When a bank’s level of non-performing loans and foreclosed assets increases to the point that the bank’s costs and expenses exceed its revenues, the resulting deficit erodes the bank’s net worth and reduces stockholders’ equity. Depending upon the particular bank’s level of net worth, a serious problem will result at some point in time unless steps are taken to mitigate the problems. This article deals with the administration of real estate properties that have already been foreclosed.
It is extremely important that the lender thoroughly evaluate and understand the loan documents, and local foreclosure laws. Depending upon the various factors contained in loan documents and the nuances of state foreclosure laws, there are usually factors that dictate the timing of when a foreclosure must be initiated.At times, a bank not foreclosing at the right time may result in a long postponement, causing more arrearages to accrue and possible deterioration of the collateral property.
Once the lender has decided to foreclose, the bank needs to have its foreclosure department ready to go. In a commercial bank, foreclosed real estate properties are referred to as Other Real Estate Owned, or “OREO,” as distinct from real estate owned and used in the operation of the bank, such as the main bank building and bank branch properties. The equivalent term at savings banks is Real Estate Owned or “REO.”
Here are some guidelines for the successful management of foreclosed properties:
- Make sure that the homeowners’ or fire and extended casualty insurance is cancelled and that the property is added to the bank’s blanket insurance policy for foreclosed properties. (Note: I have seen properties lost to fire where there was no insurance coverage due to failure to monitor this activity.)
- Assign the responsibility for managing foreclosed properties to one person.If the foreclosure volume is sufficient to occupy one or more people fulltime, then naturally you will need to hire someone fulltime for this project. Don’t rely on the loan officers that initiated the problem loans to begin with to now miraculously solve the problems that they could not foresee in the beginning.It is beneficial to have some “space” between the OREO/REO managers and the borrowers of the loan.
- Have the properties secured immediately after either foreclosure or abandonment. Maintain a central key repository in the OREO or REO department.
- Keep the properties looking decent. Do whatever is required to avoid deterioration of the properties. No prospective purchaser wants to buy a problem property or a property that looks bad.
- If there are things to be fixed on the property, find a “buy & fix-it-up” expert, and provide financing to make an attractive deal for all involved. Include a commitment to provide financing for the ultimate customer to whom the fix-up specialist will sell.
- Put up the “For Sale” signs immediately after the foreclosure. (Note: It is astonishing to me how many times I have gone into OREO and REO operations and found management amazed that a property has not sold, yet there is no “For Sale” sign on it!)
- Only list with a real estate agent if truly necessary. Your OREO or REO department will know more about the property than any real estate agent, and your financing to the purchaser will be a major selling point.You are the one to control the financing, not the a real estate agent.
- Talk to the neighbors of the foreclosed property.Friends and family of the owner will often be interested in the property. Your offering favorable financing might be the factor that tilts the scales in favor of a relative relocating close to another relative.
- Inspect the properties regularly, and document what you find. Take any needed corrective actions immediately.
- Offer financing to entice buyers. Remember that a sale turns a cash consuming asset into a cash producing asset.
- Consider holding periods and the net present value of a probable future sale when setting a sales price.The “net” in net present value allows for the holding costs which include taxes, maintenance, and any expenditures such as carpeting and other expenditures that may be required for good property marketing.
- Take note of OREO / REO events and issues at meetings of the Board of Directors. Directors often have market knowledge and contacts that can help with OREO / REO problems.
Obviously, this list of items is a lot to think about. It requires special expertise to initiate all of these various activities and to keep them moving toward the multiple finish lines
This article was written by a professional banking expert witness. He is a manager and banking regulator, has managed hundreds of millions of dollars of “problem properties” including duplexes, condos, subdivisions, office buildings, and many others across the nation. He is available on a contract basis to discuss your bank’s particular needs at an expert witness services company. See all professional and legal expert witnesses with full C.V.’s.