This article discusses what happens if a foreclosure auction is postponed or delayed. We discuss the types and reasons for postponement, who triggers them, and the effects.
Postponement of a foreclosure auction may occur months, weeks, or even days leading up to the auction date; often without notice to buyers. At courthouse auctions the auctioneer will read off the list of properties that have been removed or delayed before bidding starts. This is the only notice potential buyers may have that a property won’t be auctioned that day.
Why Are Foreclosure Auctions Postponed?
In foreclosures the lender, not the homeowner, has control of the auction date. Mortgage lenders hire third parties to manage the scheduling and operations of foreclosure auctions. But the lender retains control of the auction timing, including the ability to postpone or cancel the auction.
Lenders are not legally required to foreclose. Furthermore, bidders at a public auction are not legally entitled to be notified of a planned postponement.
It is in the best interest for a lender to get the highest return from the sale of a property. To achieve this a lender may choose from several postponement options, including:
- Postponement to a future date when prices are likely to be higher (this happens in a rising real estate market)
- Arranging temporary repayment plans with the borrower and postponing the foreclosure auction (but keeping the option open)
- Discussing a potential short sale of the property to prevent going to auction (the bank takes a smaller loss on short sales typically compared to a foreclosure auction)
- Postponing the auction to respond to or address legal challenges by the borrower or a third party
Types of Auction Delays
Foreclosure auction delays may result from a number of situations:
- The homeowner comes up with enough money to get the lender to postpone or cancel the auction
- A legal challenge is mounted by the homeowner (e.g. insufficient mortgage documentation, failure to follow required foreclosure processes, appeal in a judicial foreclosure state)
- A legal challenge is mounted by a lien holder whose priority precedes the bank’s in foreclosure (e.g. tax authority foreclosure, HOA foreclosure, etc.)
- The homeowner files bankruptcy. This typically halts the foreclosure auction process, but bankruptcy claims can be denied, which would re-start the process.
- The lender postpones the auction for administrative reasons (e.g. trustee is not available)
- The reserve price or minimum bid is unlikely to be met (e.g. when the house is “underwater” and the market price has fallen substantially)
When Auction Postponement is Not Permanent
Some banks may grant temporary loan modifications or repayment plans to the homeowner, and postpone or cancel the auction. Then, after three to six months the borrower may again fall behind on their payments. The bank will not continue with the loan modification, and will again continue filing for foreclosure and taking the house to auction.
A foreclosure auction is postponed because the bank expects to make more money in the future than today. This can happen when real estate prices are rapidly rising. In this case, the current owner has a higher probability of being able to sell the property and pay off the loan. If the bank knows this won’t happen (for example the owner has abandoned the property), it can still benefit the bank to wait to auction the property until a future date when prices are higher.
Sometimes a foreclosure auction is postponed for simple documentation or administrative reasons. In these cases, delays tend to be short and the property may come back up for sale at the next auction date.
Eventually the property will be auctioned, and it pays to keep track of these situations as a buyer.
What Can Happen During the Time a Foreclosure Auction is Postponed?
During auction postponement, several things can happen:
One, the defaulting owner can pay off their mortgage balance. In this case the foreclosure process will end and the property will not go to auction. This is rare.
Second, a defaulting homeowner can continue to live in the home without making payments until the property is officially foreclosed.
Third, additional liens may be recorded against the property by tax authorities, homeowners associations, contractors, ex-spouses, etc. who heard about the foreclosure auction. These new liens may supersede the bank’s interest, or add more liabilities for a potential auction buyer to deal with.
Fourth, the bank and homeowner can enter into a loan modification or short sale situation, which can cause the foreclosure auction postponement to become a permanent cancellation.
Fifth, the property can be vandalized or become further damaged from weather and neglect. The longer the property is stuck in the foreclosure process the higher the risks of depreciation.
Sixth, the existing homeowner/borrower could file bankruptcy. This typically halts the foreclosure process and effectively makes the auction postponement permanent.
Postponing a Foreclosure Auction is Driven by Economics
Foreclosing and selling a house at auction can compromise the value of a property up to 40%. This includes taking possession of the property, paying lawyers to handle legal matters, and paying administrative fees. It costs lenders an average of $58,000 for a foreclosure to take place, according to a 2008 report by the Congressional Research Service (PDF file).
Therefore lenders will often postpone a foreclosure auction unless it is absolutely necessary. Postponing a foreclosure auction costs the lender substantially less — often just a few thousand dollars in missed interest payments — than the $58,000 average cost of taking the property through auction.
The main reason for lenders postponing foreclosures is to reduce costs and to maximize returns on the sale of a property. If a lender can work out a new repayment plan with a borrower or accept a short sale with a buyer before the auction, or postpone the auction until prices turn up, they will delay a foreclosure auction. It is in their best interest to do so.