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Understanding the Reasoning Behind Banks Decisions to Sell Non-Performing Mortgages and Bulk REO’s
By Vic Hurlstorm | June 9, 2009
Everyone feels the negative brunt of non-performing assets, not just the lenders. A bank’s ability to borrow is negatively effected by around 900% when a mortgage defaults. Let’s say the defaulted amount of the asset is just %100,000 – in that case the bank is blocked from borrowing up to $900,000 until the property is assumed by someone else. Also, as the defaulted asset loses value the lenders must record the adjusted value, thereby taking a great financial hit.
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Lenders hands are all but tied when trying to solve the blow non-performing assets place on them. The option of foreclosure is always the last resort. The high price lenders incur with this process start with the hefty legal expenses. While the property is still REO (Real Estate Owned) it incurs the expense of considerable property management. 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.
Lenders also face the issue of 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. 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.
Currently all of the servicing agencies, course lenders and bond managers have only one thing in mind: Sell every loan that is in distress for the largest discount allowed.
Once again, an excellent solution to this debacle appears to be effective Bulk REO Investing.
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