I've reveiwed California laws, but some time ago, and other jurisdictions vary (sometimes considerably), but my recollection is that after repossession, the lender must pay the excess value to the borrower in a fairly short timeframe. The auction sale to establish value is not required by law, but is allowed by law, and provides an efficient and nearly unchallengeable method to establish the current value.

When banks end up owning properties is usually when there are no bidders; the starting bid is usually either the amount of delinquent debt or the total of the debt and any other costs that can be charged to the borrower. The bank has effectively shown that the house is worth less than what was owed at that point in time, and then it's their job to get rid of it (in some cases a bit of staging will go a long way, in others, they'll have to sell it for much less or hold it for a long time or both)