Other Real Estate Owned (OREO)

IRS Form 4952: Investment Interest Expense Deduction

What is other real estate (OREO)?

Other real estate owned (OREO) is a bank accounting term which designates real estate assets as non-productive assets. Just as an excessive intake of Oreo cookies can indicate poor health in humans, the presence of a large amount of OREO assets in a bank balance sheet can raise concerns about the overall health of the establishment.

Understanding other real estate

Unlike owners or other investors such as real estate investment trusts, the activity of a bank is not owned by real estate. Instead, their mission is to lend money to those whose business is to own real estate or to individuals who prefer to own their home rather than rent it out to an owner. Banks generally hold real estate because something has gone wrong for those to whom the bank has lent money. Most often, banks acquire other real estate following the foreclosure of real estate 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 that own them.

Example of an increase in other owned property

The increase in OREO in a bank’s balance sheet may indicate that the institution’s credit is deteriorating as its non-performing assets increase. For example, in the years leading up to the financial crisis, RezLenderBank.com provided loans above the estimated property value to many people who did not have proof of sufficient income to repay these loans. These mortgagees took out other forms of consumer debt to make their initial mortgage payments, and when the credit markets took hold in 2007, their ability to do so ended. Ninety days after mortgagees failed to make the required monthly payments, RezLenderBank.com started foreclosure proceedings against thousands of their former customers. Eventually, the residents were evicted and RezLenderBank.com assumed ownership of thousands of homes in various locations in the United States. Due to the large amount of OREO on its balance sheet, RezLenderBank.com has had liquidity and regulatory issues.

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