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How Banks Rationalize the Sale of Non-Performing Mortgages ans Bulk REO PropertiesDefaulted mortgages create a backlash whose effects are felt by not only the lenders, but the economy as a whole suffers as well. Defaulted mortgage loans mean that a lender might be hindered in its ability to borrow by around 900%. Lenders can be blocked from borrowing up to $900,000 on a defaulted loan of just $100,000, that is, until the property is divested. Not to mention that, as an asset goes down in market price, the banks are forced to adjust the numbers accordingly and eat the deficit. (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. 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. It should also be noted that with the selling of real estate also comes transaction fees and marketing expenses. Lenders also face the issue of staffing. 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. 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. 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.
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