Defaulted mortgages create a backlash whose effects are felt by not only the lenders, but the economy as a whole suffers as well. Non-performing mortgage assets could cripple lenders abilities to borrow by just under 1000%. Let’s say the defaulted amount of the asset is just %100,000 – in that case the bank is blocked from borrowing up to $900,000 until the property is assumed by someone else. Plus, as defaulted assets lose value banks are forced to write down the lower value and bear the loss.
(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 won’t foreclose unless all other options have been depleted. High legal expenses are the beginning of this costly process that lenders face. 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. Lastly, there are business dealings, complete with incurred expenses that encompass transferring said properties.
Another problem that lenders face is 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. For 15 years we have been expempt from this kind of lending crisis which has included depleting lending staffs with REO knowledge at detrimental levels. 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.
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.
