When a borrower no longer makes payments on a mortgage, the lender eventually moves toward a foreclosure. This results in the lender taking the house and selling it to try to recoup some of the costs of the loan. Most lenders want to avoid going through foreclosure because of the relatively high cost of the process.
Costs to Lender
When a lender forecloses, it must spend a large amount of money on the process of taking a house back and selling it. According to a 2008 survey by the Joint Economic Committee of Congress, lender pay an average of about $50,000 when a foreclosure takes place. This figure can vary substantially from one case to the next and largely depends on the value of the house in relation to the mortgage balance.
The process of completing a foreclosure also can take time. In many cases, lenders take several months to a year to foreclose on a property. During this period, the borrower is no longer making loan payments on the mortgage. This means that the lender is missing out on principal and interest that typically come with a standard mortgage payment. This amounts to thousands of dollars in lost revenue.
Taking Possession and Selling
The lender also must invest money in taking possession of the property. This can involve paying lawyers to handle the legal aspect of the process and paying for administrative fees. Once the property has been taken by the lender, it then must be sold. Selling the house can comprise up to 40 percent of the value of the costs of foreclosure. The lender might have to invest money in fixing up the property to get it ready to sell.
Since the costs of foreclosure are great, most lenders prefer to work with a borrower to find a suitable solution to avoid foreclosure. According to the information from the Joint Economic Committee of Congress, the average cost of avoiding a foreclosure costs the lender about $3,300. Therefore, the lender might be willing to offer a loan modification or a special forbearance, which allows the borrower to stay in the home and continue making payments toward the mortgage.