The Cost of Foreclosures

The detrimental costs of foreclosure have caused an increase in awareness within the participants of the industry. These participants include the homeowners, lenders, investors, insurers, services, and government officials. The following is a summary of the costs to all industry participants and the non-participants who are indirectly related.

The Costs to Industry Participants

The homeowners
The cost of foreclosure on a homeowner typically depends on the involvement the homeowner has with that particular property. The costs may include emotional pain as well as material, financial, and credit loss. These costs may include a complete change in lifestyle and status for the homeowner(s), which can be devastating depending on the extremity of their circumstances. Homeowners also lose their tax benefits, possible equity, and any money paid toward any other investments made for their home such as a down payment or upgrades made on their home. In addition, they have to pay moving expenses and possibly some legal fees.

The Lenders/Investors
When a borrower defaults on their mortgage, the loss is held by the participant that currently holds 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 a mortgage loan is securitized by an investor, it typically uses a servicer to handle the payments made by the borrower. The servicer handles all of the tasks necessary to keep the mortgage in good status, such as paying any necessary taxes and insurance. When a borrower defaults on their mortgage, the servicer takes the loss due to contractual agreements made between the servicer and the investor. The terms of the agreement usually involve the continued payments of principal and interest to the investor by the servicer as long as the loan remains in the security. Therefore, the servicer continues to make payments to the investor using their own funds until the property in default or foreclosure has been sold.

The additional costs incurred to a lender or servicer during mortgage defaults and foreclosure includes:

1) Staff and collection costs for time paid to contact the borrower(s) and the possible solutions to their defaulting state. The borrower’s documents are reviewed and depending on their current status, terms, and ability to repay their debts, a solution may be worked out accordingly. If a solution is not worked out, proceedings towards the foreclosure process takes place.

2) Appraisal costs to find the current value of the property in order to determine the possible available equity from that property. The cost efficiency of a BPO (Broker Price Opinion), which is the opinion of Agents who use sold and active listings to determine a comparable market value on the property, is often the first choice in determining a property’s value. Costs may vary from $0 – $400, depending on the method used.

3) Maintenance costs to keep the property in good, livable condition. City and/or county codes also require certain items are met, such as lawn maintenance and safety codes. The property also needs to be properly secured and winterized. In addition, any association or condo fees must also be paid until the property is sold. Maintenance costs may vary from $50 up to $25,000 or more depending on the condition of the property.

4) Principal, Interest, Taxes, Insurance costs. The lender or servicer must continue to make the payments for these items regardless of the borrower defaults.

5) Legal costs and court fees vary to process and auction the foreclosure.

6) Marketing costs are incurred to sell the property.

Insurers
There are two types of insurance homeowners may be required to have. 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 the homeowners from such risks as fire and natural disasters. Private mortgage insurance (PMI) is usually required by lenders for loans that are purchased with less than a 20% down payment. PMI is insurance that is payable to the lender. There is usually a higher credit risk involved when lesser down payment is made. Therefore, the PMI ensures that in case a lender cannot recover its losses after a foreclosure sale, the PMI would be able to cover the rest.

Government
The government have set up programs, such as those provided by the Federal Housing Administration, to assist struggling homeowners. FHA provides insurance that gives lenders peace of mind in that if defaults insured by FHA take place, their policy will cover any loss incurred. In addition, FHA and other government agencies also provide a variety of programs to help assist families who suffer and are suffering from the high foreclosure market. One program, for example, will be effective October 1, 2008 and will help provide assistance for homeowners who have mortgages that are not insured by FHA.

The cities/counties are also providing additional reinforcements in areas that have increased crime rates due to the growing number of foreclosed homes available. When a home is vacant due to a foreclosure, squatters tend to take advantage of the opportunity to stay in the home and often times mistreat the property. When this happens, law enforcements get involved and maintenance fees increase. Therefore, not only are taxes unpaid by delinquent borrowers, but increased law enforcements are necessary, increasing government costs.

Foreclosures contribute highly to the declining tax base. The tax base slopes downward as the value of homes decrease and unpaid taxes increase, thereby, increasing losses from government tax.

The Costs to Non-participants

The non-participants are people who have nothing to do with the mortgage and real estate industry. They are people who do not work in the field, do not have a mortgage, or do not own a home. Yes, even those who have paid off their mortgages are participants as well, but are considered involuntary participants. They own a home with a supporting value that will count towards the determination of the overall housing market value.

The costs of foreclosure can affect the society as a whole, including non-participants and involuntary participants. As mentioned, crime rates may increase in certain neighborhoods along with a lack of attention paid 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 may cause a foreclosure state. In any case, there are parties other than the borrower(s) who are willing to look for other options other than foreclosing on the borrower due to greater costs for them. There are plenty of available programs to help families and homeowners who are going through financial problems and feel the pressures of foreclosure. As mentioned, foreclosure can affect everyone. Therefore, giving up would only contribute to the growing economic distress that is currently taking place as a result of the nationwide foreclosure crisis.