May 2, 2016

Banks, Foreclosures, and the FDIC: New Rules, New Considerations

The FDIC has set forth guidelines for banks to follow when it comes to ceasing the foreclosure process after it has already started.

Banks, according to the new guidelines, are now obligated to consider how their handling of discontinued foreclosures can negatively impact surrounding properties.

The Federal Deposit Insurance Corporation (FDIC) has provided banks with a set of guidelines when it comes to dealing with abandoned foreclosures in an effort to reduce the effect that such proceedings can have on surrounding homes and neighborhoods.

The FDIC warns that if banks decide to stop foreclosures after the process has already begun, the borrower might already have abandoned the home and stopped taking care of the property. This, in turn, can lead to vandalism, crime, or other negative outcomes that can have an adverse impact on surrounding real estate and the local community as a whole.

FDIC Guidelines & Urgings

The guidelines, which are outlined and communicated via a Financial Institution Letter, explain supervisory expectations of risk management practices when it comes to discontinued foreclosures. The Letter details suggested practices and effects of foregoing foreclosure actions, along with expectations for financial institutions' policies and practices regarding the ceasing of foreclosures.

Banks that start the foreclosure process often choose to discontinue the process because of all the expenses involved, including the costs to foreclose, and the costs to fix up and sell a property related to its current market value.

The FDIC is urging banks to steer clear of any unnecessary foreclosures, and instead work more diligently and productively with borrowers to come up with sound arrangements. Banks are encouraged to take measures to help delinquent borrowers keep their properties and avoid foreclosure altogether.

Should such arrangements not be fruitful, banks are encouraged to set up policies and procedures when it comes to acquiring real estate through foreclosure (OREO) to alleviate the negative effect that the foreclosure process will have on the value of nearby housing.

Abandoning the foreclosure process after it has already begun can have negative effects on surrounding properties.

Review of Foreclosure Decisions

Examiners with the FDIC will review banks' decisions for starting and ceasing foreclosure activity, as well as the efforts taken by financial institutions to get in touch with borrowers.

The Letter issued by the FDIC stipulates the policies and practices that banks should engage in when it comes to the decision-making process dealing with foreclosures, including:

  • Using the most effective and relevant information to identify the current market value of the property in question that is at risk of foreclosure.

  • Incorporating requirements to establish when the bank's liens on the property should be lifted because of the risk of litigation related to the financial institution's role as mortgagee of the property in question.

  • Informing relevant government offices of the decision to abandon the foreclosure process.

  • Informing the borrower of the following:

    • The foreclosure process is being abandoned;

    • Whether or not the mortgage holder has released the lien on the property;

    • The borrower is allowed to remain in the property until a sale has occurred;

    • The borrower is still obligated to making payments on the outstanding mortgage, property taxes, and other fees;

    • The borrower is still obligated to adequately maintain the property.

Eliminating Delinquent Loans From a Bank's Loan Portfolio

No bank wants to have to deal with the complications related to defaulted loans on abandoned homes. As such, it would make a great deal of sense to make the effort to dispose of delinquent loans via sale in order to avoid such nuisances.

At Garnet Capital, we are in the business of helping financial institutions optimize their loan portfolios by selling off sub-par loans and acquiring those that are performing well and have the potential to be real money-makers.

Sign up for our newsletter today to find out more about our loan portfolio services.