The detrimental costs of foreclosure have caused increased awareness among industry participants. These participants include homeowners, lenders, investors, insurers, utilities, and government officials. The following is a summary of the costs for all industry participants and non-participants that are indirectly related.
The costs for industry participants
the homeowners
The cost of a homeowner’s foreclosure generally depends on the homeowner’s interest in that particular property. Costs can include emotional pain, as well as property, financial, and credit losses. These costs can include a complete change in the lifestyle and status of the owners, which can be devastating depending on the direness of their circumstances. Homeowners also lose their tax benefits, potential equity, and any money paid for any other investment made in their home, such as a down payment or improvements made to their home. In addition, they have to pay moving expenses and possibly some legal fees.
Lenders/investors
When a borrower defaults on their mortgage, the loss is borne by the participant who currently has that loan. A lender services a loan and holds it in its portfolio before the loan is sold to an investor. Therefore, a lender takes a direct loss when a borrower defaults on their mortgage. The loan then stays in the lender’s portfolio longer due to the difficulty of being able to sell it.
When an investor securitizes a mortgage loan, they typically use a servicer to handle the payments made by the borrower. The servicer is in charge of all the tasks necessary to keep the mortgage in good standing, such as paying the necessary taxes and insurance. When a borrower defaults on their mortgage, the servicer assumes the loss due to contractual agreements made between the servicer and the investor. The terms of the agreement generally entail continued payments of principal and interest to the investor by the servicer as long as the loan remains in value. Therefore, the administrator continues to pay the investor with his own funds until the property in default or foreclosed is sold.
Additional costs incurred by a lender or servicer during mortgage default and foreclosure include:
1) Personnel expenses and charge for the time paid to contact the borrower(s) and the possible solutions to their delinquency status. The borrower’s documents are reviewed and depending on their current status, terms and ability to pay their debts, a solution may be found accordingly. If no solution is reached, the foreclosure process is carried out.
2) Appraisal costs to find the current value of the property in order to determine the potential available equity of that property. The profitability of a BPO (Broker Price Opinion), which is the opinion of Agents who use sold listings and assets to determine a comparable market value of the property, is often the first choice in determining the value of a property. Costs can range from $0 to $400, depending on the method used.
3) Maintenance costs to keep the property in good habitable condition. City and/or county codes also require certain items to be followed, such as safety and lawn maintenance codes. The property must also be properly insured and winterized. In addition, any association or condo fees must also be paid until the property is sold. Maintenance costs can range from $50 to $25,000 or more depending on the condition of the property.
4) Principal, Interest, Taxes, Insurance Expenses. The lender or servicer must continue to make payments on these items regardless of the borrower’s defaults.
5) Legal costs and court fees vary to process and auction foreclosure.
6) Marketing costs are incurred to sell the property.
insurers
There are two types of insurance that homeowners may be required to carry. These are homeowners insurance (also known as hazard insurance) and/or private mortgage insurance (PMI). Homeowners insurance is always required and its purpose is to protect homeowners from hazards such as fire and natural disasters. Lenders often require Private Mortgage Insurance (PMI) for loans purchased with less than 20% down. PMI is insurance payable to the lender. Generally, there is a higher credit risk when a smaller down payment is made. So PMI ensures that in the event a lender is unable to recoup its losses after a foreclosure sale, PMI could cover the rest.
Government
The government has established programs, such as those provided by the Federal Housing Administration, to help struggling homeowners. FHA provides insurance that gives lenders peace of mind knowing that if FHA-insured defaults occur, your policy will cover any losses incurred. In addition, the FHA and other government agencies also provide a variety of programs to help families suffering and suffering from the high foreclosure market. One program, for example, will go into effect on October 1, 2008, and will help assist homeowners who have mortgages that are not FHA-insured.
Cities/counties are also providing additional reinforcements in areas that have increased crime rates due to the increasing number of available foreclosed homes. When a home is vacant due to foreclosure, squatters tend to jump at the chance to stay in the home and often mistreat the property. When this happens, law enforcement gets involved and maintenance fees go up. Thus, not only are delinquent borrowers not paying taxes, but more enforcement is also needed, increasing government costs.
Foreclosures contribute greatly to the decrease in the tax base. The tax base slopes downward as home values decline and unpaid taxes rise, increasing government tax losses.
Costs for non-participants
Non-participants are people who have nothing to do with the real estate and mortgage industry. They are people who do not work in the fields, do not have a mortgage, or do not have their own home. Yes, even those who have paid off their mortgages are also participants, but they are considered involuntary participants. They own a home with an endorsement value that will count toward determining the overall market value of the home.
The costs of foreclosure can affect society as a whole, including non-participants and involuntary participants. As mentioned, crime rates can increase in certain neighborhoods along with a lack of attention to different communities and neighborhoods, leaving certain areas open to environmental and circumstantial situations.
There is no obvious way to determine or prevent unfortunate incidents that could cause a state of foreclosure. In either case, there are parties other than the borrower(s) who are willing to pursue options other than foreclosure on the borrower due to higher costs to them. There are a host of programs available to help families and homeowners experiencing financial problems and feeling the pressure of foreclosure. As mentioned, foreclosure can affect everyone. Therefore, giving up would only add to the growing economic distress currently occurring as a result of the foreclosure crisis across the country.