When do banks foreclose?

Sitting here on this grey day I am thinking about worst case scenarios...

I know I should know the answer to this question but:

Lets say you have an IP purchased this year for $500K. For simplicity, lets say this is your only property.

You took out an 80% loan for $400K with one of the big 4 banks.

They doomsdayers were in fact correct, the bottoms falls out of the market and the IP is now down 30% in value. New value is $350K.

So, you have negative equity.

Are the banks concerned with this? As long as you keep making the mortgage payments are they happy? I assume that foreclosure would only occur if you default on the mortgage payments.

Is this correct?
Many thanks,
Graham
 
Sitting here on this grey day I am thinking about worst case scenarios...
It would perhaps better to put your mind to something that actually creates something....I suppose a bit of reflection on a worst case scenario is OK too :p

So, you have negative equity. Are the banks concerned with this?
Concerned - yes. Worried enough to do anything about it - probably not, unless you have exposure to the one lender of over $1M - then you might come up on their radar for a "review". That is why it is good to spread your loans around a number of different lenders. If one does get a "set" on you, then at least the others won't.


As long as you keep making the mortgage payments are they happy?
Yes, they just want their interest. They really don't even want the principal back....waht are they going to do with it? They have to find another customer to loan it too again...too much work.


I assume that foreclosure would only occur if you default on the mortgage payments. Is this correct?
Yes, and you can't make some 'arrangement' to get back on track.

If this were to happen, lots of other people are in the exact same position. What do the banks want with all those negative equity houses (after repossession??).
 
My understanding is that provided there are no other reason for them to go and value your property, and you are up to date in payments, it should generally not be a problem.

Having said that there is nevertheless a small possiblity that they may do a "margin call" and request that your loan be brought back to 80% LVR.


One of your key risk mitigation (if you perceive this as a risk) is to buy in areas that are historically stable through the economic situations forecast by the doomsday sayers.

Cheers,

The Y-man
 
It's rare they foreclose resi unless you miss payments.
What often happens is owners can't afford payments or stop paying as they see no point paying for a house that's now worth much less.

One of your key risk mitigation (if you perceive this as a risk) is to buy in areas that are historically stable through the economic situations forecast by the doomsday sayers.
You say this as if there are some obvious areas that have never decreased in value.
So where are these "stable" areas? Even for the last 20 years.
 
Thanks Propertunity and Y-Man,

Using a 2nd lender when the total loans > $1M sounds like a good idea. I am currently in the process of getting approval (through a broker) for about $1.4 with CBA.. (Have existing loans totaling $1M, buying a 3rd $500K property soon) Perhaps I need to rethink having all 3 loans with them...

I was thinking about 80% LVR or even less, and will have some shares to sell should the bank make that "margin call". (As long as the share market hasn't gone tiits up too!!

Sorry, it sounds like I'm being negative but I just want to make sure the shirt is safe on my (and more importantly my girlfriends) back!!http://www.somersoft.com/forums/images/icons/icon7.gif

Y-Man, where do you source that historical info regarding those safer suburbs? Could you possibly supply a website or do you have a residex account?

Thanks again,
Graham
 
Foreclosure is an absolute last resort.

Banks make money by charging interest, so it is in their interests to keep the loan going so long as the payments are being made.
Marg
 
Y-Man, where do you source that historical info regarding those safer suburbs? Could you possibly supply a website or do you have a residex account?

You'll need to ask others here for NSW.

In Vicotoria, postcode data is sold through the Government.

Cheers,

The Y-man
 
You say this as if there are some obvious areas that have never decreased in value.
So where are these "stable" areas? Even for the last 20 years.

No idea :D

I guess it comes down to the participant's interpretation of my use of the word "stable".
Perhaps lower volatility would have been better? Again, couldn't name them for you.
It could be stable at zero growth too...

Cheers,

The Y-man
 
Thanks Propertunity ....where do you source that historical info regarding those safer suburbs?

We use paid-for-subscription software in-house for this kind of info. You can pull up the last 20 years of CG for houses/units of any suburb you care to find out about.

Here's an example - say Ashfield in Sydney's Inner West - can't really complain about small falls in 2004/5 (2 years out of 20). ;)

Cheers,
Alan
 

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I'll bring out the same ole story from a few yrs ago of postcode 2560 when API announced "20% growth" (in median prices) and all the "monkey see monkey doos" ran with the story.
The real story was that almost all resi resales still lost and continued to lose money.
Meaningless medians are useless without local market knowledge.

As for "small falls" on a 95% LVR a 10% capital loss is an equity loss of 200% not counting interest paid.
And if it were to be sold the loss would be >300%.
 
Meaningless medians are useless without local market knowledge.

Absolutely correct. You have to know the market intimately and watch resales of the same property and account for the fact that renos may/may not have been done on it; plus watch new stock coming into the suburb that can skew the median upwards when in fact there may be no growth or negative growth.
 
I'll bring out the same ole story from a few yrs ago of postcode 2560 when API announced "20% growth" (in median prices) and all the "monkey see monkey doos" ran with the story.
The real story was that almost all resi resales still lost and continued to lose money.
Meaningless medians are useless without local market knowledge.

As for "small falls" on a 95% LVR a 10% capital loss is an equity loss of 200% not counting interest paid.
And if it were to be sold the loss would be >300%.

gearing works in the way up................and on the way down.

ta
rolf
 
medians comedians.

Consider this current Australian Property Monitors ranking for Brisbane.

APM%20Brisbane.gif



Dayboro is a rural village about 40km out of Brisbane, with primarily 50+ year old farm houses and weatherboard townies. The reason the schmedian went up is because there's been a few farms cut up into1-5 acre lots. Some of those are hitting the market for the first time since a McMansion was added.

Stacey Crt, Diane Drv, and Toby Crt alone are responsible for much of that schmedian movement.
 
tis only data.....................

how ine interprets it does make the difference

While all media can count, most seem to not be bothered to properly fullyreference others' work.

ta
rolf
 
The situation you describe is called a short sale in the US.... where the loan is greater than the value of the property. Lenders in the US do approve them however they do drag them out. Its actually a fascinating property transaction as you can end up having multiple offers on the property with purchasers knowing its a SS.

I'd imagine that if the property market fell out as you describe then the economy would be taking a tank as well.

Overall most lenders are happy still if you're paying. However what I've seen happen is while the US cash rate might be at @.25 pts, the actual interest rate on the loan is around 6.6%. So you're making up the losses for the bank from those not paying. But the longer the bank drags it out, the better a chance for recovery, better sale, more profit, more bailout from the taxpayer.

So usually you find these areas of the banks which approve them are resourced appropriately as well.

Interestingly, with CBA they have a similar 'financial distress' area... staff in this area has increased significantly in the last year, and they're demanding that brokers undergo training to assist them with the arrears levels for broker introduced clients.
 
I'll bring out the same ole story from a few yrs ago of postcode 2560 when API announced "20% growth" (in median prices) and all the "monkey see monkey doos" ran with the story.
The real story was that almost all resi resales still lost and continued to lose money.

Yep. There's nothing dumber than buying a recommended hotspot. It's usually too late - you're buying at/near the top of the price cycle for that suburb. You're much better off buying anywhere but the hotspot.
 
Sitting here on this grey day I am thinking about worst case scenarios...

I know I should know the answer to this question but:

Lets say you have an IP purchased this year for $500K. For simplicity, lets say this is your only property.

You took out an 80% loan for $400K with one of the big 4 banks.

They doomsdayers were in fact correct, the bottoms falls out of the market and the IP is now down 30% in value. New value is $350K.

So, you have negative equity.

Are the banks concerned with this? As long as you keep making the mortgage payments are they happy? I assume that foreclosure would only occur if you default on the mortgage payments.

Is this correct?
Many thanks,
Graham

Can I add to the above scenario, but say you were in the process of building a set of units, you had progress payments remaining and that you had not drawn down on the loan completely yet. Could the bank refuse to release the additional promised funds? I know the scenario is unlikely, but if you met your payments and obligations is this still a possibility? And if so is there anything that can be done to protect against this?

I like the idea of keeping my loans under $1M as suggested by Properunity, but in my case this may not be possible.

Properunity's post
 
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