Bulk REO Investing

Defaulted mortgages create a backlash whose effects are felt by not only the lenders, but the economy as a whole suffers as well.  A defaulted mortgage could greatly limit a bank’s borrowing ability by nearly 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.  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.)

Banks have few options that buffer the burden placed on their books by non-performing assets.  Only as a last resort will banks foreclose.  Lenders must face excessive legal fees over the course of this process.  It also generates sizable problems included with property management while the property is an REO (Real Estate Owned).  There is a higher chance that vacant REO properties will suffer damage further plummeting in value.  There are also the expenses of selling any real estate holdings that include transaction expenses and marketing.

Staffing is yet another issue lenders face.  Even if a bank believes that foreclosure is the only feasable answer it has to contend with employing enough people to manage and sell REO’s, especially if there are bulk REO’s on hand.  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.  On top of this, the United States has few in-house experts at any of the larger lending institutions who can handle bulk REO’s which need someone to manage them, secure them and sell them with minimal 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.