SBA Loan Default: Why Do Banks Cancel Foreclosure Liquidation Auctions?

It is happening more and more every day. In some areas of the country it is the rule not the exception. This trend will get larger and larger, creating a real dilemma for everyone involved, as it is unclear what happens next and what to do about this situation. It is like the groom not showing up at the wedding or maybe better described as the executioner not showing up at the hanging.

Here is the deal. On the one hand the banks need to foreclose on defaulting loans, that's the rule. Once defaulted and noticed and the process closely adhered to, the home eventually is scheduled for liquidation by auction. At this event, it is hoped that someone will bid in adequately and the bank will sell or liquidate the property converting the asset, the house, to cash for the bank. Ownership changes hands and the previous owner is out the door, on the street, without ownership of their home. New owner steps in and the bank while taking a loss receives some consideration as a payoff. That's the plan.

Now what is happening is, the bank goes through the process, perfects their position, notices the owner and the community, advertises and at the day of foreclosure auction, they withdraw the event and stop everything. Who owns the house then? It's still the original owner, as he has been brought to the edge but not pushed over.

Why would a bank do this? Difficult to know exactly what they are thinking but there are some obvious reasons we can see.

First, the bank has determined that the likelihood of a bona fide adequately high bid is all but zero. If the auction occurs and no one bids the bank ends up owning the property they must now insure it, pay for the utilities to protect it, be responsible for maintenance and repair, pay the taxes, market it indefinitely until a buyer is eventually found. This is extremely expensive, time consuming and not the business the bank wants to be in.

Thus, they are more and more frequently bringing the foreclosure process to the brink of completion and then walking away, at the auction date, not completing the process, having determined that no one will show up to bid . The bank does not want to own the home, thus, they allow the status quo to remain, the owners in the house, ownership not having been changed, and no payments expected or made for an indefinite time period while everyone waits for something to happen.

Should the economy improve, the bank can always fulfill its mission and auction the house. Until then the family lives free in a house that for all practical purposes is owned by no one. This leaves the family to care for the house, and maintain its viability as the bank waits for the economy to mend itself, which it believes will surely occur...sometime.

What should the owner do? A hard call, some stay on living, without cost, trying to repair their own financial condition, get a new job and either rework their debt obligation with the bank or walk away looking for other living opportunities, now that they have repaired their own financial situation.

It is new ground, never experienced before, thus, there is no history to follow and learn from. The fact is, this is what is happening all across America. In Detroit, entire neighborhoods are being abandoned by the banks, and the home owners are abandoning their homes leaving blocks of unwanted, not lived in, properties that neither the bank nor the borrower want or continue to live in or maintain. Ownership and its responsibilities appear to be the hot potato that no one wants to get stuck with.

It's unusual times, unusual problems, unusual actions, on every one's part.

Be aware, pay attention and make decisions with this issue in mind, it may apply to you.