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contents Volume 2, Issue 2
Freddie’s REO shift
To keep or not to keep
Renting back REO
The GSE sets out to change its REO operations in 2011
HUD to give guidance on personal property evictions
GSEs and cities won’t give up on REO rental programs
REO management, at a glance
perspectives 12 BEST PRACTICES
26 REGULATORY MATTERS
32 SALES STRATEGIES
38 JAMES A. BROWNING
35 RONALD JASGUR
17 CHAD MOSLEY
37 GLEN CALDERON
14 ANDREW JEFFERY
46 CHAD NEEL
34 JOE CUTRONA
15 RUDY KRUPKA
28 DESIREE PATNO
17 LORNE DUFOUR
30 CHERYL LANG
47 MICHAEL RICHARDSON
48 TONY ISBELL
29 DERRICK LOGAN
10 RICK SHARGA
16 ALAN JAFFA
18 DALE MCPHERSON
36 CARY B. STERNBERG
ad index CORELOGIC
MORTGAGE CONTRACTING SERVICES
DIMONT & ASSOCIATES
FIELD ASSET SERVICES
3 24-25 5
FIRST AMERICAN DEFAULT TITLE
LENDER PROCESSING SERVICES
SPECTRUM FIELD SERVICES
REO inventory poses epic challenges
VOLUME 2, ISSUE 2 MAY 2011
EDITORIAL Life has been interesting, even a bit dramatic, for those of us working in the REO space. As RealtyTrac’s Rick Sharga says in his article inside our HWFocus REO Management supplement, “To suggest that the housing market and mortgage industry are in turmoil would be an understatement of epic proportions.” Everyone involved with REO — from the servicers to the real estate brokers and vendors — will be involved in significant REO disposition efforts over the next three to four years. More than 1 million properties were repossessed during 2010, according to RealtyTrac, adding to a burgeoning “shadow inventory” of distressed properties not yet on the market, but creating downward pressure on pricing by their mere existence. Beside working through the shadow inventory, we’ve got the Dodd-Frank Act, a settlement in the works involving robo-signing issues, a discussion on national servicing standards and attempts to reform the governmentsponsored enterprises on our plates. Add to the mix technology developments and a big push toward short sales. Is your head spinning yet? For a broker, things may seem a bit slow.
It was also the largest yearly decrease since 2005. But RealtyTrac CEO James Saccacio said the lull will prove to not be due to improving conditions in the housing market. Instead, the slowdown came from mortgage servicers disrupted by problems in the foreclosure process, an issue that dragged down filings in January as well. Bob Hagmann, an REO agent with West Islands Realty in Cape Coral, Fla., said whatever the plan is, agents like him will have plenty of work to do. “I don’t think any (GSE) plan including a merger will hurt REO brokers because sooner or later the properties will have to be sold and the units that are 90-plus days in default have less than a 1% chance of coming current on their loan even if the loan was modified,” Hagmann said. “So they will sooner or later make it to our desk.” We hope this issue of HW Focus REO Management will give you the tools you need to succeed in this challenging environment.
Kerry Curry, Executive Editor
ASSOCIATE PUBLISHER Richard Bitner EXECUTIVE EDITOR Kerry Curry REPORTERS Jon Prior, Christine Ricciardi COPY EDITOR Jason Philyaw
CREATIVE SENIOR ART DIRECTOR Polly d’Avignon DESIGNERS Rosangel de Moreira, Jessica Fung, Garrett Broyles
ADVERTISING & BUSINESS SALES DIRECTOR Jesus Machuca jmachuca @ HousingWire.com ACCOUNT EXECUTIVES Christi Lingard clingard @ HousingWire.com Lauren Border lborder @ HousingWire.com MARKETING DIRECTOR Sally Powell Schall WEB EVENTS & CIRCULATION Christina Vick
THE LTV GROUP EXECUTIVE CREATIVE DIRECTOR Greg Lakloufi DIRECTOR OF INTERACTIVE SERVICES Jason Clemens DIGITAL DEVELOPERS Ron Ferguson, Jody Thigpen UX DESIGNER Joe Hair
ABOUT HW Focus is published by The LTV Group, 2701 Dallas Parkway, Suite 200, Plano, TX 75093; 469.893.1480 The information contained within should not be construed as a recommendation for any course of action regarding legal, financial or accounting matters. All written materials are disseminated with the understanding that the publisher is not engaged in rendering legal advice or other professional services. The LTV Group does not guarantee the accuracy of information provided, and is not liable for any damages, losses, or other detriment that may result from the use of these materials.
In March, the amount of REO coming into Freddie Mac slowed to a trickle. Lenders filed foreclosures or repossessed 225,101 properties in February, a 27% drop from one year before and the lowest total in three years, according to RealtyTrac.
PUBLISHER & EDITOR IN CHIEF Paul Jackson
© 2011 by The LTV Group • All rights reserved
In Loyal Pursuit of Perfection
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TO ADVERTISE, CONTACT: Christi Lingard 469.893.1492 clingard@theLTVgroup.com
Contact Jason Philyaw at jphilyaw@HousingWire.com or 469-893-1513 to contribute your PERSPECTIVE to HW Focus. Deadline for Augustâ€™s Origination issue is May 27.
Lauren Border 469.893.1500 lborder@theLTVgroup.com
REO AT A GLANCE
BUT STILL CASTING A DARK SHADOW
Real estate data provider CoreLogic said recently that some 1.8 million properties make up the shadow inventory of foreclosures, down 11% from one year ago. HERE’S A LOOK AT CORELOGIC’S NUMBERS AT A GLANCE: The SHADOW INVENTORY consists of mortgages at least 90 days delinquent, in foreclosure or already classified as REO.
1.8 million homes represents a NINE-MONTH SUPPLY of inventory. Healthy real estate markets usually hold a six-month supply.
In addition to the shadow inventory, there are nearly 2 million mortgages that are current but UNDERWATER.
The HIGHEST LEVELS of the shadow inventory remain in New Jersey, Illinois and Maryland.
Of the shadow inventory, NEARLY HALF are in some stage of serious delinquency. The rest is split almost evenly between properties in foreclosure or REO.
Freddie’s REO shift The GSE sets out to change its REO operations in 2011
F E AT U R E : F R E D D I E ’ S R E O S H I F T
BY JON PRIOR THE AMOUNT OF REPOSSESSED HOMES HELD BY Freddie Mac rose considerably in the fourth quarter of 2010, but the mortgage giant is making changes to its REO operations vital for the company to ease its burden on taxpayers. Interestingly, these changes mean opportunities for the industry. In its fourth-quarter financials, Freddie reported its REO inventory — based on the unpaid principal balance on the underlying mortgages that the borrower defaulted on — to be $12.9 billion, up 55% from one year ago. More than $3.4 billion of the unpaid principal balance in REO for Freddie resides in the West. Next highest is the $1.9 billion located in the North Central region of the country. James Bowden is the vice president of Freddie’s HomeSteps unit. While at the Mortgage Bankers Association’s servicing conference recently held in Grapevine, Texas, Freddie unveiled a restructuring of its servicing department and a new scorecard it would use for grading servicers. These new changes will be implemented throughout the year. But Bowden tells HousingWire that 2011 will also mean changes for his department situated at the end of that line. EXPANDED VENDOR NETWORK In March, Freddie expanded its vendor network to include Green River Capital and Atlas Mortgage along with the existing asset manager, Vendor Resource Management. No REO was taken from VRM. The contracts were done on a going-forward basis to give the new companies time to catch up, with the hope of ramping up volumes over time. “We made the expansion for a couple of reasons,” Bowden says. “One is it gets us away from being dependent on one company. It also allows for competition and it brings in new ideas. It’s always good to have multiple companies with different ways of thinking about things.” When awarding the contracts, Freddie looked at more than 40 different asset management companies using a “lengthy and robust” process, Bowden says. “It was a pretty grueling review,” he adds. “We looked at their current clients and at the volume that they already had. We did site visits to a few of the companies. But Green River Capital and Atlas rose to the top as far as expertise and their systems used.” LISTING AGENT NETWORK This shift has sent REO listing agents scrambling to get in on the opportunity to obtain more assignments. And Freddie is looking to expand that network as well, even as some in that network are waiting for work. Freddie has an existing REO network of close to 3,000 vendors and 2,500 listing brokers. But HomeSteps is only
utilizing 50% of that network. Over time, as more REO reaches the market, Bowden says that gap will decrease and more of the network will be used. To make sure these properties are handled correctly, Freddie is making another shift. It recently brought in a national training company and will put existing brokers through 15 to 18 hours of course work over the rest of the year. “This training will be key and critical. We really wanted to reinforce our property management standards,” Bowden says. “We take it very seriously. We have very stringent standards.” Much of the training will focus on how the properties are being maintained. Freddie inspects 25% of its REO inventory every month. Inspectors, often real estate agents, have a 13-point checklist to monitor — whether the trash is being taken out, a lockbox is on the door and the lawn is taken care of, among other things. SHORING UP REO VALUATIONS Bowden says Freddie is making a major push to shore up its valuations on the REO side. Its newly restructured loss-mitigation department will depend on what these foreclosed homes are valued at, and the main need for improvement will be a standardization. Freddie will spend 2011 implementing pilot programs to determine the best way to valuate a property. They want to see if there is any variance between the broker price opinions and an external service provider. Bowden says they intend to tweak how valuations are done to maybe include more automation and possible desktop reviews. “We plan to roll out this methodology next year,” Bowden says. RETARGETING THE BUYER SET Listing agents will also shift who they target as buyers. In March, Freddie expanded enticements designed to clear the stigma of buying a foreclosed home. It offers a two-year warranty on these properties in order to get more owner-occupants. For lower-value properties, the warranty includes things like water pumps, extra air-conditioning units and swimming pools. In 2010, Bowen said more than two-thirds of its REO sales went to owner-occupants. It is partnering with grantees in the Neighborhood Stabilization Program to put on auctions for first-time homebuyers. Freddie’s “Good Neighbor” property preservation policies require that the home is “secured, preserved and cleaned” within three business days of the property being deemed vacant. Neighboring properties receive door hangers containing contact information for any interested homebuyers or for someone concerned about the REO in their community.
Freddie will spend 2011 implementing pilot programs to determine the best way to valuate a property. They want to see if there is any variance between the broker price opinions and an external service provider.
In March, the amount of REO coming into Freddie Mac slowed to a trickle. Lenders filed foreclosures or repossessed 225,101 properties in February, a 27% drop from one year before and the lowest total in three years, according to RealtyTrac. It was also the largest yearly decrease since 2005. But RealtyTrac CEO James Saccacio said the lull doesn’t mean the housing market is improving. Instead, the slowdown came from mortgage servicers disrupted by problems in the foreclosure process, an issue that dragged down filings in January as well. “Foreclosure activity dropped to a 36-month low in February as allegations of improper foreclosure processing continued to dog the mortgage servicing industry and disrupt court dockets,” Saccacio said. This has turned the rate of REO reaching Freddie’s coffers to a crawl. Still, Bowden says there is much work to be done. “Right now we’re in a lower than expected volume inflows, as a result of foreclosure documentation issues,” Bowden says. But that is expected to ramp up to a high volume for some time, he said. Tom Moon, a Southern California-based REO broker for Fannie and Freddie and owner of Pacific Moon Real Estate, says that more listings are starting to come through, and this
means more opportunities for newer brokers to the network. “More REO assignments are coming from Fannie and Freddie. But while there may be more assignments, many of the existing REO brokers are not experiencing that much more. They cap most of us out,” Moon says. GSE REFORM Many changes have been and will still come for Fannie Mae and Freddie Mac. As Congress considers options for winding them down, the idea of forming a bad bank to handle the legacy loans and REO homes awaiting resale has come up from several analysts and commentators, which could mean more shifts for those responsible for selling these homes. Bob Hagmann, an REO agent with West Islands Realty in Cape Coral, Fla., said whatever the plan is, agents like him will have plenty of work to do. “I don’t think any plan including a merge will hurt REO brokers because sooner or later the properties will have to be sold and the units that are 90-plus days in default have less than a 1% chance of coming current on their loan even if the loan was modified,” Hagmann said. “So they will sooner or later make it to our desk.”
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Shadow inventory REOs will be with us for a long, long time By Rick Sharga
CASTING A GIANT SHADOW We’ve all read the doom-and-gloom reports predicting that the shadow inventory will morph into the real estate equivalent of a flesh-eating virus and lead to the end of civilization as we know it. The estimates of the potential inventory are mind-boggling: 7 million; 10 million; 12 million. How big is this shadow inventory? What effect is it having on the housing market? And how long is it likely to remain a problem? Let’s take a more dispassionate look at the numbers. First, let’s establish that a property currently listed for sale is in the “actual,” rather than “shadow” inventory. With that in mind, there are approximately 950,000 REOs in the RealtyTrac database. Of those, about 30% are listed for sale. This puts 665,000 properties instantly into the shadow inventory. There are another 1.2 million properties currently in foreclosure; of these, about 18% are listed for sale, adding another 984,000 potential distressed properties. Behind these foreclosure properties are another 5 million homes where the borrower is delinquent on the loan; of these, about 15% are on the market, adding another potential group of 4.25 million properties to the shadow inventory. So of the total pipeline of 7.15 million homes either in delinquency or in foreclosure, approximately 5.9 million are
not currently on the market. Many of the more dramatic estimates of the size of the shadow inventory seem to make the assumption that all 5 million delinquent loans will go into foreclosure; all of the loans entering foreclosure will become REOs and all of these REOs will hit the market at once. A MORE CONSERVATIVE APPROACH Fortunately, that’s not how the market generally behaves. A more conservative approach might suggest that a certain percentage of delinquencies will be resolved prior to a foreclosure action, and that not all of the loans entering foreclosure will ultimately become REOs. Our estimate is that between 3.25 million and 3.75 million of these homes will ultimately go on the market as REO properties, and constitute the real shadow inventory. One of the other important considerations is market timing. When will these properties hit the market? We believe that the most likely scenario, based on what we’ve seen since the beginning of this foreclosure cycle in 2006, is that property disposition will take place in a very measured, managed way between now and the end of 2013. REOs will continue to weigh heavily on the residential housing market, as the industry continues to create more inventory than the market can absorb. In fact, since the second quarter of 2005, there has only been one quarter when REO sales have outpaced REO creation (Figure 1). Based on the pace of REO sales in the fourth quarter of 2010 (95,683), it’s going to take more than 10 quarters just to work through the current inventory of REOs. Short sales, trustee’s sales and sheriff’s sales will help clear the inventory, but in a best-case scenario, it will take three to four years to clear the current and shadow inventory from the housing market — assuming that we don’t experience another unexpected wave of delinquencies and that the economy and unemployment rates improve as predicted. SLOW, GRADUAL IMPROVEMENT Assuming homebuilders remain disciplined and don’t add to the available inventory of unsold homes and current homeowners don’t flood the market with resale properties at the first sign of improvement, we can expect a slow, gradual improvement during another two years of weakness in housing before conditions begin to improve considerably in 2014. Is this actually how the market will play out over the next few years? Might some of the current problems facing the industry change the outcome dramatically for better or for worse? As Lamont Cranston might tell us, with an appropriately sinister laugh, “Only the Shadow knows.”
To suggest that the housing market and mortgage industry are in turmoil would be an understatement of epic proportions. Stubbornly high unemployment rates, an already teetering economy battered by dramatic increases in oil prices and weak consumer confidence create an environment that’s hardly conducive to a robust recovery. Making things worse are pressures from within the industry and from government and regulatory agencies attempting to address some of the problems created by the industry during the frenzied years of the real estate boom: The Dodd-Frank Act, the proposed settlement by the 50 state attorneys general over robo-signing, the reduction or elimination of the mortgage tax credit proposed by the Obama administration and the dissolution of Fannie Mae and Freddie Mac. Never has the ancient Chinese curse, “May you live in interesting times,” seemed more appropriate. In the midst of this, 2010 saw a new record set in terms of REO activity: More than 1 million properties were repossessed during the course of the year, adding to a burgeoning “shadow inventory” of distressed properties not yet on the market but creating downward pressure on pricing by their mere existence.
Sharga is senior vice president at RealtyTrac, which provides data and analytics as well as an online marketplace of foreclosure properties for consumers, investors and real estate professionals.
2010 saw a new record set in terms of REO activity:
More than 1 MILLION PROPERTIES were repossessed. — Rick Sharga, RealtyTrac
U.S REO ACTIVITY AND SALES 350
New REO Activity
100 SOURCE: REALTYTRAC
0 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
PERSPECTIVES / BEST PRACTICES
Hear from the experts on what works in successfully tackling REO challenges.
Maximizing REO asset values Current broker scorecard metrics reward low BPOs, fire sales By Andrew Jeffery dition and concerns over Federal Housing Administration financing. The all-cash offer is accepted and escrow closes in 15 days. Broker X looks like a hero: Multiple offers, a quick close and a spot-on BPO.
THE BROKEN SYSTEM Each additional day spent managing a value-added rehab project or holding an open house is one more blemish on the all-important scorecard. But the most glaring reason banks need to reconsider their broker evaluation metrics reveals an ugly truth in the world of REO: The current system rewards brokers for deliberately providing low BPO values. Agents will swear they don’t, but they do. And the listings keep rolling in. Consider the following scenario. Subject Property A has an as-is resale value of $200,000, but could use a fresh coat of paint, some simple touchup work and appliances that were manufactured some time after the U.S. went off the gold standard. With about $5,000 in improvements, the property could easily sell for $220,000. Savvy REO Broker X knows all this, but also knows that the process for recommending repairs, getting bids, performing the work and making sure it gets done right could take upward of a month. Meanwhile, the clock is ticking. Instead, Broker X provides a BPO value of $190,000 and recommends a list price of the same. The second opinion BPO comes in at $200,000, but since Broker X has a proven track record of quick sales, his low asking price gets the nod. Without so much as a sign in the yard, Broker X slaps the property on MLS and has multiple offers inside a week, the highest being $200,000. Knowing that consistently beating his own BPO value could tip his hand, Broker X convinces an all-cash buyer at $190,000 to shorten escrow. He then leans on the asset manager to accept the all-cash offer, citing the property’s poor con-
Jeffery is CEO of Cirios Real Estate, an REO brokerage in the San Francisco Bay Area.
HIGHER SALES PRICE GETS PENALIZED Now consider the same situation with Broker Y, a hungry young broker looking to impress a new client. Broker Y strongly suggests that the lender pay for repairs, promising a repaired sale price of $220,000. Property preservation vendors bid the job. The work is ordered, completed and inspected, four weeks later. With a little arm-twisting and half a dozen trips to the property, Broker Y has a sparkling clean REO slated for this week’s broker tour. Broker Y holds two open houses, blankets the neighborhood with flyers and even pays for staging. Buyers barely know it is an REO. After 15 days on the market, Broker Y collects two offers, both FHA, both at list price. The stronger of the two buyers is chosen, the standard 45-day escrow period passes and the sale closes. Broker Y, despite hitting the BPO value on the dot, took an extra two months to do so. That she earned the bank an extra $30,000 for just $5,000 worth of work doesn’t show up on her scorecard. In our timeline-based world, Broker X will get the next assignment, every time. Meanwhile, Broker Y’s reward for earning her client a great return on investment is yet another second opinion BPO on Broker X’s new listing. It is easy to see why, by focusing so heavily on timelines to measure performance, lenders are leaving money on the table. Consider this: According to RealtyTrac, just more than 500,000 REO properties sold to third-party buyers in 2010. If, on each of those sales, the listing broker had managed to squeeze just $10,000 out of the buyer via smart rehab projects or negotiating for the highest price rather than the quickest close, lenders would have pocketed $5 billion in additional REO sale proceeds. That’s billion, with a B.
Speed is essential in this business. After all, time really is money. Successful REO brokers understand this, but for the lenders and servicers they represent, speed may not be the operative word when it comes to getting the most from their bank-owned inventory. Timeline-based performance metrics result in misplaced incentives and billions of dollars in lost revenue. But it doesn’t have to be this way. For lenders interested in treating their REO inventory like assets to be maximized rather than a cost center to be marginalized, the first step is reassessing their broker network. REO brokers are evaluated on speed, since performance metrics are largely centered on pushing assets through the system as quickly as possible. This is not altogether illogical, given high REO carrying costs. And since agents only get paid when a property sells, they are well incentivized to move things along. What brokers are not incentivized to do, however, is maximize the value of the property. After all, that takes time.
UNLOCKING LOST REVENUE Unlocking this lost revenue starts in the trenches. Are timeline-based metrics really the best way to incentivize brokers? How often do brokers sell properties significantly above their BPO value? Are all potential buyers getting a chance to see your listings? How good are your property preservation vendors? When was your last surprise on-site listing inspection? Do your brokers understand your goals? How do you compensate brokers for managing rehab projects? Are your REO brokers working for you, or themselves? These are not easy questions to answer. But lenders who do will get more for their REOs. And who knows, they may even sell some faster, too.
Managing loss severity Taking a proactive approach to code violations is key By Rudy Krupka Managing loss severity takes on different meanings depending on your role in the world of mortgage banking. Whether you’re an investor, servicer or REO asset management company, the role of managing asset loss severity plays an integral part of day-to-day business operations. Investors focus on sound due diligence in the valuation of their assets. Servicers create valuation models for managing loss mitigation, short sale, deed-in-lieu and foreclosure decisions. And REO asset management companies utilize multiple valuation procedures to ensure their REO delivers the highest possible sales price. The one factor becoming more prevalent in today’s default servicing environment is the financial loss severity due to unrecorded municipal code violations. Over the past several years, local municipalities have enacted hundreds of new property registration and code violation enforcement initiatives to address the issues of neighborhood blight and problems associated with vacant properties. The trend of municipalities enacting more code violation initiatives related to foreclosures will only continue to grow. OWNERS OF RECORD Because the volume of foreclosures has skyrocketed over the last several years, identifying the current “owners of record” has become extremely challenging if not next to impossible for these municipalities. Factors such as chainof-title assignments, incorrect vesting, delay in foreclosure filings and recordings, unrecorded servicing agreements, and multiple locations of lenders exacerbate the communication and notification process of code violations. Municipalities do not have the resources to ensure code violation notices reach the responsible parties. City-issued code violation notices may go unheeded for long periods of time, resulting in excessive fines or legal action. In addition, foreclosure moratoriums instituted to address robo-signing issues delay the foreclosure process. As more properties remain vacant for longer periods of time, the chance of code violations with compounding daily fines increases. The reality is that most investors, servicers and asset management firms lack the expertise, technology and, more importantly, the capacity (both capital and human) to fully
address code violation issues. Tracking, compiling and understanding compliance requirements with a multitude of registration and code issues nationally is a full-time job. Relying on local real estate agents or field service personnel is often times a “hit or miss” proposition. The “roll-the-dice” approach in today’s growing code enforcement environment is just an invitation for that one asset that lands you on the front page of The New York Times. Code violations range from registration noncompliance, trash in the yard, broken windows, algae in pools, public safety issues, and overgrown lawns, to improvements made without permits. Fines for these code violations can range from nominal amounts to fees that compound daily in excess of $250. It’s not uncommon to see code violations fines in the $100,000-plus range on properties with compounding daily fines for several years. In fact, several regions across the UnitedStates see code violations on 40% to 50% of all properties with substantial fines and open violations. Code violations not only create financial loss severity for investors, servicers, and asset managers, but also liability and risk exposure in other areas such as clouded title and REO marketability (unrecorded liens); delay in REO closings and asset holding costs. Other issues include repair costs; neighborhood blight; criminal liability for owners of record; potential demolition and litigation costs. In order to effectively manage the severity of losses due to code violation and minimize risk exposure, the industry must take a proactive approach versus a reactive approach to municipal code violation management. A proactive code violation strategy will deliver a substantial return on the back-end, lessening financial loss and exposure. A proactive approach minimizes exposure to negative publicity and potential criminal liability. Proactive communication and cooperation with local municipalities lessens penalties and fees. A proactive strategy reduces REO timelines by resolving last minute violations prior to closing; minimizes potential risk exposure to missed unrecorded code violations and liens not of record; and builds “good will” with local authorities based on a partnership and communication. This leads to lessening your organization’s financial loss severity and risk exposure due to unrecorded, municipal code violations.
Krupka is the president and CEO for Code Violation Services, (www.cvsinc.net) in Denver, Colo. CVS provides risk and loss severity management services to the mortgage industry.
Protecting vacant properties Vigilance and new approaches can keep REOs and neighbors safe
By Alan Jaffa Keeping vacant properties safe is a year-round challenge for mortgage servicers and their field service companies. But spring and summer pose a particular challenge in many parts of the country as people, especially children, spend more time outdoors. The U.S. Census Bureau reported that in the fourth quarter of 2010, 18.4 million homes, or about 14.1% of the nation’s nearly 131 million housing units, stood vacant. Comprehensive statistics may not exist, but plenty of reports, studies and news articles paint a dramatic picture of what can happen in neighborhoods with vacant properties. Arson fires, drug activity, theft, vandalism, rape and other serious crimes are reported far more frequently in vacant properties. Sadly, several incidents have been reported where children have drowned in unsecured or improperly secured pools on vacant properties. In the spring and summer, when there is no snow to detract trespassers or create tracks, and children are out of school, vacant homes become party houses in larger numbers. Thieves are also more likely to break in to remove copper pipe, hardwood floors, cabinetry, plumbing and structural items that can leave a vacant property with little or no market value. The coming of spring is a good time for us to redouble our efforts and identify better ways to protect properties and people. CONTRACTORS AND REAL ESTATE AGENTS Mild temperatures usually mean more field service visits to vacant properties for grass cutting and other exterior maintenance. Real estate brokers are also frequent visitors to REO properties for showings to prospective buyers. It costs nothing to enlist these people to help keep properties safe. In the course of their work, contractors and real estate agents are in the best position to spot hazards such as broken doors and windows, loose handrails, broken steps, holes, broken glass or debris that could injure someone walking through the yard, or a pool hazard such as broken
fencing or a compromised pool cover. Real estate agents and contractors need to be engaged to identify and report issues immediately. Neighbors around a vacant property probably have a more vested interest in keeping a property safe than anyone. They’re also likely to be the first to spot trouble. Within privacy guidelines, neighbors should be contacted by using door hangers, notices or other means. In addition to contacting the police if they see anything suspicious, neighbors should know who to contact at the servicer or its field service company. In the same way, outreach to municipal code enforcement officials opens the lines of communications to receive early notice of potential safety issues, as well as code violations. NEW WAYS TO SECURE PROPERTIES Two new products currently stand out for their ease of installation, cost-effectiveness and ability to keep properties more secure. One is a pool cover with a 4,000-pound break-strength that contractors can install in a few minutes, compared to traditional covers that are more labor-intensive and use boards to keep the cover secure. The new cover allows contractors to secure pools faster. It comes in standard sizes and in a compact kit with all necessary hardware, and can be customized for nonstandard pools. The cover is made of a lightweight mesh that lets water through so it doesn’t puddle on the surface and keeps debris from entering the pool. Another product is a new lock that replaces a conventional hasp and padlock and can be used in place of a deadbolt. The old hasp locks have been easy to kick or break open, thus leaving properties unsecured, but this new kind of lock is made of thick, heat-treated steel that clamps into a door’s deadbolt hole and fastens into the door jamb with large, heavy-duty lag screws. As high property volumes persist, it is important that we all share our best practices to keep properties safe and secure, recognizing the challenges of time and cost. This summer, if we can prevent even one tragedy by working a little smarter, our efforts will have paid off.
Jaffa is CEO of Safeguard Properties, the largest privately held mortgage field service company in the U.S.
Code enforcement compliance DUFOUR
Constant contact is not just a goodwill effort By Lorne DuFour and Chad Mosley
Changes to federal legislation remain top of mind for most banking and mortgage professionals, yet the challenges of local code ordinances is what continues to test the resolve of asset managers, property preservation companies and listing agents alike. Across the country’s thousands of municipalities are hundreds of unique stipulations pertaining to the standards of maintaining REO properties. Since these codes seem, at times, to increase in number along with the size of servicers’ portfolios, collaboration between all REO stakeholders on managing their impact is paramount. Bank-owned homes must be marketed differently today than they were in the past. With REO inventories expected to rise, the increased number of code ordinances creates the potential for more occurrences of noncompliance, making fingerpointing easy. The REO stakeholders involved must remember that they each have a vested interest in how the others perform in their role. They must work collectively to protect and preserve properties and communities. The urgency from which the communication between stakeholders stems has two primary elements: the lack of standardization and consolidation of information; and the disparity of knowledge between the stakeholders. There are more than 400 vacant property registration ordinances and another 500 or more code compliance ordinances that a field service company must monitor at any given time. While true that more new local code requirements are being defined today as compared to years past, many of them also existed years ago, but were just not enforced. However, the transition of this industry over the past three years has brought code compliance to the forefront. Consequently, consumers want desperately for that REO property down the street to not be so glaringly apparent. The real challenge is being able to stay on top of all the ordinances. Most servicers and field services companies have assigned dedicated resources responsible for monitoring changes to existing codes as well as identifying new local codes, not to mention continuing to manage the outreach and ongoing communication between each party involved. Some major servicers even have local representation in areas where they have particularly strong exposure; the goal being
to promote code ordinance awareness and work with the cities in a way that is favorable to their initiatives. Adding to the complexities, research for ordinances must be done by locality and not by subject. So rather than trying to identify municipalities with strict requirements for snow removal, for example, the task becomes locating proper documentation for each city and reading through it manually to determine if such a thing exists. Similarly, field service companies must locate and read through documents — in their entirety and if they are even available — to see what ordinances are in place. Otherwise, a servicer may never know if a particular city has a specific ordinance. There is also no standard to filing vacant property registrations. Without standardization there is concern that as cities continue to enact ordinances, ensuring that the information reaches all affected parties becomes increasingly difficult. Beyond the need for communication about the ordinances themselves, there is an apparent need for continuous education about the REO process in general. The most significant issue with code ordinances remains to be properly identifying the responsible party for the property. Code officers have a responsibility to their communities and the people within them. However, many times they do not know at what stage the home is in, in terms of the delinquency process, which can cloud the process of discerning who to contact to get a property issue resolved. OPENING LINES OF COMMUNICATION Not only do asset managers, property preservation companies and listing agents possess varying perspectives about the process, but they also have a broad range in industry and procedural knowledge. It is important, then, to bring these parties together so that they may see through the lens of one another other. Opening up the lines of communication to brokers is also important. The traditional process for addressing property violations would be for the broker to contact the servicer, which would then communicate the situation to a designated field service company. Today’s procedure is much more streamlined, as brokers can go directly to the field service provider and relay concerns from the local code enforcement officer. This new workflow ultimately enables the problem to be solved more efficiently. The mortgage industry is under the microscope more than ever before, but encouraging proactive outreach and ongoing communication goes beyond courtesy and goodwill. For today’s housing environment, it is a necessity as we work together as an industry to protect, preserve and restore America’s communities.
DuFour is assistant vice president, code compliance; and Mosley is vice president of business development at Mortgage Contracting Services, a national property preservation and inspection company.
The high risks of property preservation Position REO with the right services at the right time
On the surface, the latest foreclosure numbers paint a brighter picture of today’s foreclosure market. According to RealtyTrac, foreclosure activity decreased 14% between January and February and marked a 27% decrease from February 2010. In addition, defaults, scheduled auctions and REOs were at their lowest in 12 months. What these numbers do not show is the continued backlog of foreclosures that have yet to hit the market. When they do, it will bring an increasing number of vacant homes with a high risk of these homes falling into disrepair. A house that is abandoned and unmaintained can lead to neighborhood blight, along with decreasing overall property values. While it may be hard to see and understand the rewards of an investment today, it’s imperative that these distressed assets are not overlooked. Ten years ago, it may have been enough to do a quick sweep of a property and put it back on the market, but the standards have changed. Inspecting, remodeling, covering utility bills and general maintenance can become a delicate and costly balancing act. Banks need to find more creative and innovative ways to approach preserving and managing these properties. Only by implementing the right services, at the right time and in the most efficient and cost-effective way will banks ultimately be able to uniquely position their foreclosed and REO properties and sell them more quickly. INSPECT DURING ALL STAGES The ability to accurately inspect properties during all stages of default is essential to maintaining high levels of quality. Ensuring objectivity and quick turn-time performance in the inspections process has become a challenge for the industry due to the volume of REO and foreclosed properties. When it comes to inspection services, banks need to make sure they are using qualified, full-time inspectors who are trained and experienced in property collateral and foreclosures. Ask potential providers if their inspector panel is full time (versus part-time) and ask about their average years of experience and training property collateral inspections. In addition, truly integrated inspection services should include occupancy, pre-sale, compliance and specialty inspections as well as online delivery, reporting and status of inspections completed in the field. And, since many inspections are needed to identify potential repairs and to verify the completion of work, banks should require tamper-proof photo documentation of the completed repairs. This will
eliminate the need to revisit properties and ensure a quicker turn time on all inspections. The saying “time is money” has never been more true than it is today, especially when it comes to managing the utility process for multiple properties. Working with a property preservation specialist that has in-house expertise and relationships with utility organizations can offer banks a single point of contact to oversee every aspect of the utility process. By implementing a more automated and processoriented approach to utility management, banks can reduce risks and better manage expenses. REDUCE TIME ON MARKET WITH REMODELING Field Asset Services conducted an independent study of foreclosed and REO properties comparing the number of days on market for remodeled properties versus those that were not remodeled. The results showed a dramatic 68% reduction in days on the market for properties that underwent rehabilitation. The prospect of rehabilitation may seem intimidating, but thanks to new programs being introduced by property preservation providers, banks no longer have to worry about managing the tasks of such an undertaking. When evaluating remodeling offerings, banks should make sure the provider tailors each project to its market and desired resale price; offers products designed to help increase a property’s overall energy efficiency and sustainability; and can manage the project to specific timelines and budget. SINGLE SOURCE OF CONTACT The number of services needed to maintain a single REO property can vary widely depending on location, condition and local government regulations. Managing a vast array of properties in multiple locations with different requirements increases the probability of mistakes and fraud in the field. To eliminate these risks, property preservation services should be offered as a single, integrated solution with centralized coordination and management. Property preservation services offered as an integrated solution provide banks with a “one-stop shop” and most often result in better pricing and processing models. By having a single source from which to access the most important services, when and where they need them, banks can reduce risks and simplify the everyday management of REO properties. Because the number of properties needing maintenance and preservation are growing daily, we must bring to market new and innovative products and processes. Preservation specialists need to deliver the right services, at the right time and in the most efficient manner possible.
By Dale McPherson
McPherson is president and CEO of Field Asset Services, a property preservation and REO asset management servicing company, which manages more than $10.8 billion in residences on behalf of our 26 major clients nationwide.
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F E AT U R E : T O K E E P O R N O T T O K E E P
p e e To k t o or n ? p e e k to
HUD TO GIVE GUIDANCE ON PERSONAL PROPERTY EVICTIONS
DI NE RICCIAR BY CHRISTI
The timeline for delinquent borrowers has grown so long that homeowners remain in limbo for an extended period. So it is no surprise that property preservation practices remain in limbo long after the homeowner has vacated. It is now the nature of housing today.
F E AT U R E : T O K E E P O R N O T T O K E E P / REO MANAGEMENT / HW FOCUS / 22
One issue in particular is what to do with a borrower’s belong- Department of Housing and Urban Development, said the ings. Personal property evictions vary state by state, but usual- agency is set to release guidance for personal property evicly consist of either putting interior items by the curb for trash tion sometime this year. Collins said HUD recognizes how sensitive an issue peror in a storage unit for a month or two. Field servicers meet with a local sheriff to assure compliance and sift through sonal property eviction can be and that servicers need some sort of defense when dealing with this issue. items to establish what is property and what is trash. Personal property involves things that a homeowner “We deal with this issue with as much compassion and sensitivity as possible,” Greg Tolander, chief operating officer may have left behind in the home after vacating it, anything of Field Asset Services. “The troublesome part is when we’re di- from clothes to furniture and other personal belongings. rected that the house is ready to be cleaned, and we find items Servicers have said they need more guidance on what they should do with such property. that we believe represent a value that qualifies as property.” “We understand it is a problem, and that’s why we’re Brad Trapnell, vice president of servicer Energy REO, agrees. There can be an intense emotional component. In ad- changing our guidelines,” he said. The pending guidance is in response to a HUD mortgagee dition, servicers and banks alike are in a very high-risk situation dealing with personal property. If a servicer disposes of letter sent out in 2010. The agency updated its property preservation guidance, requiring servicers to resomething and a borrower comes back to claim move interior debris of a property and leave it, the borrower can make a legal claim allegit in broom-swept condition. Prior to this ing failure of due process to collect his or her initiative, HUD has never had any formal belongings, Trapnell said. guidelines on how to deal with property be“Some borrowers leave the house not fully cause servicers were not required to handle understanding the process and thinking they interior property. have an opportunity to get their personal The anticipated guidance will estimate things,” Trapnell said. “Very often (servicers) a dollar amount that should be spent on have been sued and either have to settle or storage services for 30 and 60 days. HUD is take a loss.” considering an allowable cost to store perJust recently, in a hearing before the House “We’re getting sonal items after the property has been foreOversight and Government Reform Committee closed upon. HUD will reimburse the mortin Baltimore, Md., homeowner and military vetmore personal gagee up to that amount. Servicers convey a eran Kevin Matthews testified against servicers property property within 30 days of obtaining title. for wrongfully seizing his personal property “We’re getting more personal property along with his house. complaints complaints than ever before,” commented Matthews’ home was damaged due to a lack than ever before. Alan Jaffa, chief executive officer of preserof winterizing, and he was given a citation for vation company Safeguard Properties. “The an overgrown lawn after his lawnmower was The issue issue becomes what is personal property taken by the bank and never returned, according to court notes from Congressman Elijah becomes what is and what is debris?” HUD does not plan on releasing guidCummings’ office. Matthews’ foreclosure was personal ance in response to this question. Both Jaffa voided after the case was dropped due to faulty and Collins agreed it is ultimately up to the paperwork. property and servicer to determine the difference. Marc Hinkle, vice president of loan servicing at MORE CLARITY NEEDED what is debris?” PHH Mortgage and moderator of the MBA At the Mortgage Bankers Association’s ser— Alan Jaffa, panel, said his firm uses common sense to vicing conference in February, William Colidentify debris from personal property. lins, mortgagee compliance manager for the Safeguard Properties
QUICKFACT Personal property involves things that a homeowner may have left behind in the home after vacating it — anything from clothes to furniture and other personal belongings.
“If it’s a working grandfather clock, it’s probably not debris,” he said. However, for some, the lines aren’t so clear-cut. Tolander said his firm, based in Austin, Texas, uses a “garage-sale dollar amount” that varies between each of his clients, which are usually banks. If the item could potentially sell at a garage sale, then it is classified as personal property and not debris. Tolander’s team is tasked with deciding what each personal item would price at a garage sale. Each client has a different frame of reference, but give or take, it’s generally around $500, he said. Trapnell, too, mentioned a garage-sale dollar standard, but said there is ultimately no easy way to decipher the difference between property and debris. “Furniture and electronics are key items,” he said. “If it looks like somebody got up and walked out, if you see family photos and things of that nature, that should be a red flag.” Both Tolander and Trapnell believe the HUD guidance
surrounding the issue would be helpful if it set some sort of standard definition for personal property, but each realizes how difficult that would be. “The problem is the definition is so relative,” Trapnell said. Michael Foreman, senior director of industry relations at CoreLogic Field Services, thinks the pending guidelines about storage terms are going to be helpful for the servicing industry. In his opinion, storage time frames are an excellent tool for servicers because they allow his employees to get the personal property eviction process started. “The guidance lessens some potential liability on the field service provider executing the eviction,” Foreman said. It allows the servicer to do the obligated job “where a homeowner may potentially say this is missing, and where did it go?” HUD’s Collins told HousingWire that details are still “in the discussion phase” and he had no timeline as to when the guidance would be released, except that it would be available by the end of the year.
Happy Anniversary to us! It is not surprising that some of the nation’s largest servicers rely upon MCS. For 25 years, we have provided them with quality property inspections, property preservation and REO property maintenance. We make protecting and preserving our nation’s communities our highest priority. At MCS, we are not just another field service provider, but innovators whose clients have come to expect quality work and exceptional customer service. Count on MCS to help you prepare for whatever the next 25 years may bring.
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access granted. last year, rEo Expo set a new industry standard. This year, with a completely revamped educational offering, even more on-site agent interviews, the Pinnacle Awards and a whole lot more, REO Expo 2011 is designed with one goal in mind: helping you do more business than ever before. Join us as we make industry history. Again.
rEo Expo 2011 supports rEbuilding togEthEr
REO Expo will donate 5% of registration proceeds to Rebuilding Together. Rebuilding Together is the nation’s leading nonprofit working to preserve affordable homeownership and revitalize communities. Their network of more than 200 affiliates provides free rehabilitation, modifications and critical repairs to the homes of low-income Americans, making homes safer, more accessible, and more energy efficient. www.rebuildingtogether.org. REO Expo is proud to support Rebuilding Together — together we can all support our most vulnerable neighbors with the most basic of necessities: a warm, safe and dry home.
June 12–15, 2011 | fort worth, texas
R E G U L AT O R Y M AT T E R S
PERSPECTIVES / REGULATORY MATTERS
The regulatory landscape seems to be changing daily. It is important to stay informed.
Certification is key for REO brokerages Federal government increases the push for minority- and women-owned firms
REO brokerage business practices are more complex, demanding and time-consuming than ever before. Just the very nature of running a business, studying market trends and incorporating new policy mandates requires an enormous staff and keen business awareness. Monitoring legislative and policy opportunities in Washington — often with implementation and execution coming from regional hubs such as Dallas — is often beyond the staffing and tracking capability of most REO brokerages. National servicing requirements are being thrust into the mix with the challenging economic environment and discoveries of past issues. Several officials are suggesting that the Consumer Financial Protection Bureau write national servicing standards to bridge servicer differences for loan modifications and foreclosures. The days of policies becoming effective in months or next year are long gone. Nowadays policy implementation can become effective immediately. This affects all of us in default services as well as homeowners across the nation. To be prepared and take advantage of new programs and other opportunities, REO brokerages should seek certification for their businesses. Diversity certifications, such as women, minority, veteran, veteran-disabled, lesbian-gaybisexual-transgendered, and Hubzone business owners, should be taken advantage of. Note that while Hubzone designations are not necessarily based on diversity, they are based on a business’ location in a “historically under-utilized business zone.” Taken together, and considering the multiple ownership structure of many firms performing work in default services, a significantly wide net is cast in who can apply for diverse business designations. JOINING ALLIANCES Business owners can join an alliance with quality industry-specific organizations as an excellent source to supplement a business knowledge base and for utilizing a larger pool of resources to increase their business’ footprint and opportunities. A key trend emerging for federal agencies and private-sector financial firms is the push to increase their diversity in 2011 with the utilization of women- and minority-
owned firms in default services. Knowledge of what is coming down the pipeline and how to best position a business is the key to opening windows of opportunity and expanding a business’ footprint. The Obama administration is ramping up additional attention paid to these diverse business owners, with legislation such as the Dodd-Frank Act providing more current movement to back up the renewed emphasis. The DoddFrank Act established a series of deadlines for key changes spelled out in the legislation. Key among them was the January 2011 deadline for implementation of the new Office of Minority and Women Inclusion. At most federal institutions, existing diversity offices will be rolled in to the new OMWIs. Prepared diverse business owners can expect additional requirements for staff, expansion of services and greater efforts to include businesses on the ground. To be considered for supplier diversity, set-asides, or other initiatives, business owners should pay attention to multiple levels of opportunity to demonstrate diversity, starting at the day-to-day management, employees and subcontractors. Certifying a business as diverse-owned is no guarantee of new business; however, it can potentially shrink the pool of competition or be a key differentiator with potential multiple opportunities for a firm seeking additional business. The more certifications you complete, the more you will enhance your firm’s profile to support the supplier’s diversity of new business opportunities. KNOW YOUR CERTIFICATIONS There are several different certification programs available both on a local and national level. Several of these certifications are only recognized within a very specific geographic location, specialty or classification. Certifications can range from a very simple, free online questionnaire to much more extensive, time-consuming, paperwork-intense processes with a nominal fee structure. Target your new business opportunities and complete your firm’s profile to best suit your potential client’s diversity needs. One of the biggest mistakes REO brokerages make is incomplete or inaccurate firm profiles for current and new business opportunities. Perfection is no longer an option. It is a requirement.
By Desiree Patno
Patno is the founder and president of the National Association of Women REO Brokerages. NAWRB represents women business owners and is the only provider of women-owned business certification in distressed services.
Compliance in the eviction process A misstep can delay action and cost the servicer By Derrick Logan Moving loans through the foreclosure process has become one of the most challenging tasks for the mortgage lending industry. By all accounts, millions of homes will go into foreclosure before the current crisis ends. Unfortunately, completing a foreclosure is not the end of the loss-mitigation process. The REO still has to be sold off, which can be extremely difficult if the property’s current resident is not evicted and the property not made ready to sell. Eviction field services are becoming more important for the reasons above, but there are others. Every state in the union has laws governing how and when a resident may be legally evicted from a property. While there are some similarities, no two states handle this process in exactly the same way, making this process incredibly complex for servicers. The various states’ eviction laws all have different time frames for a legal eviction and lockout. For instance, in a study of state foreclosure laws performed by REO Allegiance, servicers in one particular state saw an average timeline to evict of 120 days in 2007. By 2010, the average timeline had increased to 520 days in that state. In some jurisdictions we have studied, the foreclosure and eviction process can take up to two years. A misstep anywhere along that line can delay the eviction, costing the servicer more money. To make matters worse, eviction is not simply a matter of changing the locks. Many individual events must take place during this window of time, and they must all happen in accordance with all state and local laws or the servicer will be forced to start at least some of the process over, costing the servicer more time and money. It’s important to begin preparing for the lockout as early as possible, checking all requirements and lining up appropriate field services to ensure a smooth operation. On the day approved for the eviction and lockout, the servicer must have a representative on the scene who has already coordinated with the local authorities and is ready to fulfill any and all statutory obligations set by the state or locality. KNOW LOCK-OUT REQUIREMENTS Lock-out requirements vary wildly between jurisdictions. While some jurisdictions may require garbage bags to be available at lockout, others may require much more. In some cases, dumpsters must be on site on lockout day. Some states require a moving truck and a storage facility to be secured for the current occupant. Waivers and releases specifying that the former occupant’s personal property was
not damaged by the servicer or its representatives should be signed by the previous resident before the keys to such storage facilities are released to them. In Nassau County, New York, you have to show the sheriff proof that the storage facility has been pre-paid or the lockout will be canceled. In other cases, towing companies must be retained to remove automobiles. Animal control experts may be necessary for pets, or emergency services could be required for occupants who would be at risk if moved improperly. In some counties, local law may even stipulate how many able bodies must be on hand at the lockout. Across Maryland, for example, typically 10 to 15 people must be on hand. Meanwhile, in Washington, D.C., you would need 25 able-bodied men on site, or the sheriff will cancel the lockout immediately. Arriving at the property unprepared is as bad as not showing up at all. In the wake of a fatal shooting involving a law enforcement officer and a locksmith in Miami-Dade County, Fla., many jurisdictions have made changes to their required processes. In Miami-Dade, for instance, eviction field services personnel must meet with law enforcement personnel at a location remote to the property in question in advance of the lockout. The time and location of this meeting is not disclosed until the day of the lockout. The best eviction field services companies provide for real-time information flow to both the servicer and the listing real estate agent to ensure that the property is ready for the market in the shortest period of time. In all cases, before and after photos are important to verify to the servicer that the work has been done and the property is ready for market. This provides a sense of continuity for the servicer, allowing these firms to hand over this work without losing control. Web-based systems are best for this as they provide anywhere access to the information. If any missteps are made during this course of action, the lockout process will be delayed. If a writ expires before the occupant is evicted, for instance, it can take another 90 days to get the new paperwork to try again. Consequently, in the markets where more time is required, quality processes are even more important in order to effectively decrease overall loss severity. Because timelines vary and change in every jurisdiction, and servicers are held by the court to act within these statutory requirements, it becomes very challenging for servicers to remain compliant in their eviction processes, particularly for those firms that service loans on a nationwide basis. For these reasons, servicers will continue to reach out to qualified eviction field services professionals to aid them in the final disposition of these REO properties.
Logan is director of business development for REO Allegiance, a firm that has been active in the eviction field services business for more than 20 years.
Tackling the QRM and servicing standards Industry should seek and embrace clear, common sense rules
The qualified residential mortgage, or the “skin-in-the game” requirement, was well-intentioned when it was penned into the Dodd-Frank Act. It sought to have mortgage companies that package their loans into securities hold 5% of the risk for any mortgages that did not meet the “gold standard mortgage” requirements. The intention was to allow regulators the ability to monitor mortgage origination practices and discourage the proliferation of lax underwriting practices that contributed so greatly to the housing market collapse. Recent research supports this line of reasoning: Findings suggest that retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities. After tumultuous debate, the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency all agreed on a 20% down payment minimum for any loan to be considered a QRM. Many, including the Center for Responsible Lending, are alarmed at the QRM proposal, stating it excludes potential homebuyers who will be pushed out of the market with a 20% down payment rule. The QRM has been interpreted as the impetus for more restrictive lending practices and ultimately a bottleneck in the already lethargic housing recovery. It should be noted here that there is nothing in DoddFrank that says lenders can’t lend with less than 20% down. However, with this transference of the risk back to the lender, there will be a segment of the population that will no longer be able to purchase a home. Reality dictates that “homeownership for everyone,” may be feasible. SERVICING STANDARDS The loan servicing issues that have come to the forefront have made it impossible for servicers who traditionally operate under the radar to continue to do so. They have been pulled into the folds of this proposal. The warning shot over the bow came earlier this year when Sheila Bair, chairman of the FDIC, addressed the Mortgage Bankers Association in Washington. Bair said the failure of the servicers to act has slowed the housing
market’s ability to recover. She presented a multifaceted approach to stopping the delays in the process with a common sense approach to remedying some of the problems plaguing major servicers. LOAN MODIFICATIONS The Federal Reserve Board helped put together a deal where there would be limited servicers’ standards around the retention rule, with more inclusive rulings to follow separately. The agreement outlines the steps servicers will be required to initiate within 90 days of the homeowner becoming delinquent on their payments. A loan modification must be offered to any person whose home is worth more than its present value in foreclosure. Also on the table is the treatment of second liens, which in the past presented a major obstacle in efforts toward bolstering home retention. The proposed agreement requires the second-lien holder to disclose how that lien would be handled upon 90-day delinquency by the borrowers. The rule will not dictate the final outcome, but at least it is no longer an automatic slammed door to negotiation of a loan modification. In addition, the lien holders would also have to disclose if they are the owners of the first and second lien. In addition, creditors would be required to have compensation package agreements with their servicers that do not impede or discourage loss- mitigation negotiations with the homeowners. Though this will not be the only loan servicing regulations to come about, it is a start. More succinct definitions of what constitutes loss-mitigation efforts must be established and should not be left up to the market players to make that determination. As evidenced with the minimal success of the Home Affordable Modification Program, servicers are willing to initiate loan modifications, but the rules have to be defined to avoid the frequently changing landscape that proved to be so daunting. We know the changes are coming — some may be already be in place when this is published — and we need to let our concerns be heard, but most important is the final outcome, which must consist of changes that are sustainable and bring our industry into lock-step with the current needs of the housing climate now, and as we move forward.
By Cheryl Lang
Lang is president and CEO for Integrated Mortgage Solutions, a national woman-owned firm that provides asset management services to the mortgage servicing industry, including inspection, repair, preservation, and REO management, among other services.
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S A L E S S T R AT E G I E S
PERSPECTIVES / SALES STRATEGIES
Learn from the pros on what works and what doesnâ€™t when selling REO properties.
Homeowners association fees Ignore them at your own risk By Joe Cutrona
Cutrona is senior director of REO Services at CoreLogic.
STATE AND LOCAL KNOWLEDGE ESSENTIAL Not surprisingly, HOA issues tend to be concentrated in the same handful of states that have the highest foreclosure and negative equity rates: Florida, Nevada and parts of California. These are also areas with high concentrations of condominiums and planned communities, which, of course, have HOAs. (Although Washington state is not usually considered as hard hit as the so-called “sand” states, it ranks high on the list of states with HOA issues.) Regulations governing HOA fees vary by jurisdiction but the trend in recent years has been to extend the periods in which HOAs can recover for past due charges. In 2010, Florida extended the period in which HOAs can collect from six to 12 months prior to foreclosure and set the total amount at 1% of the original mortgage balance. Nevada also extended its super-lien period from six months to nine months. Many state legislatures are taking a hard look at this issue. Washington state has recently changed the wording and interpretation of its statute of limitation on super-lien allowables. In Washington, this means that “allowable unpaid dues” can be collected in the six months prior to a foreclosure event. But its six-month, super-lien period only applies to condos. Single-family homes are not included in this law, so HOAs stipulate that servicers must pay the entire balance. This is a much greater financial burden on servicers. To help servicers manage an increasing number of HOArelated invoices, REO management companies have set up special teams to handle issues with HOAs and code violations. This may involve being familiar with the varied requirements regarding HOA invoicing, and HOA covenants,
Homeowners associations — like municipal and county governments — have been hard hit by the housing crisis and are aggressively looking for ways to recoup assessments that have gone unpaid as borrowers default. With foreclosure timelines now averaging 17 months nationally, it is not uncommon for HOAs to present REO servicers with large invoices for past due fees, plus late charges and penalties, as well as legal and collection costs. Many servicers are now questioning the size and the reasonableness of HOA invoices, as well as asking REO management companies to scrutinize and, if appropriate, renegotiate HOA fees. To get a sense of the scale of what is at stake, in 2010, servicers asked CoreLogic to review more than $7 million worth of HOA invoices. During that process, we were able to identify and negotiate $1.4 million worth of savings, resulting in a 20% reduction in fees.
conditions and restrictions, and the practices of management companies, collection companies and HOA attorneys. How important is this? Well, a servicer recently received a whopping $127,000 HOA invoice for a single, high-end property in Hawaii. But a closer reading of Hawaii’s HOA state statue showed that there was a $3,600 ceiling for what this HOA could charge on prior-to-foreclosure assessments, plus current dues, or another $8,664. All of which was impressed upon the HOA’s attorney, and the servicer avoided an $114,736 overcharge. Some HOAs are using very expensive law firms and collections agencies to pursue their claims, which raises questions about the reasonableness of the invoices. In Nevada, one invoice for $200 in past dues came with $4,000 in legal fees tacked on. Another invoice from Florida grew from $2,515 to $7,500 when legal fees were added. ONE PROPERTY, SEVEN DIFFERENT HOAS Increasingly, a single property can be in arrears with more than one HOA: for example, an owners’ association and also a golf or tennis club. Recently, one of our clients foreclosed on a property in Florida and learned, to its chagrin, that not one, but seven separate (though related) HOAs lined up to present past due invoices. While this is unusual, the increasing complexity and, at times difficulty, in dealing with specific HOAs and their management companies is not. Some refuse to provide a ledger of past due charges until the servicer, or its agent, can show a recorded foreclosure deed. In many counties swamped with foreclosures, deeds are slow to record and this can add months to the beginning of the settlement process and the delays translate into higher total charges. Occupancy issues can also be challenging with various HOAs. Are the occupants now considered tenants instead of owners, who have to be treated according to the new GSE guidelines? And what if owners are continuing to pay certain fees, such as pool, docking or sports club memberships? Are the HOAs accepting the fees, and if they are, will the servicer eventually be credited for them? Most HOAs are simply trying to recover what’s owed. But the high volume of defaults in some markets is creating errors, unreasonable charges, delays and, in some cases, questionable business practices. Servicers are sensitive to the needs of HOAs and are usually willing to pay appropriate and required charges related to REO properties. But the days of servicers auto-paying these charges are coming to an end. There is growing realization that increased scrutiny of HOA invoices is needed along with a willingness to push back when necessary. The famous quote by Finley Peter Dunne comes to mind: “Trust everyone. But cut the cards.”
REO’s new landscape REO departments need a robust sales mindset By Ronald Jasgur When the current housing crisis reared its ugly head, the industry assumed it was a short-term problem and proceeded to ramp up toward the ability to manage the avalanche of foreclosed properties moving to REO. At most companies, the same processes that were in place when REO numbers were in the dozens are effectively the same processes used today. The only problem now is that they’re applied toward managing hundreds or thousands of properties rather than a few, with a singular goal of tracking the life cycle of a property from default through disposition. Default managers everywhere concentrated on how quickly properties could be moved from foreclosure to disposition, tracking how many properties were liquidated each month and what type of loss severity was ultimately realized. When defaults represented 1% of originations, it was easy to “lend your way” out of a bad situation. More originations offset the low, but growing, default rate, and “the new normal” of liquidation allowed the industry to be content with routine tracking and reporting. Not anymore. Most lenders rely on some pretty sophisticated technologies to track REO. They’re terrific for managing assets, collecting documents and tasking the numerous vendors who are relied upon to move assets along a predetermined track. But the systems and processes that are being used today to manage assets leave glaring holes — and missed opportunities. As the nation comes to terms with the fact that the housing crisis is beyond our worst fears and is going to be an issue for the next 10 to 15 years, there are new problems that default managers must address. REO DEPARTMENT AS SALES FORCE At the MBA servicing conference this past February, many executives commented that there is much room for
improvement in the way REO is handled. Not one of these individuals considers their REO department to be a sales force. But they should. Government oversight, institutional investors and industry policies are beginning to force attention on agent-buyer fraud, ambiguous and haphazard sales policies and vendor reviews. The successful companies in the new landscape will be those that look at their REO inventory as a product that needs to marketed, managed and sold rather than a byproduct of a failed origination. REO inventory has long been the redheaded stepchild of the mortgage industry. Now that these properties represent at least 25% of today’s sales, it’s time to transition from an operationally centered process to a sales-driven approach. With a modest shift in perspective, banks and servicers can reinvigorate their default departments and prepare everyone involved for greater success. Shifting from incremental improvements to a finely tuned sales machine requires not only identifying and reducing incidents of fraud and inefficiency but also creativity. Identifying ways to cross-sell within an organization, offering community incentives and capturing origination leads for in-house sales staff are ways that the industry can offset the original loss from a defaulted loan. There is not a product known to man that sells itself. The very reason companies support a sales force is to gain the best execution through the broadest customer base possible. If we really expect to resolve the REO crisis, we must stop managing the process and begin approaching this with a most robust sales approach that we can create. No company wants to manage their products; they want to SELL them.
Jasgur is president of Woodward Asset Capital, parent company to OfferSubmission.com and VerifiedShortSale.com.
Gain and retain Getting and keeping REO business By Cary B. Sternberg
The key to making a profit in the REO sales business is to be so good at what you do that you continue to get assignments from current clients and establish a reputation that can help acquire new business. But if you are new to the REO world, how do you get business? And even if you already have business, how do you attract more? I am often approached by agents who say, “I want to earn your business!” My answer is “How are you going to do that?” And they say, “If you give me the privilege of listing your property, I will sell it faster, cheaper, easier.” The problem with that is that the agent isn’t really earning my business. They want me to first give them a listing and then prove to me that they can perform. That seems backward, so how do you attract new business? How much do you want to increase your business and, even more importantly, do you have the resources, both manpower and financial, to back up your promise of superior service? Don’t lose business you already have as a result of being spread too thin. DO YOUR RESEARCH If you do not want to be fronting what could become large sums of money, find out if the prospective client requires property preservation services or if they use property preservation companies who do the work and then submit directly to the client for reimbursement. Does your target client have many assets in your market area? Does your target client have assets that are generally in the size, condition and locations that you service? Once you have your target client, identify their assets that are already listed and concentrate on selling those assets. When you attend the next REO Expo or similar conference, be able to introduce yourself to the target client by saying, “Mr. Servicer, I am Johnny B. Goode from C. Berry Real Estate and my team and I have sold 60% of the assets you have listed in my market. I was hoping that would earn me the opportunity to show you that I can manage and list your assets with equal effectiveness.” I can’t guarantee this will get you a listing, but it is much more likely to work than simply asking for the business. After the sale of an asset, send a note with details of your track record to the asset or sales manager. Send cards or notes at unexpected times of the year, not major holidays.
Edible treats during the holidays should be sent to the whole team, but make sure to understand the company’s gift policy before sending anything. Here are some ideas I have gathered by watching successful agents over the years: • Acknowledge the initial assignment and occupancy report within eight business hours, and make sure the report and verification is correct. • Understand cash-for-keys, or relocation assistance, policies and strive to increase your conversion percentage. • Be the asset manager’s go-to-person in your market. • Understand the policy for preparing broker price opinions and exceed expectations in preparation and delivery. • Make sure that your sales price to BPO value percentage is high and know how it compares to the sales price to appraisal percentage. • Make sure that you understand the policy for offer submissions — and that you exceed it. Anticipate questions the asset manager may ask about the offer and submit answers with the offer. • Give your asset manager weekly updates on the progress toward closings, highlighting deadlines made or missed, and advise on challenges or extensions needed. AT AND AFTER CLOSING Real estate brokers and agents should also keep others in the loop, including the lender, closing attorney and buyers agent. Also, attend the closing to make sure that everything goes smoothly. Finally, inform the asset manager when a sale is closed. Follow up with the closing agency and make sure that the funds are remitted to the asset manager as per its policy. Within a week of closing, verify to the asset manager that recording has taken place, all signs and lock boxes have been picked up, and all utilities have been switched to the buyer’s name, and that you have informed the field service provider to halt any grass cutting, snow removal or other services. The key to success for the broker or agent is to anticipate the needs of the asset manager, and fill them before being asked.
Sternberg has provided executive leadership for American Homes Mortgage Servicing, IndyMac Bank, Excellen REO and Ocwen.
Reaching out to owner-occupants How brokers can make a difference when selling REO By Glen Calderon The late playwright and Congresswoman Clare Booth Luce once said the famous words “no good deed goes unpunished.” To be sure, we have all had experiences in which our best intentions have gone awry. The trouble with this thinking is that it can stop us from actually doing the right thing when it really counts. A perfect example is our nation’s escalating REO crisis and the opportunity REO brokers have to help lift all boats. Numerous studies have validated that selling REOs to investors can perpetuate future defaults and eventually create more vacancies. As a broker in metropolitan New York in the late 1990s and early 2000s, I experienced this firsthand as we had a significant inventory of REO properties, most of which were in underserved communities. As a result, I made a personal and business commitment to try to end the vicious cycle of REOs by selling my clients’ properties to as many owneroccupants as possible. Although I was not a housing or outreach expert, my efforts got me two U.S. congressional awards and I got to serve on the homeownership committee of the largest housing counseling agency in New York City. This was more than five years ago, but the steps I took are still applicable and would work today. Fannie Mae’s First Look and HomePath initiatives, as well as HUD’s initial owner-occupant period and its Good Neighbor Next Door program are outstanding efforts to promote sales to owner-occupants. But it is still the local real estate professional who should support these programs with marketing and outreach. Rather than leave the nation’s recovery to others, here are five action items REO brokers can do right now: 1. Encourage buyers to attend homebuyer counseling. A recent Freddie Mac study showed that we can reduce future defaults by as much as 34% through individualized homebuyer counseling. 2. Maintain and train a diversified, multilingual staff to better handle incoming inquires and to share home- buying options to a greater range of prospective homebuyers.
3. Align with a knowledgeable rehab lending partner that knows both conventional and HUD’s 203(k) loan programs. 4. Create a website as a resource for buyers to educate themselves. Offer these buyers an opportunity to electronically receive a list of available properties and updates at no charge. Also provide hard copies of these lists to anyone who asks. 5. Provide frequent and consistent outreach to the community by participating in educational seminars and homebuyer fairs. REO brokers should plan on a minimum of two or three events per month. REO BROKERS CAN DO MORE Yet REO brokers can and should do even more. For example, fraud and predatory lending are nationwide issues that will play a larger role for us in the real estate and mortgage banking communities. These practices are so distressing because the consumer as well as the lender may not be aware of them until it is too late to remedy or cure. This loss is both quantifiable and yet nonquantifiable. That is, the economic loss suffered by a lender is quantifiable in dollars and cents — but the losses suffered by the families and communities are far more severe, as fraud and predatory lending most affect those who can least afford it. The expertise of an REO broker has never been in greater demand. Buyers need counsel to advise and guide them through a very complex and expensive home buying process. Financial clients need help in avoiding illegal and costly activities such as fraud and predatory practices. They need an REO broker who can be their local eyes and ears, one who can help them better originate and manage the entire mortgage process — and not just for REO transactions, either. The REO broker’s expertise and access to data is far more valuable to clients than ever. When one helps a client make money or save money, one will always have work by delivering a value-added service. And when one does the right thing, one adds value to the local community, too. In the words of Clare Booth Luce, “In the final analysis there is no other solution to man’s progress but the day’s honest work, the day’s honest decision, the day’s generous influences, and the day’s good deed.”
Calderon is CEO of Frederick, Md.-based Default Resource, a diversified financial services company that provides the full spectrum of default and origination products and services to the real estate and mortgage markets.
Improving the short-sale timeline Lenders could speed the process with pre-approved pricing
By James A. Browning The trend of increased short sale activity has gained momentum in the last year according to banks, lenders and outsourcers. In some local markets, short sales are now outnumbering REO transactions. According to asset managers, the number of short sales will continue to increase. Experts in the industry predict the foreclosure or REO process will slow to a crawl due to the courts as well as other problems servicers face in today’s market. Short sales are conducted outside of the foreclosure process. The lender gives homeowners opportunities to list and sell their properties for less than what is owed. Based on my experience, the main frustration in a shortsale transaction is the approval process from the lender after the purchase contract has been submitted to the bank. The time frame for a response, whether a denial or approval, can be incredibly drawn out. At this time, there are currently only a few companies working with the banks for a preapproval sales price for a short-sale listing. This practice of a pre-approved short sales price should be standard practice with all banks and GSEs. In today’s tumultuous real estate climate, real estate agents really have no choice but to adapt to the world of short sales and REOs if they want to stay in business in the many distressed markets across the United States. But many shy away from the short sale market due to the cumbersome process, lack of success, long, drawn-out timeframes. There is also a lack of education and experience on how to successfully negotiate this type of process. Add to that the uncertainty of the commission to be paid, and you have agents opting out of these transactions altogether. EXPEDITING TRANSACTIONS Given the often long and arduous process in place today, real estate agents would gladly embrace working with distressed homeowners, if lenders would provide an approved sales price prior to the short sale property listing. If this practice were installed, it would expedite the transaction and give both the listing and selling brokers confidence that the transaction has a higher probability of closing. It would also allow properties to be listed with a realistic price as opposed to what we see today: Short sales listed too low to be realistic or too high based on the amount due on the loan. What agent wouldn’t want to know up front what is expected of them in order to facilitate the short sale transaction? Not only would this shorten the cycle of submitting
the listing/short sales package through to the approval/denial letter by weeks or even months, it would also minimize the number of contract terminations by buyers who give up due to the unknown time frame for response and closing. This practice would instill confidence within the real estate community by those who currently choose not to work with short sale sellers and buyers. According to RealtyTrac, there were approximately 314,002 short sales nationwide in 2010. This represented 10% of all residential sales, while REO sales accounted for an additional 16%. The average sales price of a short sale was $206,306 nationwide, which was 15% below the average sales price of homes not in foreclosure. By contrast, the average REO sales price was 36% below the average sales price of homes not in foreclosure. The difference between short sales and REO sales prices amounts to 21%. Nationally, in the third quarter of 2010, Fannie Mae and Freddie Mac reported a ratio of approximately 5 to 1 between foreclosures and short sales. There were roughly 200,000 foreclosures and 40,000 short sales. Clearly the benefits of short sales are evident, and can work toward promoting more stability within local housing markets and helping distressed homeowners who prefer an alternative to foreclosure. If we could get the pendulum to swing more toward short sales than REO sales, this would not only have a more positive impact on market values, but it would also allow lenders to achieve higher recovery rates. Short sale properties sell for more than REOs and are more likely to be in better condition. Short sale sellers are certainly less likely to strip their homes of the kitchen or leave it loaded with trash, as we often see with REO properties. While the industry has been trying to decrease the number of REOs through loan modifications, short sales and processes, there is still work to be done. The administration’s Home Affordable Foreclosure Alternatives program launched in April 2010 has had spotty success. Recent changes to the program, however, should result in more homeowners qualifying for HAFA and thus increase short sales. Most servicers have added short sale negotiators, departments, procedures and staff. The next step is to find ways to shorten the timeline and to list these properties with pre-approved list prices. Real estate agents can be very influential in helping distressed homeowners choose the short sale option. The current short sales trend is going to drastically increase over the next three to four years. Do not miss the boat, for the sake of all of us in the real estate industry who desire to provide service to sellers and buyers, distressed or not.
Browning is the founder and course creator for the REO Institute of Colorado (REOInstituteColorado.com), and broker/owner of the Browning Group LLC. He instructs, speaks and writes on a national level regarding the default industry, distressed markets and related topics such as short sales and REOs.
RENTING BACK REO GSEs and cities tackle foreclosure blight with tenants â€” and bulldozers BY JON PRIOR
F E AT U R E : R E N T I N G B A C K R E O
red flag for declining cities is the amount of traditional home sales moving on the market compared to ones lost to foreclosure, or REO.
In Cleveland, the decade began with regular home sales accounting for about 94% of the market, but over the next several years, that number dropped to about 60% as the few buyers that remained bought more REO, according to a recent study from James Follain of the Research Institute for Housing America. In Stockton, Calif., the drop was starker. Regular sales dominated through 2006 but declined by half in 2007 and made up only of 11% of the market in 2008. Since then, the recovery has sputtered along. Regular sales have only taken back one-third of the market since. But not every foreclosure can be sold. To clear these neighborhoods of blight and vacancies, some cities have been forced to turn to two other options: bulldozers and rentals. For now, one is winning out over the other. In November, the city of Detroit unveiled a plan to demolish 10,000 abandoned and dilapidated houses.
Retaining Occupancy on Foreclosure (ROOF) was first launched as pilot in 2009 to rent previously foreclosed to homeowners.
ROOF organizers targeted 24 homeowners as part of the pilot, but 20 had already abandoned the property. The program fizzled, but is currently being restarted.
F E AT U R E : R E N T I N G B A C K R E O
the pilot, the average monthly fee was $350 a month. At the end of the three-month term, if the property has not sold, options to renew would be available. Organizers originally targeted 24 homeowners during the pilot, but it turns out they reached out too late. Michigan has a mandatory six-month redemption period, in which the borrower has time after the foreclosure sale to redeem the home for what the bank received at the sale. “It did not work well,” said Steve Bancroft, the executive director at the Detroit Office of Foreclosure Prevention and Response. “We reached out too late in the foreclosure process.” Bancroft said 20 of the 24 properties were already abandoned by the time they got word out. Two of the homeowners already made other arrangements, but two did elect to participate in the program and stayed for nearly six months. Bancroft’s office hired an executive director to guide ROOF and they made pitches to several major lenders at the Mortgage Bankers Association’s servicing conference held in Grapevine, Texas, in February. Bancroft said the response was positive. They’ve also reached out to national housing counselors to help them reach borrowers in time. He said the new changes should take effect this year for another try. Two large servicers agreed to participate, but HousingWire could not immediately receive verification from those companies. The foreclosure crisis transformed Detroit. Blight is rampant. There are so many vacant properties, the city is electing to bulldoze them by the thousands. The population has dropped, but Bancroft stayed behind to implement a program that could help the city recover. “We can’t prevent every foreclosure, but we can prevent vacancies,” Bancroft said.
The city’s mayor, Dave Bing, proposed a plan to reduce blight in the city and bulldoze homes considered dangerous hot spots for crime. By 2013, the end of his term, he hopes to demolish 10,000 such structures. The demolition is expected to cost $20 million, and will be funded by the Neighborhood Stabilization Program, which awarded $2 billion to state and local governments in January 2010. Stacy Williams has been an REO broker in Detroit for six years where he works for AI Realty. Williams said the properties are owned by the city and were repossessed and abandoned after homeowners failed to pay property taxes. He said while it’s a good idea to get rid of some of these vacant properties, the city could have used the REO system in the city to liquidate the properties. “What they should do is try to sell them. Right now, there’s a shortage of homes in Detroit. When I list a home, I usually get four or five bids. The city should try to use brokers to try and sell some of them,” Williams said. The city decided to exercise another option. While its plans to rent REO back to the homeowners fizzled in 2010, organizers aren’t giving up. A pilot for the Retaining Occupancy on Foreclosure, or ROOF, was launched in 2009, but it underwhelmed. It was created by the Detroit Office of Foreclosure Prevention and Response and Potestivo & Associates, a legal service provider to the default servicing industry. ROOF allows the previous owners of a property to stay in the home for up to three months after foreclosure. The occupant must pay all utilities, heat, water and electricity, and a monthly fee will be instituted on a “sliding scale” based on how much the owner can pay. During
Not all properties are able to fit into any program . Some like the one above will be targeted by a Detroit initiative to bulldoze up to 10,000 REO homes.
Fannie’s rental program was a first Fannie Mae initiated a rental option years ago, not only to keep renters of single-family homes out of a foreclosure that they did not cause, but to prevent more vacancies. Fannie reports its REO inventory by volume of properties. In the fourth quarter, it reported 162,489 in REO that needed to be resold, up 88% from the year before.
The lease agreements vary from month-tomonth or 12-month leases. A spokesperson for Fannie said the program went into effect before Congress passed the Protecting Tenants at Foreclosure Act, and was one of the first programs in the industry.
Prices for REO are also dropping along with the rest of the housing market. The governmentsponsored enterprise reported that REO net sales compared with the unpaid principal balance was 55% in the fourth quarter, down from 57% the quarter before. In 2005, REOs sold at 87% of the unpaid principal balance.
“These families have kids who have been in school districts. They have foundations in their communities, and we don’t want to uproot those families,” the spokesperson said.
The spokesperson said the main driver behind In California, Arizona and Nevada, Fannie holds the rental program has always been to keep the more than 33,000 properties in REO, nearly as home occupied and to keep from disrupting the much as the 35,000 in the entire Midwest combined. lives of those inside.
The rental program began in January 2009 and was a first for the industry. Tenants were given the opportunity to stay in the home for a fee comparable to the individual market. As of the end of February, Fannie Mae had more than 10,000 tenants in properties around the country with more than 1,500 more still considering the program.
Critics of the Protecting Tenants at Foreclosure Act point out that the servicing and REO industry cannot be transformed into landlords, but those instituting rental programs like these see a much more ominous threat to their businesses and areas. Though renting does pose challenges to their operations, vacant homes wreak havoc on prices, introduce crime and undermine the most solid hope the housing market is desperate to resuscitate: Homebuyer demand.
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PERSPECTIVES / TECHNOLOGY
Whether itâ€™s the Internet or a software program, technology is king in managing REO.
Short sale uncertainty Auctions provide an innovative way to move distressed property
Many mortgage industry experts are predicting that 75% of all home sales will be short sales or REOs through 2011 and 2012. With so many areas around the country struggling with very high distressed property levels, real estate agents are working harder than ever to move houses in their markets, and even the most creative agents find it difficult to get deals closed. Agents on both sides of the transaction find themselves asking where they should invest their time and efforts when the surrounding homes in the neighborhood sit empty, and whether a deal can be done is subject to a great deal of uncertainty. In the case of short sales, there is a significant question as to whether the seller can actually accept an offer, and if the holder of the loan is willing to approve the transaction. This uncertainty reduces the return required to cover the cost of marketing. An innovative answer for this problem is for the parties involved in the transaction to partner with a short sale auction firm. Sophisticated auction firms have the technology, know-how, databases and capital to create a powerful, multifaceted marketing campaign targeted to the right buyers. Most importantly, working with an auction firm does not cost the agent or the homeowner anything and do not touch the agent’s commissions.
AUCTIONING BENEFITS The main benefit of short sale auctions is the amount of marketing and visibility the auction firm provides. The auction firm advertises throughout the country, across numerous media outlets, including radio and print advertising and via the Web. It also leverages large investor databases, conducts mass e-mail campaigns and even deploys social media for marketing outreach. Because auction firms have vast buyer and investor databases, as well as proven marketing strategies, they are able to appropriately tailor their campaigns, targeting the best prospects for the type of property, price range and community. This highly tailored approach reaches significantly more qualified buyers than traditional marketing and results in a more efficient sales process. The short sale auction is a call to action that greatly differentiates homes listed for sale. At a time when the volume of properties in some stage of disposition is skyrocketing, an innovative short sale auction firm can provide the quickest, most efficient way to liquidate a property while eliminating the costs and delays associated with the foreclosure process. Given the hard clearing work that is still ahead to help real estate markets stabilize and recover, short sale auctions could become the preferred and most effective disposition choice.
HOMEOWNER AND AGENT Naturally, homeowners want to avoid foreclosure if at all possible. By negotiating a short sale, borrowers are able to bring a quicker resolution to a difficult situation, helping ease stress and worry. In many cases, the borrower is able to minimize the negative consequences of the foreclosure and receive relocation benefits that allow for an improved financial situation. Once a defined acceptable minimum is
Neel is president and chief operating officer of Lender Processing Services’ asset management and field services divisions.
THE LENDER’S PERSPECTIVE In today’s market, lenders often find that short sales can be more cost-effective than foreclosure. While short sale proceeds do not cover what is owed on the property’s mortgage loan balance, the lender is able to forego the numerous risks and ongoing costs involved with the foreclosure and REO process. The short sale transaction eliminates significant legal, maintenance and other holding costs. The short sale auction process puts a timeline around the process. This allows for the best use of the lender’s resources and focuses efforts on driving an outcome. The lender enters the auction process with a pre-approved minimum acceptable sales price.
established, the homeowner will have clarity on what price is acceptable to his or her lender. For real estate agents, working short sales can be an extremely tedious and protracted process. Still, if agents hope to participate in today’s market, they will likely be involved in short sales. An experienced short sale auction firm can help streamline the process by working with the agent to develop a customized marketing program that minimizes the agent’s time and eliminates the expense associated with property marketing. Best of all, the auction process has a definite timeline, so properties that are going to move do so more quickly. It’s important to understand that auction firms are not debt collectors and do not contact the borrower directly. So when agents decide to engage a short sale auction firm, they must talk to the homeowners and obtain their permission to auction the property. Then the auction firm will create a marketing plan that includes a wide range of possible promotional tactics that are sensitive to the homeowner’s interests. The goal is to effectively market the property, liquidate quickly and make the entire short sale process easier and more effective for all parties.
By Chad Neel
Finding an REO’s true value A one-size-fits-all method doesn’t work for property valuations By Michael S. Richardson While most savvy homebuyers and sellers are familiar with the difference between a regular home sale, a short sale and an REO, most are not familiar with all the intricacies of selling and buying homes in the current market. In promoting sound mortgage decisions, lenders are emphasizing the importance of implementing and maintaining strong quality controls to ensure reliable valuations and evaluations of homes in disparate neighborhoods around the country. One of the biggest challenges facing lenders is the time it takes to review an REO in order to identify its associated risks while finding its true value. Using a one-size-fits-all approach cannot be applied to property valuations since the type of transaction, amount of data available, neighborhood conditions, individual opinions and other variables differ from property to property. Firms operating in the secondary market are driven to seek out mortgage loan pools that meet their investors’ requirements. They know that the risks of early payment, default, fraud, misrepresentations and predatory lending are realities of the marketplace, and that they must manage the disposition of REO properties appearing in pools of loans. Many times, the sale of REO properties in loan pools has been hampered by disposition cycle times that have easily lasted for months, resulting in lost sales. The average retail homebuyer will not wait out the REO sales process because they seek to move into a home in a reasonable amount of time. Only a few homebuyers are willing to trade that inconvenience for a very low-priced house. If a lender waits to initiate the REO process, it can lead to a potential decrease in property value and other unwanted scenarios. Any delay in initiating the field management work increases the likelihood of deterioration and vandalism and lender holding costs. Lenders need to accurately price REO properties to move sales. TAPPING TECHNOLOGY Technology can help shorten the REO sales process by providing lenders with alternative instant valuation tools that improve the data available to analyze the DNA of individual properties, although technology alone cannot identify the true condition of the property or neighborhood. A broker price opinion can provide banks with a quick valuation analysis of REO properties and is often ordered multiple times over the period when a loan is defaulting. Many financial institu-
tions prefer ordering BPOs instead of appraisals due to their faster turnaround times and lower costs. It is widely viewed that BPOs are not a replacement for appraisals, but BPOs are the best option out there to help determine an immediate sales price for bank-owned properties in a timely fashion. And to find an REO’s correct value it takes experienced people, a set rules process and technology with the proper DNA information to identify and get a better handle on the risk of the individual asset. To successfully sell an REO, the lender has to be completely focused on finding the true value of the home the first time, as the first loss is the least expensive loss for a bank in most cases. The purpose of a BPO is not to directly ascertain a property’s value. It is a way to assess the probable price that a property can be feasibly listed in a specific marketplace, and is conducted by real estate agents and brokers who are the local market experts. A BPO requires a licensed real estate broker or agent to physically and visually inspect the property and provide comparables that support the suggested list price and anticipated sales price, while providing data and comments on neighborhood and market conditions. Most asset management companies consider their own specific needs and processes when reviewing BPOs. REO valuation errors can occur if consistent standards are not applied that take into account specific company guidelines. Rules and information that are defined for each lender’s guidelines need to be included in each BPO report. This type of BPO includes rules-based standards, reasoning and methodology, making it more like an appraisal. Valuation errors can be costly. A bank-owned property valued $10,000 too high could result in two to three months or more of increased marketing expenses. More time on the market also leads to a swollen REO inventory, causing further market price depreciation. The same property, priced $10,000 too low, results in a $10,000 loss to the bank at the time of sale and in accelerated price depreciation, which can potentially decrease other bank assets and increase the rate of foreclosures in the area. The majority of BPOs need more quality control checks in each section of the report. Data can be validated by thirdparty valuation partners that are integrated into the process along with human analysis to ensure all of the broker comments in the BPO and the overall report make sense during the valuation review. Timelines count when ascertaining REO values. Unacceptable delays can cost lenders a lot of money. Effective, flexible and better quality BPOs can provide asset management companies and lenders with the tools to manage risk and find the true value of their assets.
Richardson is president of BrokerPriceOpinion.com, a Westminster, Colo.-based provider of customized real estate valuation solutions that employ analytics and client-specific rules. The company provides nationwide valuation services through a network of 65,000 real estate professionals and appraisers.
Selling REO online The Internet sales culture has modernized REO disposition
By Tony Isbell It’s no small understatement and no secret to say that we are in the midst of a true buyer’s market. In this buyer’s market, smart buyers are diligently looking for bargains, and many have figured out where the biggest bargains are located – within the world of REO. And increasingly, finding and purchasing REO bargains means buying via Internet bidding sites and online auctions. The real estate market is fat with properties, but how do you find them? It used to be that you would get in your car with your real estate agent and drive around and look at every possible property that might “fit the bill” for you. But, now, in this age of technology, the vast majority of property purchases begin on the Internet, and some sources estimate that 90% of all property purchases involve the use of the Internet including sites such as Zillow.com and Truilia.com. New online brokerage models, such as ZipRealty.com and Redfin.com, have also developed. We have seen this trend grow over the past several years, but beyond the mere use of the Internet as a property search mechanism, now savvy property buyers are using the Internet to actually create a transaction and buy a house online. When our online auction website first launched in January 2001, most everyone we talked to in both the real estate and technology industries said we were crazy — they said people may buy coins, books and baseball cards via the Internet, but there’s no way they will buy a home via the Internet. But, for 10 years, we have been auctioning homes exclusively via the Internet with growth every year, and now most every real estate auction company has a mechanism for selling homes online. With 27,000 closed transactions, I’d say the concept is here to stay. It will evolve, as does all new technology, but Internet sales are the future of all industries, including real estate. The process of online real estate sales has proven to be a win-win for both buyers and sellers of REO properties. By embracing the Internet and online sales, sellers become proactive in the sales process. They set the dates and terms of the transaction. The bottom line is that online home sales are working. As the inventories of institutional properties have continued to grow and the conventional market has been at a virtual standstill, REO sellers have wisely begun to turn to on-
line bidding sites with more frequency. Sellers have learned the power of Internet sales, and buyers have gained trust and confidence in the process of buying via the Internet. Internet traffic to our site and many others continues to grow exponentially, even in a down market, indicating much pent up demand still exists for homes. The large number of properties on the market has had the effect of motivating portfolio owners to become more aggressive in their pricing, and the transparency and competition generated by online bidding sites gives buyers the confidence that they are paying a true market value for their properties, creating a another win-win situation for sellers and buyers. Using the Internet to purchase real estate is a trend that will continue to grow no matter how the market conditions evolve. It is our expectation that online bidding, in some form, will only become a larger part of the mainstream real estate industry, as institutional sellers, real estate brokers/ agents and homebuyers continue to realize what an effective and efficient tool they can be. POSITIVE EFFECT ON SALES Additionally, technology and the Internet sales culture have begun to have a positive effect on short sales. Just a year ago, as many of us in the industry know, it took four to six months for banks to determine if it was beneficial for them to sell a property as a short sale, but now in many areas of the country, where they have bolstered their technology resources, banks are now able to make that decision in a matter of four to six weeks. It’s just a matter of time before short sales are purchased commonly via the Internet. But, more than that, I believe that this use of technology and the Internet as a mechanism for selling REO and short sale inventory, could potentially have an even bigger effect — it may prove to be one of the sparks of the real estate industry “correction” that will begin to head the industry back to a more healthy point of property appreciation. Certainly, if the federal government would allow the correction to occur, then the market would recover faster and with greater tenacity. Albert Einstein said, “In the middle of difficulty lies opportunity,” and that is true for so much innovation. Our industry has confronted the difficulty of the market and from that has embraced Internet technology as a means of streamlining and modernizing the REO industry.
Isbell is president and CEO of RealtyBid.com. He has been involved with the real estate business for almost 20 years.
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