What is NO BID?
Definition
A NO BID is a decision made by the Department of Veterans Affairs (VA) when a loan it has guaranteed goes into default. Instead of acquiring the property through foreclosure, the VA opts to pay the guaranteed amount to the lender. This strategy is usually employed when the VA determines that the property’s decline in value makes paying the guarantee a less costly alternative.
Detailed Explanation
In cases where a VA-guaranteed loan goes into default, the VA has two primary options:
- Acquire the property through foreclosure.
- Pay the guaranteed amount to the lender without acquiring the property (NO BID).
When the VA opts for a NO BID decision, it essentially pays off its guarantee amount to the lender. This decision is usually made when the VA determines that the cost of acquiring and managing the property through foreclosure would be greater than the guaranteed amount payable.
Example
Consider a scenario where a borrower defaults on a VA-guaranteed loan. The lender initiates foreclosure proceedings and is prepared to sell the property to recover the loan’s outstanding balance. If the VA assesses that the property’s market value has significantly declined, it may decide that foreclosing on the property would result in greater losses. In such cases, the VA will make a NO BID decision and pay the guaranteed amount to the lender. The lender, in turn, retains the property and must cover its losses through the property’s sale or other means.
Frequently Asked Questions
What criteria determine a NO BID decision?
The VA considers various factors, including the property’s market value, conditions, and whether foreclosing and managing the property would result in higher costs than simply paying the guarantee.
How does a NO BID decision affect the lender?
While the VA pays the guaranteed amount, the lender often ends up holding a property of declined value. This may result in additional losses if the property’s sale doesn’t cover the loan’s total amount.
Can lenders challenge a NO BID decision?
Typically, no. The VA’s decision-making process is final, and lenders must accept the NO BID and pursue other avenues to recoup remaining losses.
Does NO BID protect the borrower in any way?
NO BID is primarily a decision between the VA and the lender. Borrowers face foreclosure proceedings irrespective of a NO BID or acquisition by the VA.
VA Loan:
A mortgage loan program established by the United States Department of Veterans Affairs to help veterans and their families obtain home financing.
Foreclosure:
The legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
Guarantee:
A promise or assurance that certain conditions will be fulfilled. In real estate, a loan guarantee by an entity (like the VA) obligates payment under specified circumstances.
Default:
Failure to meet the legal obligations (or conditions) of a loan, typically manifested in the failure to make regular loan payments.
Online Resources
References
- “VA Loan Guaranty Service.” Department of Veterans Affairs.
- “Foreclosure Handbook.” Consumer Financial Protection Bureau (CFPB).
Suggested Books for Further Studies
- “The VA Loan Book: Everything Veteran and Military Service Members Need to Know About VA Loans” by Chris Birk.
- “The Foreclosure Survival Guide” by Amy Loftsgordon.
- “Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher.
NO BID Fundamentals Quiz
### What does a NO BID decision involve?
- [x] The VA paying the guaranteed amount to the lender instead of acquiring the property.
- [ ] The VA acquiring the property and selling it directly.
- [ ] The lender refusing to auction the property.
- [ ] The borrower avoiding foreclosure completely.
> **Explanation:** A NO BID decision involves the VA paying the guaranteed amount to the lender while the lender retains the property, often due to its decreased market value.
### In what situation might the VA make a NO BID decision?
- [ ] When the property is assessed to be in excellent condition.
- [ ] When the borrower agrees to new loan terms.
- [x] When the property's value has declined significantly.
- [ ] When foreclosure proceedings are not an option.
> **Explanation:** The VA typically makes a NO BID decision when the property's market value has declined significantly, making the acquisition more costly than paying the guarantee.
### What is the result for lenders after a NO BID decision?
- [x] Lenders often obtain the property and must seek ways to cover excess losses.
- [ ] The loan is forgiven by the VA.
- [ ] The property is sold immediately at market value.
- [ ] The borrower retains ownership of the property.
> **Explanation:** After a NO BID decision, lenders usually obtain the property and need to cover potential losses through its sale or other means.
### How does a NO BID decision primarily affect the borrower?
- [ ] The borrower's debt is reduced or forgiven.
- [ ] The borrower retains their home without foreclosure.
- [ ] The borrower gains a new loan agreement.
- [x] The borrower still faces foreclosure proceedings.
> **Explanation:** Despite a NO BID decision, the borrower still faces foreclosure proceedings as the VA addresses matters directly with the lender.
### Who makes the NO BID decision?
- [ ] The lender.
- [ ] The borrower.
- [x] The Department of Veterans Affairs.
- [ ] The real estate agent.
> **Explanation:** The Department of Veterans Affairs makes the NO BID decision based on an assessment of the property’s value and potential costs.
### What does the guaranteed amount protect?
- [ ] The borrower from foreclosure.
- [x] The lender’s risk exposure.
- [ ] The property’s market value.
- [ ] The real estate agent's commission.
> **Explanation:** The guaranteed amount helps protect the lender from some of the financial risk involved in the loan default by covering part of the outstanding debt.
### Can a NO BID decision be reversed?
- [ ] Yes, through an appeal process by the borrower.
- [ ] Yes, if the property's value improves.
- [ ] Yes, if the lender disputes the decision.
- [x] No, it is typically a final decision made by the VA.
> **Explanation:** A NO BID decision made by the VA is generally final and not subject to reversal or appeal by borrowers or lenders.
### How often does the VA resort to a NO BID decision?
- [ ] Regularly, as a standard practice.
- [x] Occasionally, based on specific conditions.
- [ ] Rarely, only for high-value properties.
- [ ] Always, whatever the property's condition.
> **Explanation:** The VA resorts to a NO BID decision occasionally based on specific conditions such as a significant decline in property value.
### What option does a lender typically pursue after a NO BID decision?
- [ ] Entirely passive approach.
- [ ] Returning the property to the borrower.
- [ ] Seeking a higher loan guarantee.
- [x] Selling the property to recover losses.
> **Explanation:** After a NO BID decision, the lender typically seeks to sell the property to recover as much of the remaining loan balance as possible.
### Which VA benefit is directly associated with the NO BID decision?
- [x] VA Loan Guaranty Service.
- [ ] VA Health Benefits.
- [ ] Education and Training.
- [ ] Disability Compensation.
> **Explanation:** The VA Loan Guaranty Service is directly associated with the NO BID decision, as it involves loans guaranteed by the VA for veterans and service members.
