The benefits to the lenders are based on the high likelihood of the lender buying the property back at closing.

FIRST LENDER:

Once the foreclosure sale occurs, the Lender must pay (these are estimates):

• Foreclosure costs (legal and auction fees and expenses) of $6000.00
• Bankruptcy legal costs and delays $2000.00
• Resale Commission of 5-6% of sales price
• Property Preservation costs
• Eviction costs for each unit of a building
• Any repairs to bring the property to health code standards
• Repairs to make the property presentable for resale
• Unpaid back taxes and water/sewer
• Carrying costs including taxes, insurance, winterization, etc.
• REO legal fees and expenses
• REO Tax Stamp of $4.56 per thousand

Given the above additional expenses, it is often financially beneficial for the First Lender to accept a price that is equal to or a small amount less than total due on the loan.

SECOND LENDER (if applicable):

If the property goes to foreclosure sale and does not sell for more than the amount owed on the first mortgage (including first mortgagee’s fees and expenses of foreclosure), the Second Lender gets $0. If there is some equity in the property, the second lender may have an agent bid at the foreclosure sale of the first lender and then try to resell the property to recoup some of their losses. But, in most situations, the second lender does not attend the sale and gets $0. So, if a short sale offers 50%, it’s much better than 0%!

In both situations, the lenders can sue the borrower for any losses after the foreclosure BUT usually do not unless the borrower has other assets worth collecting.