Thursday, December 29, 2016

the typical/historical percentage loan principal loss in home mortgage foreclosure

4:41 AM Posted by Unknown 1 comment
This topic is fraught with problems. For example, what exactly constitutes a loss of principal? Is the typical/historical loss period just for the recent housing crisis or since the inception of consumer mortgage loans?
 
Another major problem is that a Foreclosures is merely the seizure and sale of a mortgage loan's collateral; it is not a satisfaction, forebearance or forgiveness of the debt (which includes principal presumably lost). The mortgage note remains after foreclosure unless the loan is discharged by agreement, bankruptcy or other action (or if the foreclosed property was sufficient to pay off the debt).
 
Yet another problem is the recent 1997-2006 United States Housing Bubble, in which most homes were severely overvalued when the mortgage loan was made. Thus, a loss of principal is by some measure a loss of "value" that never existed in the first place.
 
Say a stock is valued by its fundamentals at $50, and I buy it at an inflated value of $100. When it comes back to $50 and I sell it, I've lost $50. But suppose I financed that purchase by getting a bank to lend me $80 and I put in $20? When the stock is sold at $50, how much of my $20 will I lose and how much of the bank's $80 will be lost?
 
Prior to the recent housing crisis, foreclosure losses of principal throughout the industry were extremely low, so a "historical" analysis of foreclosures would not be particularly meaningful in that context.

Check out this chart for historicals. Severity is basically % loss.


Keep in mind that this is principal loss on a foreclosed mortgage loan, based on the bid at sale. If the property becomes REO at the sale, then the loan may be subject to further losses. We calculated the loss from the loan balance, not from market value of the home at the time of the sale. This is only the loss on the foreclosed loan, and not from the total loan balance if there was more than one loan. For example if the first mortgage foreclosed, say for a 20% loss, there might have also been a second, subordinate mortgage that suffered a 100% loss and that "second" would not be included here.

1 comment:

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