How long does a loan have to be in default before foreclosure auction occurs?

This is a question frequently asked as debtors in default want to know ‘how much time they have left and what will happen?’ The answer of course varies considerably all over the country from bank to bank and state to state, but here is what we see.

The basic standard is after 90 days the bank must pursue you and “exhaust their legal remedies” to protect their guaranty from the SBA. The SBA has withdrawn their guaranty often enough to put the scare into every SBA bank lender, thus at 90 days they tend to take off the gloves and launch their assault.

However we see a steadily increased response as banks are getting more aggressive sooner, some not waiting more than a few weeks after appropriate warning and then launching into aggressive attack as soon as they believe they have satisfied the legal requirements of default.

Alternatively we see many banks that apparently are reluctant to accept the loss and thus ignore the default at their own peril.

Of course the best excuse of all is the larger banks are so clogged with defaults they seem to wait endlessly before they respond to a default, in some instances over a year or more. We have a few that are over two years in the waiting zone with little sign of bank activity to accelerate the collection process.

This seems to be especially true in regards to liens or mortgages on homes. The banking system simply does not want to recognize the loss and certainly does not want another home it must insure, maintain and own for an indefinite time period so they also tend to bring things to a foreclosure head and then pull out of the process and wait, not certain for what, other than to avoid taking the loss and owning the property.

Keep in mind foreclosure is a very expensive process estimated to cost the banks approximately $35,000 for a home foreclosure, as well as ongoing expense for holding the property and the negative effect it has on its financial operations and specifically maintaining FDIC mandated proper liquidity ratios, which are depleted by foreclosure. Thus waiting is the game, fairly unpredictable and controlled by state statutes, however in a word it takes a long, long time to kick you out of your home.

Commercial property is likely to experience a faster response, quicker to liquidate by auction. Once again the same issues prevail, they want to hurry but frequently cannot, because of the same barriers, however in view if the banks need to liquidate collateral to receive their guaranty they tend to be far more aggressive with commercial property and attack much sooner as it is easier to liquidate.

In a nutshell, commercial property is being foreclosed on faster, homes slower. We have many strategies to either accelerate the process or slow it down significantly all depending upon what works for the borrower and what our objectives are.

It is all a work in process, and the real answer is the time involved in the workout process can be influenced dramatically in either direction, faster or slower, and in view of this ability to affect the result, we include these strategies in our overall workout plan. The point being we must be pro-active in all aspects of a debt workout, designed to support the best interests of the borrower.

It is a controllable issue.