I am frequently presented with a situation where my client, a small business owner, has voluntarily awarded the bank (and by extension, the SBA) a lien on his home. And the key question my client asks is: “Will they take my house?” Unfortunately, there is no simple answer, because the outcome of this situation depends on several key factors. Specifically:

• Equity in the home
• Borrower’s financial status (i.e. personal net worth)

Let’s start by discussing the financial status of the borrower:

It is key to understand that the bank does NOT want to evict you from your home. In fact, the SBA guidelines for dealing with a delinquent loan with a lien on the borrower’s home specifically recommend that the bank try to work with the borrower to avoid foreclosure on their home. What this means in practical terms is that if you can “settle” with the bank for a sum of money that is roughly equal to what they would receive if they pursued foreclosure, then the bank as usual will accept the money in lieu of foreclosure and release the bond at the borrower’s home.

However, achieving this is complicated by the fact that any money held by the borrower is often subject to the borrower’s personal guarantee (PG) with the SBA bank. So if you have “cash” available to make a settlement offer, it is also subject to the PG, so it cannot be used to pay for the house. The only exception to this is if the money is in a protected asset, such as an IRA or 401K.

Now let’s talk about Equity in the House:

First, it is critical to understand that the definition of “fairness” is different, depending on your perspective. There is what I call Fair Market Equity, which is based on Fair Market Value (FMV). This is the amount of money that would be left after paying the mortgages and fees (broker, legal, sales tax, etc.) if you voluntarily sold your home in the normal way.

However, for the purposes of assessing equity in a situation where there is a hostile SBA bank attempting to take the house by force, equity is assessed differently. In order for a bank to take your home, it must foreclose and then auction it off. In the foreclosure sale, the SBA bank must also be prepared to pay off the primary mortgages. Then you can see immediately that yew The home is unlikely to get more in the foreclosure sale than the primary mortgage values, the SBA bank is unlikely to pursue foreclosure (more on this later). Therefore, when evaluating the “equity” in a home attacked by an SBA bank, the home is no longer worth fair market value, but is worth what the bank would receive in a foreclosure auction, or liquidated value ( LV).

This value is highly contested by SBA banks, but a good rule of thumb is a maximum of 80% of fair market value (IRS and FDIC guidelines for liquidated value) to as low as 50% of fair market value. (not uncommon in some depressed states like Florida). NV, CA and MI).

So when I am asked the question, “Will the bank take my house?” I first need to look at what is the liquidated value that the bank would receive from the SBA in a foreclosure auction. Depending on the result of that analysis (significant capital, nominal capital, no capital), the answer becomes clearer.

Let’s look at each of these scenarios:

Significant capital: In cases where there is significant capital (I use $ 40K + as a general rule of thumb), then the borrower should expect the bank to aggressively pursue its lien, and unless the borrower can shell out an amount of cash equal to the amount that the bank would receive in the event of foreclosure, then the borrower runs the risk of losing his home.

Nominal or No Equity Capital – For situations where the bank would receive nominal or no cash in a foreclosure sale, the bank has no real motivation to move forward with a foreclosure. However, this does not automatically translate into the banks’ willingness to release the link. Often times, the bank will decide to “sit” on the lien until the homeowner has paid off the primary mortgages or the home has risen in value enough that the SBA bank’s lien has significant equity value. In these situations, it is imperative that the borrower makes an offer of significant value (~ $ 25K) in order for the bank to release the lien (as well as the personal guarantee). Otherwise, the strategy is to simply stop paying ALL mortgages and let the house foreclose.

So, in summary, the answer to the question of whether the borrower will lose his home is that it depends on whether there is any home equity in the home equity and whether the borrower has adequate financial resources to settle with the SBA bank. The worst case scenario is when there is capital, but the borrower does not have financial resources. In those cases, the bank will seek foreclosure and even bankruptcy. May it will not prevent the borrower from losing their home (although the borrower should always consult with a bankruptcy attorney).