Banks Incentive to Sell Non-performing Mortgage Notes and REO Properties

Everyone feels the negative brunt of non-performing assets, not just the lenders.  A defaulted mortgage could greatly limit a bank’s borrowing ability by nearly 900%.  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.  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.)

Lenders hands are all but tied when trying to solve the blow non-performing assets place on them.  Only as a last resort will banks foreclose.  The high price lenders incur with this process start with the hefty 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.  There are also the expenses of selling any real estate holdings that include transaction expenses and marketing.

Staffing is yet another issue lenders face.  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, the United States has few in-house experts at any of the larger lending institutions who can handle bulk REO’s which need someone to manage them, secure them and sell them with 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.