What is Other Real Estate Owned - OREO
Other Real Estate Owned is a bank accounting term that refers to real estate owned assets as non-earning assets. Just as excess intake of Oreo cookies may indicate poor health in humans, the presence of a large quantity of OREO assets on a bank balance sheet may raise concerns about the overall health of the institution.
BREAKING DOWN Other Real Estate Owned - OREO
Unlike landlords or other investors such as real estate investment trusts, banks’ business is not the ownership of real estate. Instead, they are in the business of lending money to those whose business it is to own real estate or to individuals who prefer to own their dwellings rather than rent them from a landlord. Banks hold real estate typically as a result of something having gone awry for those whom the bank lent money to. Most often, banks acquire other real estate as a result of foreclosure on real property following a default by the borrower who had used the property as collateral for their loan. Most OREO assets are available for sale by the banks who own them.
Example of Increasing Other Real Estate Owned - OREO
Increasing OREO on a bank’s balance sheet may indicate that the institution’s credit is deteriorating while its non-earning assets are growing. For example, in the years prior to the financial crisis, RezLenderBank.com made loans in excess of assessed property values to many individuals who lacked evidence of sufficient income to repay those loans. These mortgagors took on other forms of consumer debt in order to make their initial mortgage repayments and when credit markets seized up in 2007, their ability to do so ended. Ninety days after the mortgagors failed to make their required monthly loan payments, RezLenderBank.com began foreclosure proceedings against thousands of its former customers. Eventually, the residents were evicted and RezLenderBank.com assumed ownership of thousands of houses in various places around the United States. As a result of the sizable amount of OREO on its balance sheet, RezLenderBank.com has struggled with ongoing liquidity and regulatory issues.