Why Banks Decided to Sell off Non-performing Mortgage Notes and Bulk REO

When a property is not yielding income it has dire consequences for the lenders and the general economy 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.  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.)

Mortgage lenders are left with few options to ease the weight placed on the books by non-performing assets.  Only as a last resort will banks foreclose.  These actions are pricey for lenders and start with exhorbitant legal expenses.  REO (Real Estate Owned) properties also incur pervasive property management headaches until they are unloaded.  REO properties increase the chance for liability every minute they sit unoccupied, amplifying the risk that the asset will further nose dive.  It should also be noted that with the selling of real estate also comes transaction fees and marketing expenses.

Another problem that lenders face is staffing.  Even if lenders have exhausted all other options, if it decides to foreclose it must employee enough people to manage the properties and unload sometimes numerous REO’s.  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.

Today most lenders, bond managers and servicing agencies seem to have one goal: Unload shaky loans for pennies on the dollar ASAP.