A reader wanted to know whether his 30-year Fixed Rate Mortgage could be foreclosed simply due to a drop in the market value of the property. As with many questions of this type, there are two specific pieces of advice I can give: Read your mortgage or deed of trust and see if there’s a provision allowing the bank to foreclose due to a drop in the market and, if in doubt, consult an attorney. But more generally, let me relieve a little stress by stating that I’ve never heard of such a provision. I think the reader was probably worried because we talk about loans requiring a certain “loan-to-value” percentage. The only purpose of that terminology, to my knowledge, is in actually securing the loan. Once you have the loan, loan-to-value doesn’t come into play unless you want to refinance, take out a second mortgage, etc.
That said, market factors could come into play with any mortgage foreclosure scenario and may be one thing the bank considers. But with falling values, I’d generally expect this to work in the homeowners favor. The thing to remember is that the bank or mortgage company is only concerned with protecting its investment. Foreclosing in a temporary downturn would mean taking a loss and all downturns are temporary in the context of a 30-year fixed rate mortgage. Even if the bank had the right to foreclose in such a situation, without some other factor being involved, it would be a very bad business decision to foreclose on someone whose payments were coming in on time and with no indication of any other problem.
There’s the rub. If the bank thinks it is going to have to foreclose anyway in the near future and it sees a possibility that the market could get even worse, it may foreclose sooner rather than waiting for losses to get worse. But in that scenario, the drop in value is only a factor in deciding when to foreclose – it’s not the actual justification for the foreclosure. The actual justification is the late payments, etc.
Now it is also important to consider why there was a drop in property value. If it is simply a matter of market forces, all of the above applies. If it’s because the property is not being taken care of, that’s a whole different ballgame. Check your mortgage or note and deed of trust, but most of them specify that the borrower will take proper care of the property. Now I can tell you from experience in dealing with actual foreclosures that banks don’t often foreclose for this reason alone either, but it is a possibility. At the least a homeowner should make sure that the yard and exterior of the home are kept in good order, as when mortgage companies sell packages of loans some properties are picked at random for drive-by inspections. A single late payment may also be enough to trigger a similar drive-by inspection and serious exterior problems may lead the bank to get aggressive about inspecting the interior and protecting the property against further damage. If you leave a property vacant and it is falling into disrepair, the bank may also have the right to secure the property and take other actions to preserve it and they may be able to bill you for the expense if they don’t foreclose.
If for some reason you are in a foreclosure scenario and market value has played a role, start with the bank’s normal workout procedure as the last thing they will want to do is foreclose at a loss. If for some reason that doesn’t solve it, the best bet would be, in consultation with an attorney, to adopt every possible delaying tactic to make foreclosure less attractive while catching up the payments and working with the bank on any other issues such as repairs.
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