Good lawyers will not recommend filing bankruptcy if the benefit is not clear. If you are giving up your house with only one mortgage and no other significant debt, many of us will typically advise against it. But in Missouri that could change if the banks start getting too greedy.
Unlike some states, Missouri allows a mortgage lender to collect a deficiency after foreclosure. So if the house sells in foreclosure for less than is owed, the bank could sue you for the difference. Junior mortgages and home equity lenders usually will do this. But historically the first mortgage did not. That might change for a classic reason — profit.
In the past mortgage lenders in non-judicial (outside court) Missouri foreclosures would “bid” what they were owed on a loan at the foreclosure auction. If no one else bid more, the house went back t0 the bank to satisfy the debt owed.
Increasingly, the lenders are bidding less than their full debt at the sale. In part they claim to do this to encourage other bidders to take the property so the bank doesn’t have to. It doesn’t seem to have worked very well. And often the bank just did not foreclose as long as they did not want to run the risk of being stuck with the property in a down market.
But the larger the deficiency left on the loan, the bigger the loss to the bank. Or so you would think. The Missouri Supreme Court ruled April 12, 2012, that the debtor can’t fight the calculation of the deficiency as long as the sale was properly conducted and the low bid by the bank doesn’t shock the conscience of the court such that the sale might be voided. It doesn’t matter that the sale price at foreclosure is almost always less than the property could be sold in a non-forced, properly-marketed scenario.
This practice encourages banks to low bid at the foreclosure sale. A low bid might draw in speculators. But they can also sue the debtor for the “loss” on the sale. And, if the bank is the successful bidder, the bank then has the opportunity to re-sell the property and wipe out the loss or even turn a profit — while still collecting the full “loss” from the debtor.
In a place like Missouri where the real estate market is improving but speculators still have trouble getting financing (from banks), the foreclosing banks have a chance to take your house from you, sell it off to themselves at a private auction in less than a month with no meaningful public advertising, take any equity that might be there in a fair market value for their own, and leave you to pay them bank more than they actually lost on the account.
In effect, as long as you are in default on your mortgage, the bank can choose the moment when to start foreclosure — when the market might look good for your house. They can choose how rapidly to pursue it — which can make it hard for other bidders to get their finances in order. They can choose their credit bid — and not disclose it beforehand which, if too low, could encourage speculators. And they can “market” the property to the exclusive audience of only those few people who read legal newspaper ads for fun and profit. Then, once they have sold the house to themselves or someone else, they don’t have to actually tell the debtor immediately who it was sold to or for how much. (Or even if you called off the sale at the last minute.) It’s basically an arbitrage speculators definition of an easily-manipulated market.
Most of the banks are too large and the foreclosure process is too mechanized for them to actually have a plan to steal the possible equity in someone’s home. I have too many cases where fabulous houses can be foreclosed and resold quickly but the banks will not move while — at the same time — they are aggressively foreclosing on some houses they’ll never be able to re-sell.
But the law also should not set up scenarios that encourage banks to start taking houses because they see the possibility of profit in, frankly, speculating in the homes of their former customers.
Photo Credit: Jeffrey Turner