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How Banks Rationalize the Sale of Non-Performing Mortgages ans Bulk REO Properties
By Vic Hurlstorm | June 22, 2009
The ill effects of non-performing assets are not just felt by the lenders but the entire economy is negatively impacted by them. A defaulted mortgage could greatly limit a bank’s borrowing ability by nearly 900%. Lenders can be blocked from borrowing up to $900,000 on a defaulted loan of just $100,000, that is, until the property is divested. Also, as the defaulted asset loses value the lenders must record the adjusted value, thereby taking a great financial hit.
(A quick note from the editor: For related information, check out Bulk REO Investing.)
Lenders hands are all but tied when trying to solve the blow non-performing assets place on them. Lenders will exhaust all other avenues before resorting to foreclosure. High legal expenses are the beginning of this costly process that lenders face. It also generates sizable problems included with property management while the property is an REO (Real Estate Owned). There is the concern that damage to REO properties, while they sit vacant, increases and further hurts the chances of any real profits. It should also be noted that with the selling of real estate also comes transaction fees and marketing expenses.
An even bigger problem banks face is staffing. If foreclosure appears to be the only option left, banks often don’t have the manpower to oversee and divest REO’s, especially bulk REO’s. For 15 years we have been expempt from this kind of lending crisis which has included depleting lending staffs with REO knowledge at detrimental levels. Not to mention the fact that the US has few experts capable of handling bulk REO’s while juggling the task of managing them, protecting them and divesting them with a low margin of loss.
Without a doubt, today’s servicing agencies and mortgage companies seem to singlemindedly be in agreement to unload troubled loans as quickly as possible even if it means selling at a loss.
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