What The Bank Will Bid At Auction And How It Affects The Borrower

What will the bank bid at the foreclosure auction? It is an important question as it affects the residual debt of the borrower and strategy associated with resolving these issues. Sometimes it’s the full amount of the debt, other times it is nothing and other times it is a small amount above the highest bid.

First, let’s separate the foreclosure on real estate and that on business equipment. In real estate, we most frequently see the banks bidding in their mortgage amount even if there are no bidders. There’s a simple reason – when they then resell the property, they experience the least amount of taxable gain as taking the property in at the mortgage amount increases their basis to that amount.

With non-real estate assets they will either willingly allow someone to bid up to an acceptable number or, if there are no bidders at all, they will bid very low just to win the day. Then, depending what the assets are, they will either junk them or attempt to sell them, whichever seems most plausible.

Here is another important issue – if you are in foreclosure and the bank bids the full amount of the mortgage, you as the guarantor or borrower no longer will have any shortfall liability. The bank has, in essence, purchased the asset for the amount owed freeing you from any further debt.

If it is non-real estate assets and the bank bids in low or the buyer purchases for less than the debt, the borrower or guarantor will be held liable for the shortfall.