The informations Us Bank Foreclosure
If my understanding of banking is correct (and it probably isn't), then it
would seem that foreclosures are bonanzas for banks. If a mortgage holder
can't pay, then the bank takes ownership of the house, yes? If so, then the
bank has attained the full value of the loan in the form of a hard asset.
However, if the mortgage holder *is* able to pay, then the bank simply earns
the interest. Therefore, foreclosures would be preferable for banks. Is this
correct?
It depends. I know someone who had partly paid off his house when the
local economy went bust. He lost his job, his savings dwindled, and the
time came when he wouldn't be able to make the last payments. He had no
hope of a loan given the general situation. He was iranian, and an
iranian man came to him and offered him $5000 for his equity in the
house. He felt he had no choice but to agree. He was mad about it
years later. If he'd let the bank foreclose he'd have nothing.
The banks won't get the chance to foreclose on the most desirable
properties, those will get transferred at some price. In general
they'll get to foreclose on the properties in which they already have
the most equity. So they'll have to loan them out again. And when it's
balloon mortgages etc, they won't have gotten much yet.
Then they have houses, which aren't nearly as useful to them as money in
the bank. Often they sell them at auction for whatever they can get.
Another opportunity for loss.
Bankers might feel that on average they're better off to mortgage to
people who will be able to pay off, and get a sure thing. When the
buyer can't pay it's a gamble whether the bank will make money, and also
it's a gamble whether he's kept up the property's value.
All in all, even when banks might profit greatly by foreclosure it isn't
the sort of thing that banks are usually good at and they aren't likely
to think that way. At the end of a property boom the banks might pick
up lots of houses that in theory used to be worth a whole lot of money
and that may be worth a whole lot in the future. But banks prefer to
shuffle money. They don't have the skills to rent out a lot of houses
waiting for the values to rise, and lack cash in the meantime.
Similarly, I once looked at a map that showed the property in one area
owned by US Steel, and it looked to me like US Steel could do very well
if they gave up the steel business and went into real estate. But if I
met the President of US Steel I doubt I'd suggest it to him. He might
take offense.