The Painful Cost of Foreclosure

Posted by: Chris Palmeri on May 08

Everyone knows the price of foreclosure on home owners. They lose a place to live, their credit rating, whatever down payment they made, their hopes, their dreams.

New numbers from ratings agency Standard & Poors spells out the cost to mortgage investors. For the 2006 vintage of subprime loans it’s about 19% of the loan amounts outstanding.

How do they get those numbers? S&P figures an astonishing 42% of the loans made that year to borrowers with bad credit will go into foreclosure. Then it calculates that about 45% of the amount owed on those loans will be lost. Here’s the breakdown on that: 19% is lost due to the decline in the market value of the home. That’s about a $40,000 loss on a typical loan of $210,000.

Then there is the 26% lost to the costs of foreclosure. It can take a year or more to go through the whole process from when a borrower stops paying to when the house is finally sold and the lender recoups whatever money it can. There’s 13.6% of the loan amount lost in interest payments. About 3% of the home value the lender has to pay in property taxes. There’s 1% in legal fees, 6% to real estate agents, about 3% of the loan spent on home maintenance.

Nobody wins.