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Financial Institutions: Converting Commercial Mortgages to REO — Valuation and Accounting Considerations


The commercial real estate markets are currently experiencing unprecedented declines resulting in escalating mortgage defaults and a sharp spike in Real Estate Owned (REO) assets, property in the possession of a lender as a result of foreclosure or forfeiture by a borrower.

Many valuation and accounting considerations factor into the decisions executives at financial and lending institutions make when converting commercial mortgages to REO assets.

In this report, Matthew G. Kimmel, principal, Deloitte Financial Advisory Services LLP, and Brian D. Ruben, partner, Deloitte & Touche LLP, provide an overview of the factors financial institutions and lenders should consider before deciding to take back REO assets. Primarily, these include:

  • Current commercial real estate market and debt condition
  • Pre-REO planning
  • REO valuation issues

REO is often considered a last resort by lenders after other options such as loan workouts and sales of the loans are considered because many lenders do not have the resources and/or experience to manage and operate the real estate to maximize its value. Nonetheless, the number of REO assets has increased dramatically from April 2009 to December 2009, a trend which may continue in the foreseeable future.

Read the attachment to learn more.

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