Understanding the Reasoning Behind Banks Decisions to Sell Non-Performing Mortgages and Bulk REO’s
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. Plus, as defaulted assets lose value banks are forced to write down the lower value and bear the loss.
(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. Foreclosure is almost always the last action banks take. Lenders must face excessive legal fees over the course of this process. The outcome is pervasisve property management while it continues as REO (Real Estate Owned) property. There is the concern that damage to REO properties, while they sit vacant, increases and further hurts the chances of any real profits. Last but not least, there is the marketing and transaction expenses that go hand in hand with selling real estate of any kind.
Another problem that lenders face is staffing. It matters little that a lender feels the only option is to foreclose if proper staffing can’t be put in place to manage and unload these REO properties. The last time a major lending crisis of this proportion took place was about 15 years ago when REO experts among the lending staffs were let go, much to the detriment of banks and buyers alike. All the more, one is hard pressed to find large lenders in the U.S. with the in-house capabilities of juggling bulk REO’s, property management, security staffing on top of unloading them without huge losses.
Nowadays the progression of most bond managers, lenders and servicing agencies seems to be this: Shake off troubled loans at ridiculously low prices just as fast as possible.
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