How Charge-Offs Affect Your Note & REO Deals

Using Charge-Offs in Your Note and REO Prospecting

Charge Offs may be a very good indicator as to the likelihood that a bank is willing to sell some of its distressed loans or  bank owned real estate (OREO).

Net Charge Offs indicate that the bank is writing down or “charging off” losses in a particular category.

Healthy charge off numbers may indicate that the bank is preparing its balance sheet for market priced dispositions.

User Questions About Charge-Offs

Question: When banks Charge Off a loan, they still own the loan. Do they make money off the loan when or if they sell the loan they charged off?

Answer: When banks charge-off part of a loan like a mortgage and then they get money back in from it that money the receive is recorded as “recovery”.

When a bank charges off some portion of a loan it is for accounting purposes, it doesn’t have an impact on the face amount owed.

If a bank had a loan of $1MM UPB and then charged off $500,000 then sold it for $750,000

  • the borrower still owes $1MM
  • the $250k that came in over the charged down amount is “recovery”
  • they’re still not making a profit they are mitigating loss