The Reasoning Lenders Use for Unloading Non-Performing Mortgage Notes as Well as Bulk REO Properties
When a property is not yielding income it has dire consequences for the lenders and the general economy as well. A bank’s ability to borrow is negatively effected by around 900% when a mortgage defaults. For instance, if a loan of $100,000 is in default, the lender is forbidden from borrowing up to $900,000 until the property is dumped. As a property loses its value, the only option banks have is to record the adjusted value and take the financial hit.
(A quick note from the editor: For related information, check out Bulk REO Investing.)
Mortgage lenders are left with few options to ease the weight placed on the books by non-performing assets. Only as a last resort will banks foreclose. These actions are pricey for lenders and start with exhorbitant legal expenses. It also generates sizable problems included with property management while the property is an REO (Real Estate Owned). There is a higher chance that vacant REO properties will suffer damage further plummeting in value. 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. 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. It has been almost 15 years since the last major crisis in lending took place and personnel have been robbed of REO experts at staggering 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.
Today most lenders, bond managers and servicing agencies seem to have one goal: Unload shaky loans for pennies on the dollar ASAP.
