The Painful Cost of Foreclosure

Posted by: Chris Palmeri on May 8, 2008

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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.

Reader Comments

Mark

May 9, 2008 9:02 AM

So, if I read this right, it makes sense for me to just walk away if my home is worth 80% or less of the value of the loan. Good to know!

Squeezebox

May 12, 2008 1:27 PM

It's not good news that banks and homeowners alike are losing out, but it is good news that somebody finally put a number to the figure. That means that we can finally re-establish a market for the D--- things! They should sell at a discount of 20% more than they did two years ago.
The banks finally know how much loss reserve to set aside, so they can get credit flowing again. We may finally seeing the dawn after the darkness. :)

property bulgaria

May 15, 2008 6:51 AM

Nice post to me :O

Lashawn

June 4, 2008 10:07 PM

very nice!

dennis

December 21, 2008 5:26 PM

Can the bank go after personal investments like IRAs, kids college account? Are there any forecloser expenses I would be obligated to pay?

jerry

February 24, 2009 6:12 PM

hi,
i am a uk resident with a home in florida and unfortunately am considering foreclosing on it.
does anyone know what costs i am likely to incurr if i do this and if the lender can ask me for more money if the eventual sale does not cover the loan amount.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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