Everyone feels the negative brunt of non-performing assets, not just the lenders.  Non-performing mortgages limit lenders borrowing power by up to 900% in many cases.  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.  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.)

Banks have few options that buffer the burden placed on their books by non-performing assets.  The option of foreclosure is always the last resort.  This process includes expensive steps for the lenders that start with high legal fees.  REO (Real Estate Owned) properties also incur pervasive property management headaches until they are unloaded.  The amplified danger to REO properties as they sit empty only raises the chanses that its assets will lose even more value.  When selling any property there are expenses – from marketing to transactions that accompany selling real estate.

An even bigger problem banks 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.  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.

Currently all of the servicing agencies, course lenders and bond managers have only one thing in mind: Sell every loan that is in distress for the largest discount allowed.