A foreclosure auction is the sale of a home that a lender has taken back from a borrower who stopped repaying the loan, so that the lender can recover what it is owed. Today most of these auctions are held online. In India, banks and housing finance companies hold them under the SARFAESI Act, 2002. The Act lets a lender take possession of a property given as security for a loan, and sell it, without first going to court. Indian newspapers and bank websites call these sales bank auctions, or e-auctions of property.
Here is how it works in India. A home loan becomes a non-performing asset (NPA) when its EMIs are unpaid for more than 90 days. The lender sends the borrower a demand notice, which gives 60 days to repay the full amount due. If the borrower does not repay, the lender takes possession of the flat. An approved valuer values it, and the lender fixes a reserve price, the lowest bid it will accept. The lender then publishes a sale notice in newspapers and online, at least 30 days before the auction. The notice gives the reserve price, the date, and the earnest money deposit (EMD) that each bidder must pay to take part. The EMD is usually 10% of the reserve price.
Take, for example, a flat in Nashik on which ₹32 lakh is outstanding, including interest and costs. The valuer values the flat at ₹42 lakh, and the bank sets the reserve price at ₹38 lakh. Four bidders each pay an EMD of ₹3.8 lakh and log in to the e-auction website. Each new bid must be at least ₹50,000 higher than the last one. After 45 minutes, the highest bid is ₹40.5 lakh. The winner pays 25% of the price at once, and the rest within 15 days. The bank keeps ₹32 lakh and closes the loan. It must pay the remaining ₹8.5 lakh to the borrower. The three losing bidders get their EMD back.
The auction software does several jobs. It registers bidders and checks their KYC documents. It collects the EMD and runs the timed bidding. It extends the closing time by a few minutes whenever a bid arrives near the end, so that no one can win by bidding in the last second. It records every bid for the lender's auditors. Many repossessed homes are also advertised on real estate portals and on websites that list bank auctions.
Before an auction, the loan is handled by the lender's debt collection team. In America, the same steps are run by mortgage servicing companies, and some of them run large online auctions of foreclosed homes. Cars are sold in a similar way: insurers sell written-off cars at a salvage car auction, where the highest bid also sets the price.