Texas: Excess proceeds in a foreclosure vs a bank REO sale?

Question

I know that in Texas if a property with only one lien against it is sold at a foreclosure auction for more than the amount of the loan being foreclosed upon, then the excess is paid back to the owner who was foreclosed on.

My questions relate to what happens if the property is not sold to a 3rd party at the foreclosure auction, but reverts back to the bank lender (i.e. becomes bank-owned REO property) and the bank later sells the property for more than it was owed at the time of the foreclosure.

Questions: Does the bank get to keep ALL of the proceeds from the sale of the REO property? Or does the bank only get to keep up to the outstanding amount of the loan that was foreclosed upon and the excess still goes back to the original borrower?

I'm just curious regarding the law, as it seems like IF the bank can legally keep the excess on REO sales, then there might be occasions when a bank has an incentive to discourage 3rd party foreclosure bidding on certain properties in the hopes that the properties revert back to the bank and can later be sold for much more.

Thank you.

Jerel Ehlert · Answer

Bank forecloses on borrower and complies with all the requirements for non-judicial process. At auction, no bids but the bank's credit bid, making it the winner/new owner. Bank, later, sells the property for more than it was owed at auction. Question is: does the bank get to keep the difference?

Yes.

Issue: what's to keep banks from discouraging 3rd party bids?

Well, lots of things. First, that would be fraud. State and federal licensing agencies would crawl so far up the rectum of everyone who participates in such a scheme that they would have a terminal case of constipation. Next, there is no amount of profit a bank could make on a series of transactions to compare with the revenue generated from operations (i.e., just not enough juice to tempt them).

The only way this really happens is if you get smaller, unregulated HML/PML foreclosures. It is still fraud, but you have reputational pressure.

Chad U. · Answer

The bank can do whatever they please with the property after. No they are not obligated to pay any excess proceeds if they sell as an REO and it was more than originally owed by the borrower. The foreclosure wipes any rights and equity of redemption of the borrower.

Lydia R. · Answer

@Jim McGovern At the foreclosure auction the bank does not own the property, they own the debt. So any money over the total debt amount owed to the bank (including all the fees and the cost of the foreclosure attorney) goes to the borrower who was foreclosed on. However if no one bids on the property at the auction the bank becomes the owner of the property which then gives them the ability to renovate and resell the property for a profit and the foreclosed borrower is not entitled to any of it.

Does the bank have incentive to try and get properties back, yes. But remember, banks arent investors. They have so many moving pieces that often the right hand doesnt know what the left hand is doing. Something like this would require a coordinated effort between multiple parties, including whoever is conducting the public auction. I cant say it never happens but its highly unlikely.

Bruce Lynn · Answer

Legally I don't know, but typically what I have seen is they bid the amount owed. Only time I have seen different than this is for 2nd lien holders. They might bid more than 1st would so that they don't loose their second...Every now and then you will see some weird stuff like that, but not always clear the motivation. I've also seen HOAs bid, so they don't get wipe out if 1st forecloses.

Somehow I don't think most banks want to be in the position of holding and trading real estate. I don't think there are that many banks anyway actually holding the note...but there are some. I think most lenders end up selling off the loans. I would also think there are probably a lot of rules or restrictions on bank type entities to not be trading in their main accounts. Their business is to make loans and good loans. There are subsidiaries sometimes that might trade stocks or commodities or other investments, but I don't think many are set up to trade residential real estate for a profit based on foreclosures. I think just the opposite...they don't want to foreclose, they do everything they can not to foreclose. There are loss mitigation departments sometimes set up to figure out ways not to foreclose.

I think you can also look at short sales....why would bank agree to short sale vs foreclosing.

I think you can look to hotel properties right now as an example. Something like 80% during Covid were in default in Texas from what I understand. Makes sense even if my numbers are wrong. My guess is very few were foreclosed on. Most lenders probably don't want the asset back, they want the bring the loan current. They could have foreclosed and probably waited 2-3 years and resold at a giant profit as things open up....but then they get regulators breathing down their necks, piss off all the borrowers, and then have to get in the business of running hotels...that when they would have foreclosed were money losers. On the residential side you would think some of the riskest loans are hard money. But ask the hard money lenders if they want the property back so they can capitalize on trying to resale for a profit. I doubt most want to do it.

There are other lenders out there like Blackstone, Insurance Companies, family offices, hedge funds, other private lenders.....probably mostly commercial lenders and because they are into all things beside just straight lending, I'll bet they might foreclose in the right circumstances, hold the asset for a while and try to resale when market recovers.

Texas: Excess proceeds in a foreclosure vs a bank REO sale?

Texas: Excess proceeds in a foreclosure vs a bank REO sale?

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