Why does a mortgage default hurt a bank?

Question

I'm not clear on how a defaulted mortgage seriously hurts a bank since the bank can foreclose on the home. I see that the bank expects income from the loan, and when someone defaults the bank loses that income. However, the bank then gets to posses & sell the home, which seems like it would help or even fix the bank's balance sheet by providing cash for the bank to use. So: where in this process does the bank lose a significant amount of money?

I understand that the bank loses money, I just don't get how it's lost.

Answer 1

Time is money and a foreclosure can be drawn out for a year or more. Then there are the attorneys fees and possible damages to the property and more time to market the property once they get through the foreclosure and then marketing expense when they have to pay Realtors and perhaps closing costs for the new buyer. Adding insult to injury is the fact that they will be selling against every other home in the market and they will have to discount it pretty heavily if they want to sell it quickly and then they had better hope no one steals the copper or the pipes don't burst when the home is not properly winterized and house sits empty all through the Winter.

The fact that the house is probably worth less than what is owed is just a starting point.

I have probably missed some of the ways banks lose money when a home owner defaults.  

Answer 2

The issue is that the bank more than likely doesn't own your mortgage.  They probably sold it to someone else as in investment who expects to get paid.  No, these investors are NOT evil people, they're the ones that provide the money so more people can get loans and buy a house.  

When you don't pay your mortgage, the people who own your loan don't get paid.

The bank will foreclose as they're required to but it costs them a lot of money to prepare the house for sale, not mention legal and broker fees.  It doesn't end up being a wash to them.

Answer 3

Banks borrow the $$ that they lend to their borrowers. They may pay, say 4 per cent interest to borrow $100k to lend to their borrowers at 6 per cent. Their income is the 2 per cent"spread" plus a few bucks up front for making the loan. Once the loan becomes non-performing, they're still paying the 4 per cent so they start losing $$ immediately. Then they have to pay for lawyers, title search, foreclosure fees, possibly maintenance to protect the property, the taxes, insurance & all the other expenses of litigation and upkeep until the property is sold. They will only get those costs back when and if the property is sold for more than the loan balance plus all those costs and expenses -- which is increasingly unlikely -- the longer the arrearage & foreclosure last. And all the while they are STILL paying that 4per cent on the total amount which they'll never get back.

BTW the morons who run this board have screwed it up so that if you use the "per cent" sign it won't accept your input!

Answer 4

IN many cases, the bank is not able to recoup the balance of the mortgage loan as the house sells (at auction) for below the balance.  The bank then basically eats the difference, creating a loss.