If you check around on many of the real estate blogs, you’ll find, despite the urban legends some are perpetuating about banks looking to foreclose on borrowers, that this is the last thing any lender wants for completely self-serving reasons. The more REO and/or non-performing loans a bank has on its books, the closer they will get to that magic number (determined by a banking regulator dictated formula) whereby the State or Feds are called in to intercede upon that bank. They can issue an injunction against any more lending activities till that bank gets its house in order, or can simply shut them down.
Banks only foreclose when they have to. If a bank has loans out on properties that are now overencumbered because of market conditions, how does it help the bank to foreclose on those borrowers who are continuing to make timely payments? It doesn’t.
The instances where this has ocurred has been on commercial lines of credit, construction loans, forward commitments, etc., and it’s totally normal on those kinds of loans products because they are essentially conditional commitments to lend, and if the conditions aren’t, or are unlikely to be met, terms get changed, or worse yet, the bank pulls out. Some people, not implying that about anyone on this site, think of banks as government agencies or charitable organizations, instead of businesses seeking to preserve their solvency, keep employees employed and generate a return for stockholders who took risks investing in those institutions. They have to watch out for their interests too : )
