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Foreclosure Despite Positive Equity

CNBC published an interesting article last week. Here are the key points, verbatim.  See if you can find the one that grabbed my attention:

• Hundreds of thousands of homeowners could soon lose or sell their homes as Covid-related mortgage bailout programs expire.

• There are not a lot of options for borrowers who lost too much income or their businesses during the pandemic, although they could take advantage of high equity in their homes and sell.

• That has not been the case so far. A data firm found that nearly a third of borrowers who go start the foreclosure process with at least 40% equity in their homes go to foreclosure anyway.

• “They may have equity, but then it’s a matter of where they going? Where are they going to go? Where are they going to purchase?” said a housing counselor.

Did you find it? Nearly a third of borrowers in foreclosure had at least 40% equity in their homes! That is absolutely staggering. We are talking about serious money that is being left on the table. However, without getting too deep into the psychology of this issue, I have seen that many find financial stress debilitating. This may help explain some of the issue.

Association Managers and Board Members should take heed, especially if you are not in a super-lien state. If you are fortunate enough to be in a state where assessments are prioritized above the mortgage, then you would likely be made whole in the event of a mortgage foreclosure. Other states where assessments are junior to the mortgage have a serious risk to consider.

Mortgage companies generally bid in the amount of their debt when foreclosing, so your unpaid assessments could easily be wiped out despite the equity in the home. This is easy pickings for bank, which get to wipe out junior lienholders and keep the upside when they resell.

I recognize that this has been a unique time, and most communities have historically low delinquencies. This is good news, but Boards and Managers should not be lulled into a false sense of security. Make sure your collection policies are being followed systematically and timely each month. If you act on your delinquencies in a timely manner, you can leverage the positive equity in homes and be well-ahead of a potential bank foreclosure.

 

Effective collections are an important element of financial health. As you review the effectiveness of your collections, consider getting standardized bids on an annual basis. Get a free collections RFP here!

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