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. 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.)
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. The outcome is pervasisve property management while it continues as REO (Real Estate Owned) property. There is a higher chance that vacant REO properties will suffer damage further plummeting in value. When selling any property there are expenses - from marketing to transactions that accompany selling real estate.
Lenders also face the issue of staffing. It matters little that a lender feels the only option is to foreclose if proper staffing can’t be put in place to manage and unload these REO properties. Since about 1994 there hasn’t been this kind of lending crisis in which REO experts have been axed at jaw dropping proportions. Not to mention the fact that the US has few experts capable of handling bulk REO’s while juggling the task of managing them, protecting them and divesting them with a low margin of 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.
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