How Banks Rationalize the Sale of Non-Performing Mortgages ans Bulk REO Properties
Posted on June 26, 2009
Filed Under Loans | Leave a Comment
The impact felt by non-performing assets are detrimental to the economy and mortgage lenders alike. A bank’s ability to borrow is negatively effected by around 900% when a mortgage defaults. If the property in question is defaulted on, leaving $100,000 owed, the mortgage lender is hindered from borrowing up to $900,000 until the property is unloaded. 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.)
Banks have few options that buffer the burden placed on their books by non-performing assets. Foreclosure is almost always the last action banks take. This process includes expensive steps for the lenders that start with high legal fees. While the property is still REO (Real Estate Owned) it incurs the expense of considerable property management. REO properties increase the chance for liability every minute they sit unoccupied, amplifying the risk that the asset will further nose dive. 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. Even if a bank believes that foreclosure is the only feasable answer it has to contend with employing enough people to manage and sell REO’s, especially if there are bulk REO’s on hand. The last time anyone saw a lending crisis of this magnitude was almost 15 years ago, and not since then have the valuable number of REO experts been lost at such perplexing numbers. 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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