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. Also, as the defaulted asset loses value the lenders must record the adjusted value, thereby taking a great financial hit.
(A quick note from the editor: For related information, check out Bulk REO Investing.)
There aren’t many solutions for banks when it comes to easing the negative impact non-performing assets have on their accounts. Only as a last resort will banks foreclose. These actions are pricey for lenders and start with exhorbitant legal expenses. While the property is still REO (Real Estate Owned) it incurs the expense of considerable property management. REO properties increase the chance for liability every minute they sit unoccupied, amplifying the risk that the asset will further nose dive. When selling any property there are expenses – from marketing to transactions that accompany selling real estate.
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. The last time anyone saw a lending crisis of this magnitude was almost 15 years ago, and not since then have the valuable number of REO experts been lost at such perplexing numbers. Also, the larger lenders in the United States are hard pressed to come up with current in-house experts who can manage bulk REO’s or provide the proper management or security for them while preparing to sell them without incurring too great a loss.
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.
