taxes, insurance, maintenance, security, etc.) and the time value of money until a sale.  The remaining number, after all those deductions, will be dramatically lower than Jim thinks it will be. Jim's lawyer's advice?  I'm reminded of that old Southern expression, "He's just peeing on your leg."  In other words, you have a temporary warm feeling but it gets cold and ugly and smelly pretty quickly. If you are facing foreclosure, and a loan modification will not help your situation, work with a real estate professional to short sale your property. The process is not quick, and there will be stresses involved. But, at the end of the day, you will have sold your property for MORE than the bank's likely foreclosure bid and there is a very high probability the bank will forgive any remaining balance due on the note, if you make that part of your negotiations with your lender.

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4 comments

  • You will need to speak to an attorney for legal advice about your particular situation.

    Generally speaking, the tenant in such a circumstance files an answer to the eviction lawsuit filed by the lender or other owner after the foreclosure. The tenant answers and says it has a bona fide lease and, under the Protecting Tenants at Foreclosure Act, cannot be evicted. Only a handful of published decisions discuss the Act. The issue of filing in Federal court or State court has come up when a tenant “removes” a state court eviction case to federal court. Parties are allowed to file a document and automatically transfer a case to federal court, but once there, the Judge or the other party can question federal court jurisdiction. If the court determines there is no federal court jurisdiction, the parties are sent back to state court. That is called “remanding.” In all cases to discuss this issue, the federal courts have remanded back to state court and said there is no federal jurisdiction.

    Please remember there is uncertainty about whether the Act applies to all residential mortgages, or just those that were “federally related mortgages” The Act also says it applies to any “immediate successor in interest.” No one knows what THAT means. Is it just the first purchaser at the auction, or does it include subsequent buyers? We don’t know.

    Here is the FDIC definition of a “federally related mortgage”
    Federally related mortgage loan or mortgage loan means as follows:

    (1) Any loan (other than temporary financing, such as a construction loan):

    (i) That is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property upon which there is either:

    (A) Located or, following settlement, will be constructed using proceeds of the loan, a structure or structures designed principally for occupancy of from one to four families (including individual units of condominiums and cooperatives and including any related interests, such as a share in the cooperative or right to occupancy of the unit); or

    (B) Located or, following settlement, will be placed using proceeds of the loan, a manufactured home; and

    (ii) For which one of the following paragraphs applies. The loan:

    (A) Is made in whole or in part by any lender that is either regulated by or whose deposits or accounts are insured by any agency of the Federal Government;

    (B) Is made in whole or in part, or is insured, guaranteed, supplemented, or assisted in any way:

    (1) By the Secretary or any other officer or agency of the Federal Government; or

    (2) Under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other officer or agency of the Federal Government;

    © Is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation (or its successors);

    (D) Is made in whole or in part by a “creditor”, as defined in section 103(f) of the Consumer Credit Protection Act (15 U.S.C. 1602(f)), that makes or invests in residential real estate loans aggregating more than $1,000,000 per year. For purposes of this definition, the term “creditor” does not include any agency or instrumentality of any State, and the term “residential real estate loan” means any loan secured by residential real property, including single-family and multifamily residential property;

    (E) Is originated either by a dealer or, if the obligation is to be assigned to any maker of mortgage loans specified in paragraphs (1)(ii)(A) through (D) of this definition, by a mortgage broker; or

    (F) Is the subject of a home equity conversion mortgage, also frequently called a “reverse mortgage,” issued by any maker of mortgage loans specified in paragraphs (1)(ii)(A) through (D) of this definition.

    (2) Any installment sales contract, land contract, or contract for deed on otherwise qualifying residential property is a federally related mortgage loan if the contract is funded in whole or in part by proceeds of a loan made by any maker of mortgage loans specified in paragraphs (1)(ii)(A) through (D) of this definition.

    deniselevans on
  • ? So in the case of a foreclosure on a large home where the owner has 2 bona-fide tenants with leases and are “at arms length”, if the lender does not follow the Protecting Tenants at Foreclosure Act, what recourse do the 2 tenants have??? Is this handled in Federal court? or State court? and who pays for it?

    Vicky on
  • Still on the books. My husband says banks made money in spite of themselves. Until recently, that is. This is what I’ve learned about the Protecting Tenants at Foreclosure Act and courts that have interpreted it:
    To my knowledge, so far only fourteen (14) reported decisions discuss the Protecting Tenants at Foreclosure Act. The law is not very well known yet. Of the 14 decisions, eleven (11) of them involve the technical question of whether a party in a state court lawsuit can remove that case to federal court just because the Protecting Tenants at Foreclosure Act might affect the parties’ rights. The courts to consider this said that just because a federal law might provide a defense, doesn’t mean you get to transfer the case to federal court. So, they’ve booted those cases back to state court for further proceedings.
    Only three cases discussed the merits of the statute. Here’s what they say:
    August 5, 2010: Harper v. J.P. Morgan Chase. Georgia court held that wife of former owner was not a bona fide tenant under the statute. Although not necessary to the opinion, the court also remarked that the rent was 30% less than market rents, and seemed to indicate a 30% discount was “substantially less than market rent” and so disqualified the tenant from the Protecting Tenants at Foreclosure Act.
    May 5, 2010: Bank of America v. Owens, New York case. New owner after a foreclosure sent questionnaire to tenants to determine if they were bona fide tenants under the Act. Tenants failed to complete the questionnaires and return them. New owner took the position this meant they were automatically NOT bona fide tenants, and started eviction proceedings before the 90 days had expired. New York court held you can’t just make up your own “trip wires” to decide if people are bona fide tenants or not. If they had no written lease, or a month-to-month lease, they were entitled to 90 days notice to vacate unless the new owner proved they were not bona fide tenants.
    November 9, 2009: Collado v. Boklari. New York court held the Protecting Tenants at Foreclosure Act was not unconstitutional if you interpreted the language:
    “(a) In general—In the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential real property…”
    as containing a typo, and which SHOULD read (after the word “or” is removed)
    “(a) In general—In the case of any foreclosure on a federally related mortgage loan on any dwelling or residential real property…”
    The point was, with the word “or” left in, that made the statute too broad, because it would then also apply to foreclosures on seller-financed property! The federal government can’t possibly regulate in that area. Please, please, please, don’t yell at me and tell me they are trying to do exactly that when they say you must have a mortgage loan originator’s license if you sell property and hold the financing. The answer to that is: The federal government somehow strong-armed the STATES into passing those laws, in co-ordination with the federal laws. So, it’s our own STATE that says we have to get licensed to finance our own property sales. That is allowed, and is constitutional. The Collado case turned on another technicality that came up because the tenant failed to answer the eviction complaint on time and had a default judgment entered against him. He was trying to get the case reinstated. Based on technicalities having nothing to do with the Protecting Tenants at Foreclosure Act, the court decided they would not let the tenant re-open the case, and he would have to vacate the premises immediately.

    deniselevans on
  • I have not heard anything about Protecting Tenants at Foreclosure Act in a very long time and, frankly, wasn’t sure it was still on the books. I’m working a deal on a four plex and I have learned the two remaining tenants have been offered a “cash for keys” to encourage them to move out. I wonder why banks just don’t seem to understand… it is so much harder to get a fourplex financed when it is empty. I believe it was Robyn Thompson I heard say, “There are no intelligent life forms to be found in banks. LOL

    Steve Payne on

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