Foreclosure

What is Foreclosure?

When a homeowner stops paying on a loan used to purchase a home, the home is deemed to be in foreclosure. What this ultimately means is that the ownership of the home switches from the homeowner to the bank or lender that provided the loan.

During the initial stages of foreclosure, the bank or lender actively seeks to resolve the debt and return ownership of the home to the buyer. However, after significant time has passed, the lender often simply issues an eviction notice to the buyer. They determine that recouping the loan will best be accomplished by putting the home back on the market and selling it to a new buyer.

Homes in foreclosure are owned by the lender that provided the individual or family with money to purchase the home. If the debt is never paid off, the lender then owns the home outright. The goal, typically, is to then sell foreclosures in bundles. If the lender is willing to sell a foreclosed home on an individual basis, it will be listed with a realtor.

Why Foreclosures Happen

A foreclosure occurs when the homeowner is behind in making payments on the mortgage loan used to purchase the home. Foreclosure is something no homeowner wants to experience and, in most cases, the lack of payments on a home loan is usually due to an unexpected dip in finances or a change in the owner’s circumstances. The reasons why a home might fall into foreclosure are endless, including:

• Loss of employment, either by being fired, laid off, quitting, or inability to work for medical reasons
• Unexpected medical bills
• Separation or divorce
• Unanticipated costs associated with the maintenance of the home itself

Example of Foreclosure Events: The 2007 Housing Market Crash

One major culprit in foreclosures needs to be mentioned, and that is an economic depression. One of the best examples is the housing market crash of 2007/2008. Home sales and prices soared, largely fueled by subprime mortgages. Eventually, the bubble burst when home prices started to drop, causing a full collapse of the housing market and, inevitably, a large-scale economic crisis.

Many people were left underwater on their home mortgages – owing more on mortgage loans than their homes were worth – after the crash and opted to walk away from their homes because it was more cost-efficient to do so. In such cases, families invited foreclosure because it was cheaper to walk away than continue to pay on a home that was worth far less than it would cost them in the end.

The information surrounding foreclosures, how and why they occur, and what happens afterward is extensive. To keep it simple, it’s important to understand that foreclosure is a result of unpaid loans/failure to pay off a mortgage. An individual who fails to make payments will see their loan go into default first. After 90 days, the lender can give an official notice of foreclosure and, if the debt remains unpaid, take full ownership of the property.

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Cost of Debt
• Fannie Mae
• Mortgage-backed Security (MBS)
• Real Estate
• See all commercial lending resources