The Explanation as to Why Banks Allow the Sale of Non-Performing Mortgage Notes and Bulk REO Property
Everyone feels the negative brunt of non-performing assets, not just the lenders. Non-performing mortgages limit lenders borrowing power by up to 900% in many cases. Even if the amount in default is only $100,000, the impact on the bank is that it is forbidden to borrow up to $900,000 until the property is sold. Not to mention that, as an asset goes down in market price, the banks are forced to adjust the numbers accordingly and eat the deficit.
(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. Lenders won’t foreclose unless all other options have been depleted. 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.
Furthermore, lenders mus face the problem of staffing. Still, if a mortgage lender thinks foreclosure is teh only reasonable option, it is faced with the daunting task of finding enough staff to oversee and unload 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. On top of this is the crisis the United States faces among the larger lending services who have few if any capable REO experts who can handle bulk REO’s as well as possess the ability to successfully manage and protect them al the while selling them at a minimal loss.
As quickly as humanly possible today’s lenders, bond managers and servicing agencies appear to be charting the same course: Get rid of those unstable loans even if it means selling at a loss.
