May 31 2009
Why Lenders Decided it Was in Their Best Interest to Sell Non-performing Mortgage Notes and Bulk REO
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. 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.)
There are few solutions available to lenders that relieve the brunt non-performing assets put on their registers. Lenders will exhaust all other avenues before resorting to foreclosure. 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 the concern that damage to REO properties, while they sit vacant, increases and further hurts the chances of any real profits. 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. Even if lenders have exhausted all other options, if it decides to foreclose it must employee enough people to manage the properties and unload sometimes numerous REO’s. Since about 1994 there hasn’t been this kind of lending crisis in which REO experts have been axed at jaw dropping proportions. 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.
Today most lenders, bond managers and servicing agencies seem to have one goal: Unload shaky loans for pennies on the dollar ASAP.
