Everyone feels the negative brunt of non-performing assets, not just the lenders.  A bank’s ability to borrow is negatively effected by around 900% when a mortgage defaults.  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.  As a property loses its value, the only option banks have is to record the adjusted value and take the financial hit.

(A quick note from the editor:  For related information, check out Bulk REO Investing.)

There aren’t many solutions for banks when it comes to easing the negative impact non-performing assets have on their accounts.  Foreclosure is almost always the last action banks take.  This process includes expensive steps for the lenders that start with high legal fees.  While the property is still REO (Real Estate Owned), it requires extensive property management.  The amplified danger to REO properties as they sit empty only raises the chanses that its assets will lose even more value.  It should also be noted that with the selling of real estate also comes transaction fees and marketing expenses.

Furthermore, lenders mus face the problem of 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.  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.  On top of this is the crisis the United States faces among the larger lending services who have few if any capable REO experts who can handle bulk REO’s as well as possess the ability to successfully manage and protect them al the while selling them at a minimal loss.

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