The ill effects of non-performing assets are not just felt by the lenders but the entire economy is negatively impacted by them. A defaulted mortgage could greatly limit a bank’s borrowing ability by nearly 900%. 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. Also, as the defaulted asset loses value the lenders must record the adjusted value, thereby taking a great financial hit.
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Banks have few options that buffer the burden placed on their books by non-performing assets. Foreclosure is almost always the last action banks take. These actions are pricey for lenders and start with exhorbitant legal expenses. While the property is still REO (Real Estate Owned), it requires extensive property management. The proliferated risk of harm being done to REO properties while they sit empty only increases the chances it will further lose value. Lastly, there are business dealings, complete with incurred expenses that encompass transferring said properties.
Staffing is yet another issue lenders face. If foreclosure appears to be the only option left, banks often don’t have the manpower to oversee and divest REO’s, especially bulk REO’s. 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, 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.
Without a doubt, today’s servicing agencies and mortgage companies seem to singlemindedly be in agreement to unload troubled loans as quickly as possible even if it means selling at a loss.
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Tags: bulk reo, bulk reo investing, defaulted mortgages, foreclosure investing, Foreclosures, mortgage defaults