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. 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.)
Lenders hands are all but tied when trying to solve the blow non-performing assets place on them. 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 incurs the expense of considerable property management. The amplified danger to REO properties as they sit empty only raises the chanses that its assets will lose even more value. There are also the expenses of selling any real estate holdings that include transaction expenses and marketing.
Another problem that lenders face is staffing. If foreclosure appears to be the only option left, banks often don’t have the manpower to oversee and divest REO’s, especially bulk REO’s. Since about 1994 there hasn’t been this kind of lending crisis in which REO experts have been axed at jaw dropping proportions. 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.
Without a doubt, today’s servicing agencies and mortgage companies seem to singlemindedly be in agreement to unload troubled loans as quickly as possible even if it means selling at a loss.
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