The real estate market crash that reached its height in 2008 and 2009 increased the number of forced sales and investor purchases throughout the market as owners found their borrowing situations too severe for them to deal with. The common solution to such problems is a restructuring or foreclosure. In a foreclosure, investors do have the opportunity to purchase the house, but if there is negative equity the investors have no obligation to offer loans to make the difference. However, this does not rule out the possibility of such an arrangement.
Negative Equity Effects
Negative equity occurs when the value of a house on the market is lower than the loan principal due on the house. This means that even if the house was sold as a foreclosure, the money received would not cover full loan debt -- even foreclosures are bound by market forces. As a result, an amount of money is leftover. The borrower may have to pay this leftover debt, which can be very difficult for someone already facing a foreclosure. A new loan may be able to help the situation, and there is a variety of sources that the borrower can turn to.
Investor Pools
With some arrangements and government programs, such as the principal reduction program, loans are restructured in order to make payment easier for borrowers to deal with. In this case, investor pools can help to subsidize a loan by partially investing in loans and mortgage-backed securities. These securities, very risky since the housing market crash, can be bought for low prices by investors hoping to make a return. The pooled money of the investors is then used to create a new loan for the borrower. The investor pool only holds, through the lender, the debt obligation and potentially the deed, not the house itself.
Unsecured Loans
The house is actually be sold, then the borrower can turn to an unsecured loan to find the money to pay back the leftover debt. Unsecured loans have no collateral, since there is no equity left to use as collateral anyway, and often come with higher interest rates and are outside the channels of normal lending, Many borrowers obtain unsecured loans from friends and family, but they can also get them from private investors--potentially, even the investors buying the property in a foreclosure.
Additional Options
In some cases, such as a short sale or certain foreclosures, the lender will agree to forgive the debt incurred by negative equity. If the homeowner bought a house during or right before the crash, government programs may allow this forgiveness to occur without any obligation. However, according to normal tax laws the forgiven debt will count as income and will incur a tax of its own. However, the borrower does not need a loan to pay off the leftover principal.
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