The ill effects of non-performing assets are not just felt by the lenders but the entire economy is negatively impacted by them. 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. Additionally, as a property loses value, the lenders must adjust the numbers and eat the loss.
(A quick note from the editor: For related information, check out Bulk REO Investing.)
Lenders hands are all but tied when trying to solve the blow non-performing assets place on them. Only as a last resort will banks foreclose. The high price lenders incur with this process start with the hefty legal expenses. The outcome is pervasisve property management while it continues as REO (Real Estate Owned) property. There is the concern that damage to REO properties, while they sit vacant, increases and further hurts the chances of any real profits. When selling any property there are expenses – from marketing to transactions that accompany selling real estate.
Staffing is yet another issue lenders face. 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 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. All the more, one is hard pressed to find large lenders in the U.S. with the in-house capabilities of juggling bulk REO’s, property management, security staffing on top of unloading them without huge losses.
Currently all of the servicing agencies, course lenders and bond managers have only one thing in mind: Sell every loan that is in distress for the largest discount allowed.