Most likely you have heard the term REO and know 
that that it refers to a foreclosed or bank owned property. You also probably know that it stands for “Real Estate Owned”. There is a pretty good chance that the thought process ended there and went no further.
If it did go further, you would realize that the term REO makes no since. Real estate owned? Owned by who? All real estate is owned. This real estate just happens to be owned by the bank.
If we back up just a bit and look where this REO came from, it makes a little more since. It was a home mortgage that was bundled up with a bunch of other home mortgages and sold on the secondary mortgage market as a mortgage backed security. The servicing of the loan was still kept with a bank or other lending institution but the collectable debt as well as the risk became part of this security.
Ideally, this mortgage backed security would be comprised fully of collectable debt. When you look at the assets that make up this security, it would be a list of collectable debt. As mentioned earlier, there is risk and some of these loans will foreclose. Then the security will no longer have that collectable debt, they will have the collateral. That collateral will be listed as real estate owned or REO.
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