By Mike Heayn

This may be intuitive, but I feel compelled to remind my readers that banks lend out money primarily to make additional money in the form of interest. Banks and other lenders are not in the business of owning or managing real estate. It may seem illogical that these entities would not want to own real estate, but, after I explain why, you will see that banks are not interested in holding real estate.

First, before I can explain the reasons why lenders do not like to own real estate, I need to explain how they might come to own a property. When a lender, in this case a bank, takes a piece of real estate back from a borrower, it is known as a foreclosure. Before a foreclosure proceeding can begin, the lender must give the borrower one or more chances to cure the missed payment or other delinquency.

The following are the general steps that take place from delinquency to foreclosure, and these can vary from state to state:

- Borrower misses payment due date;

- Borrower misses payment grace period, typically 10-15 days after due date;

- Bank contacts borrower via phone and/or mail requesting payment, late charge assessed;

- After the grace period, another 29-60 days pass, depending on the state. During this time, the borrower can rectify the situation by paying the missed payment and any associated late fees;

- Foreclosure proceedings begin;

- Borrower is given one last chance to cure delinquency before property is placed for sale. Some states do not offer this cure period;

- Property is sold at public auction;

- Bank will bid and usually wins auction for property.

Why would the bank want to buy back the property if the bank is not in the business of owning real estate? The answer is simple — after the foreclosure proceedings are over, the bank will take a larger loss if they do not try to sell the property themselves.

Now that the bank has foreclosed on the real estate, it has to decide what to do with it. When a bank owns a foreclosed piece of real estate, it is known as a “real estate owned asset” (REO) or a non-performing asset. The bank needs to get the REO off its balance sheet for the following reasons:

- A non-performing asset or an asset that is not making a return wastes company resources. Employees should be using their time to work on performing assets to help increase the company’s revenue.

- Selling a non-performing asset allows a bank to realize a return on the money that was lent on the asset, even if it is a loss.

- Most banks need to go to Wall Street for capital. If a bank has too many non-performing assets, they could be viewed as having made poor underwriting decisions, making them high risk, which could inevitably lead them to receiving below average or poor ratings from rating agencies compromising their ability to attract new capital for future lending.

- Selling non-performing assets frees capital that can be used on performing assets. Also, for every non-performing asset, a bank needs to place percentage of the non-performing assets value aside in cash or deposits until the non-performing asset is sold or becomes a performing asset. Banks make money by lending money, the more money they have to place aside for non-performing assets the less potential profit they can make.

Foreclose is a scary possibility for any borrower. However, most lenders would rather not go through the process due to its high cost and the lengthy time period required to gain control over the asset and return it to the market. The best thing to do if you think you may miss a payment is to contact your lender. Most, but not all lenders will work with you to avoid foreclosure.

Just remember to call your lender right away. Time is not on your side once you have missed a payment.

Mike Heayn is a Washington Mutual multi-family loan consultant. He can be reached at (310) 428-1342, or at michael.heayn@wamu.net.