Strategies Used by the Banking Industry to Mitigate Losses on Non-Performing Loans

1673 Words Feb 19th, 2013 7 Pages
Strategies Used by the Banking Industry to Mitigate Losses on Non-Performing Loans

In depressed economic times, Banking is an industry that is prone to substantial financial losses, from customer’s closing their depository account to an increase in outstanding loan delinquency. An increase in consumer and commercial loan defaults can damage the integrity of a Bank’s outstanding loan portfolio. Such deterioration can lead to an increase of “Non-Performing Assets”.

Once a loan is nonperforming, (usually when a debtor has not made their scheduled payment for at least 90 days, but there are other reasons why a loan can be deemed “non-performing”) the odds that it will be repaid in full are considered to be substantially lower. The
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"After that bounce, it 's gone back down a little, and looks to be flat for the foreseeable future," says David Tobin, one of the two principals of Mission Capital Advisors. "It 's a smart time to sell." (McDonald, 2011)

Another reason for the converted interest in selling these assets is the challenge that banks are having in making new loans. “Analysts and investors are demanding balance sheet improvements out of the banks”, says Tobin, “and if the banks can 't show strength by adding new, solid loans, then they 'll do it by unloading legacy assets that are a drag on capital”. And that 's just what has happened. "But when they can sell, they do. The best thing a bank can do is sell properly marked assets that help fix the balance sheet. The more you can sell, the better you are perceived." says Tobin. (McDonald, 2011).

So, how do bank’s dispose of these assets and what is done with those assets that cannot be sold on a Secondary Market? There are several loss mitigation alternatives used by banks in both scenarios.

Typical Strategies used in the sale of non-performing loans are usually Note Sales, Short-Sale or Short-Payoffs, or a Deed in Lieu of Foreclosure. A Note
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