Banks much prefer you to recover from your financial hardship situation and be able to catch up on mortgage payments than to repossess your property.
Make no mistake about it, when it comes to banks and financial institutions providing loans to finance purchase of property, they are purely and simply interested in the secured lending of money and the interest that comes back over the term of the mortgage.
Their business plan has nothing to do with profiting from property transactions. The only interest they have in the property you are purchasing is that it has the market value to well and truly cover the amount they have lent you as security for the loan. That is why they will lend up to 80% using the property as security only; any higher percentage lent (i.e. 90%) and you need to take out mortgage insurance as additional security for the bank.
All of the Terms and Conditions of the mortgage agreement are based on you paying the regular and consistent payments over the term of the loan. They do that in volumes and that is where significant profits come from for the lending departments’ bottom line.
They are not using their own money either, it comes from customers’ savings & investment accounts and from other global financial institutions that give money for much less interest than you pay for your mortgage. You could say that banks are pretty smart and have all bases covered in that regard.
Like anything in business, there are always risks so the better you manage, reduce and mitigate risk, the better the business is equipped against potential losses.
So how do banks handle clients that default on their mortgage agreement? – The process they follow is here, however we can once again drill into the business plan to see how things often pan out……….
Like I said in the beginning, lending institutions and departments are not interested in carrying on with property transactions, they are in the business of lending money and getting interest returns in bulk. So a client defaulting on a loan is not a desirable outcome for either party. That is why there is a lengthy process involved to try and get things back on track if possible.
It actually costs banks tens of thousands of dollars (the actual amount varies depending on property/condition/location etc.) to repossess a property, get it on the market and sell it. Their primary goal when this happens is to recover what is owed to them.
Often when the property has fallen into ruin (e.g. been trashed) and it has been repossessed with the bulk of the loan still owing, the costs to repair/sell can be too high and then you get a fire sale where the property is flogged off in its’ current condition and some renovator picks up a bargain and the bank writes it off as a loss (that’s where the risk comes in and a small percentage of this scenario is built into the business plan).
Some institutions may even have insurance policies to protect them from these risks however it is still a cost of doing business that is based on risk assessment which will vary from lender to lender based on their loan approval criteria – the more lenient the criteria, the higher the risk.
On the other hand, where a property owner(s) has paid off a good chunk of the loan and then defaults and cannot recover, the bank will repossess the property and go through the process (Step 6).
Even though there is a lot of equity now in the property (equity = difference between market value and what is owed on the property), the Terms and Conditions of the loan are clear and basically state that upon default where all reasonable steps have been taken to resolve the default and get things back on track, and when all efforts are exhausted where repossession of the property is the only option remaining, the bank now has the right (as mortgagor) to evict you from the property, then dispose of the property and retain all monies recovered as a result of the sale.
This means that the defaulting party (property owner(s)) is not only evicted from the property, but will not get a red cent in return, whether there was equity in the property or not. In cases where the recovered funds have fallen well short of what was owed, it is up to the lender’s discretion whether they write the loan off as a bad debt, or whether they continue to pursue the shortfall. This usually comes down to the borrowers current income status.
So you can see how this can become an absolute dire situation for people who have just gone through loss of their job, loss of a spouse or loved one, a mental or physical disability, separation or divorce, having an investment property totally trashed by a bad tenant or any one of a number of circumstances that can be overwhelming for most.
And when I say most, it is also most that do not know where to turn. For some, it’s fear of the embarrassment and I’ll just sweep it under the carpet and put on the appearance that everything is fine. For others it’s fear of being taken for a ride by a lawyer who’s in it for the substantial fees. For some, it’s just simply who can I trust to help me.
Many in these circumstances just shut down all communication with the outside world, ignore the bills piling up in the letter box and just want to curl up in a ball and will it all to go away – not a nice place to be by any stretch of the imagination. All of these reactions are perfectly normal and are a part of our built-in defence mechanism, but do not help resolve the situation.
The reality is, when you are in this situation, no matter how it came about, you need someone trustworthy who is not emotionally invested in the mess in any way, shape or form.
Someone who can quickly produce an effective plan that simply works and gets you the best result possible and the ability to move on – in most cases completely debt free of all outstanding bills relevant to the property and in many cases, with some cash in the pocket to start over.