The Value of Foreclosed Property:

There are many factors that impact the value of foreclosed property. The simple fact that the property is being foreclosed on indicates that it may be sold at a substantial discount relative to similar properties. Loans that foreclose early in their life will have the largest discounts.



The discount on a foreclosed property is not as great if the state allows deficiency judgments by lenders against borrowers. In contrast, the discount is larger if the property is being sold in a state that requires foreclosures to proceed through the judicial system. Lastly, appraisals seem to be more accurate for low down payment loans, leading to smaller discounts at foreclosure.



Foreclosed properties may be vacant for a substantial time period before they can be sold as the legal process of foreclosure runs its course. During this period, the lender’s costs of holding onto a foreclosed property increases because a property that should have been generating mortgage revenue, generates none.



In general, foreclosed properties sell at a substantial discount and this discount is larger when foreclosure occurs early in the loan’s life. The magnitude of the discount varies by the type of house, borrower and seller attributes, loan types, time and locations. Because local governments, not the federal government, define foreclosure laws, variations in how long and how costly the foreclosure process is also has a substantial impact on the size of the discount.



Any borrower who provides a small down payment can end up in a negative equity position even if prices only drop slightly thus increasing the likelihood of default and the magnitude of the losses on a default.



Since defaults and losses are sensitive to down payments, especially as they become small or even approach zero, lenders are likely to be sensitive to the accuracy of the appraisal in low down payment loans.



For example, appraisers provide a variety of different types of appraisals ranging from full appraisals, which include a detailed inspection of the property, housing stock, neighborhood, and available comparables to driveby appraisals and only electronic appraisals.



If more accurate appraisal techniques are used on low equity loans then the value of foreclosed property should be higher for loans with smaller down payments.



In addition, the behavior of the property owner prior to foreclosure (during ownership) may also have an affect on the value of the property.



Not all property owners are the same.



Some will more aggressively maintain the property and others will allow it to depreciate over time through a lack of maintenance.



This will lead to different rates of house price appreciation and property value.



The requirement of a judicial foreclosure process may lower the resale price of the property because it is vacant or rented for a longer period of time, which should increase the opportunity cost of holding the property under the lender’s ownership.



However, this effect is probably smaller than the effects of the right of redemption, because the new owner of the property at least has a clean title. In addition, deficiency judgment provides more power to the lender and therefore may lead to a quicker resolution of the foreclosure process, providing less time for the property to deteriorate.



Again, this effect should be much less important than the right of redemption in terms of house prices and the recovery from sale.



Previous research has focused on the relationship between how much of the outstanding balance on a loan is recovered and state foreclosure loans.



State level foreclosure laws can also have impacts on the appreciation of foreclosed property.



For instance, if a loan is foreclosed in a state that allows the borrower the right to redeem the property after paying the foreclosure expenses for up to a year after the foreclosure date the discount increases.



But the impact of foreclosure laws is different for each type of law.



For instance, if a state requires that the foreclosure proceed through the judicial system the discount also increases, but the discount is smaller in states that allow the lender to recoup any losses from other assets beyond just housing.



In summary, there are many factors that impact the value of foreclosed property.



The simple fact that the borrower has defaulted indicates that it generally will be sold at a substantial discount relative to similar properties.



This discount is mitigated somewhat if the state allows deficiency judgments by lenders against borrowers. In contrast, the discount is increased if the property is being sold in a state that allows statuary right of redemption.



Lastly, foreclosed properties tend to follow the movement of house prices in

the area but in a muted fashion.



For instance, if house prices in general increase by 100 percent then the sale price of foreclosed property will increase by 89 percent plus any other discounts discussed above.



Therefore, the discount becomes larger the more prices have increased.