Lender takes possession question ???

[Brenda Sacchetto]

I have a fairly dumb question. When a house has been foreclosed and it say's,

"The lender has taken ownership of this property through a foreclosure auction for the amount of .." and the original loan on the house was more than what was acquired at the foreclosure auction, does that mean an independent investor purchased the home at the auction? Because if the loan went back to the bank it would be for the original purchase price, correct? and it would specify that it went back to the original lender....??

I know-it's dumb..but I really am confused on this

[Dion DePaoli]

No question is 'dumb' here. No worries, if you don't know, just ask. The beauty of BP.

When someone buys a property with financing, they have to put up a down payment. So generally speaking, loans are not 100% of the purchase price, they are less. Down payment requirements can range from 2.5% to 35%, depending on the Mortgagee (lender) and the loan product/program. Conventional loans require less down payment than most hard money loans or private loans. As loans are made and time occurs, borrowers make payments which may lower the principal balance of the loan. So the using the term "Purchase Price" is not really the accurate terminology. A borrower may purchase a property for $100 by putting a down payment of $10 and borrowing $90. Then over time the borrower may have paid the principal balance of the loan down from $90 to say $70. The Mortgagee is only due the principal balance of the loan, plus any fees and advances made plus accrued interest. So if $5 was owed in interest and fees, the Mortgagee is ONLY entitled to collect the $75 total. Any bid above the $75 will have the excess funds go to junior lien holders in succession then the the actual borrower who was foreclosed.

The notice you read clearly states the Lender (Mortgagee) has received a deed on the home. So it is not a new third party investor who owns it, it is indeed the lender. When an asset goes to auction, the Mortgagee is enforcing remedy from the security interest (Deed of Trust / Mortgage) that liens the property. The Mortgage is owed what ever the remaining Unpaid Principal Balance of the loan is plus any fees and advances plus interest arrears. It is not uncommon for the sum of those parts to exceed the value of the home or exceed what the property may get at auction. The Mortgagee can set a minimal bid for the auction, where if the bid amounts at auction do not meet or exceed that number, there will be no sale of the property at auction to a new investor. That amount can be set under the value, at the value or over the value of the property up for auction. Some local regulations will govern the amount in percent of total due that a Mortgagee is required to set for auction. That is called the minimal bid. Other local areas do not have a minimal bid. The asset then reverts back to the Mortgagee as REO. The loan is extinguished per the foreclosure process and a deed is given to the Mortgagee. If a bidder at auction gives a bid which is above the minimal bid for auction, they they will be awarded the home, provided they pay at auction.

So using the $75 example above. The Mortgagee can set mimimal bid at say $55. So any bid above the $55 means a new investor will take ownership. The Mortgagee will be entitled to up to $75, since that is what they are totally owed. If the buyer bids $65, then the Mortgagee will get paid $65 after the auction finalises. If the bid at auction is $45, then no sale will take place, since the minmal bid of $55 was not met or exceeded. A bid of $85 would pay in full the Mortgagee and the $10 overage would pay any junior lien holder (like a second mortgage or a mechanics lien) and if none are present, the money goes to the borrower.

In most cases, the original lender is not the investor who owns the loan right now. From time to time, this is the case but most of the time it is a new "investor" who owns the loan. Loans trade (bought and sold) in a secondary market for investment purposes. The common public still tries to refer in layman's terms to the investor as the Lender, but the investor is not likely the entity who funded the loan. So, your question asking about going back to the "Original Lender" is not a true statement. The loan, if not sold at auction, will revert back to the Mortgagee (Investor) which may or may not (most likely) be the "Original Lender".

When the Mortgagee takes possession of the deed, they are now the formal owner and they can rent the property or sell the property or do what ever they deem fit. They are the legal owner.