Why Do Banks Sell Their Notes?

Paige Panzarello specializes in buying non-performing notes at a steep discount from a bank and turning those notes into a profit.  Many ask her, “Why Do Banks Sell Their Notes?” The primary reason that banks sell bad notes is to mitigate any risk that implicates the bank.

For every loan that is in default, the banks are required to have cash reserves of $7.  On $1,000.000 of bad loans, $7,000,000 is reserved. The banks can’t make new loans on that money. Selling distressed paper takes the weight off of their shoulders, improves their investor relations and alleviates an aspect of unpredictability. How does it improve investor relations? No longer are they in the news for foreclosing on a family and kicking them out of their house. It is bad PR to see the borrower’s belongings out on the lawn. That mean old 1stBank is inhumane!

Banks are most definitely not in the business of real estate management, nor do they wish to be. It cost a lot of money to own a house through foreclosure. Maybe, $50,000 per house and that’s a loss. Banks are not in the business to take losses.

Bottom line, selling notes is vital to the successful operation of a bank. The overhead costs of surveying and maintaining properties is too costly and not beneficial for them while regulations by the federal government drive foreclosure costs sky high for the bank.

The buyers of non-performing have a lot of options to work with defaulted borrowers. They want the homeowner to start paying again on their mortgage. They can lower interest rates. They can lower the amount of debt outstanding for those underwater bringing the mortgage more in line with the real market value.  They can forgive arrearages if the borrower makes timely payments for a period. The goal of the buyer of non-performing note is to keep the family in their house.

In conclusion:

  • Banks are required by law to hold at least seven dollars for every defaulted dollar in cash reserves.
  • The goal is to sell bad
  • Keeps the FDIC off of their back and cleans up their financial books.
  • Banks are not in the business of real estate management.
  • Regulations drive foreclosure costs for banks sky high.
  • Dodd-Frank regulation.
  • Banks got a massive hit when they foreclosed on properties, to avoid negative press they will sell.

If you want to learn more or invest in non-performing notes, call us.

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