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December 12, 2018, 03:49:54 PM |
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Some things in the Whitepaper are really interesting. Still learning about real estates
What is a distress asset ?
Since the financial crash of 2008/2009 all EU member states have been experiencing post-recession
recovery, some faster than others. Because different member states are recovering
at a different rate, it has brought about a lot of opportunities in non-performing loans (NPLs)
market specifically those backed by real estate collateral. Most of the financial problems of
the crash in 2008 were brought on by the onset of non-performing loans, and overvalued
properties across Europe. Simply put, parties could no longer afford to pay their mortgages
which led to one of the biggest financial meltdowns ever seen.
NPLs and financial institutions
A performing loan will provide a bank with the interest income; it needs to make a profit and
extend new loans to other customers. When customers do not meet their agreed repayment
arrangements for 90 days or more, the bank must set aside more capital on the assumption
that the loan will not be repaid. This reduces its capacity to provide new loans.
To be successful in the long run, banks need to keep the level of non-performing loans at a
minimum, so they can still earn a profit from extending new loans to customers. If a bank has
too many non-performing loans on its balance sheet, its profitability will suffer because it will
not earn enough money from its credit business. In addition, it will need to put money aside
as a safety net in case it needs to write off the full amount of the loan at some point in time.
It means that banks could slow down their capital, which they had to devote to the provision
of non-performing loans. In some cases, they were prepared to sell high-collaterals in order
to clean up NPLs from their books, improving their capital adequacy, and start reusing this
money.
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