Lets say you are $150k into a $200k mortgage, then default. What prevents the bank from selling it at $50k, which is just enough to recover their principle?
Practically? There's a whole bevy of reasons why this isn't done in practice but the bottom line is it's not in the bank's best interest:
- The bank is likely mortgaging other properties in the area. They don't want the value of the housing going down.
- The bank doesn't want to slow down real estate sales with people waiting on "deals" on foreclosures. They'd just as soon be issuing new mortgages which results in more money coming in the door.
- The bank doesn't want to get a bad reputation. Look at the issues Wells Fargo is having. It's easy to lose your reputation, it's hard to get it back.
In general what happens is the property goes to auction. Because the buyer has to either pay cash or secure their own financing and be able to take quick possession of the property the house will typically sell for 17%-20% below market value.
In this example since you're $150K into a $200K mortgage let's say the house's market value is $300K. It would sell at auction for $240K. The bank will have $35K in expenses and fees and so will cut a check for $210K-$50K = $155K to the homeowner.
In general it's in your best interest to sell the house yourself before the bank forecloses. Let's look at this example again. You sell the house for $300K. Say you have $24K in closing costs, plus there's the $50K you owe the bank. You'll net $226K. That's $71K more in your pocket than letting the bank foreclose.