Understanding the Reasoning Behind Banks Decisions to Sell Non-Performing Mortgages and Bulk REO’s
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 mortgages limit lenders borrowing power by up to 900% in many cases. If the property in question is defaulted on, leaving $100,000 owed, the mortgage lender is hindered from borrowing up to $900,000 until the property is unloaded. 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 are few solutions available to lenders that relieve the brunt non-performing assets put on their registers. 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. 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.
Staffing is yet another issue lenders face. 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. The last time anyone saw a lending crisis of this magnitude was almost 15 years ago, and not since then have the valuable number of REO experts been lost at such perplexing numbers. 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.
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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How does this happen? Why do people (politicians of all stripes) when they get into office suddenly lose their ability to process information wisely and make sound decisions? To your point David, they are willing to sell cash producing assets one time to meet this years payment…but what happens next year when the payment is due again?
1Discount loans have hardly ever been the main source of funds in the market for reserves. In fact, the move does signal that the pessimism and fear in the market for reserves and the money market have been reduced considerably and that the economic outlook is improving. The move seems to be a warm-up to later, more significant moves for those who really don’t understand that the discount lending window is a minor policy these days. Why not say something like that? Is it too frank?
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