Archives For: Editorials
Mortgage Servicing News ?November 2005
By Robert Klein, CEO
Safeguard Properties, Inc.
When a mortgage loan servicer becomes responsible for the condition of an asset the company has loaned money against, it depends on field services vendors to protect that asset. Utilizing a good field services vendor improves the likelihood that the mortgage servicer’s primary asset will be protected during the foreclosure process. This risk is further reduced when the field services vendor and the servicer practice the most important skill in the industry: communication.
Everyone in business will tell you that effective communication is one of the keystones of a profitable enterprise, but when it comes to the mortgage field services business, poor communication doesn’t just hinder the operation, it shuts it down. To show you why this is true, let me first define what I mean by effective communication.
When a loan servicer and a field services vendor employ good communication skills, the servicer knows as much about the condition of the property as when the loan was initially written. The field services company literally becomes the servicer’s eyes and ears, sending back all of the data that the servicer would gather about the property as if one of its employees was standing in front of the home.
During the default process, the servicer is called upon to make critical decisions as to how it needs to proceed. The time frame that the servicer receives this information in is another critical factor in the default decision-making process. Based on the information provided by the field services company, the servicer will make the decisions that will determine its level of success. The better the information about the collateral, the better the decisions are likely to be. Having a vendor on the ground that the servicer can trust when a property goes into default can spell the difference between a satisfactory resolution or a heavy loss.
Fortunately, opening channels for effective communication is much easier today than it was in the past. Technology has introduced e-mail, Internet file transfer, spreadsheets, instant messaging, digital cameras and conference calls. But it’s still up to the field services vendor to utilize these tools. It is critical that information is received from the field and transmitted to the servicer in a short period of time. Once again, technology is the key factor.
Safeguard Properties serves mortgage servicers across the nation, requiring our teams to send data back from all over the country. Technology makes this possible. In rare instances, the effective use of technology by the field services vendor is the only way to keep the servicer and its investors safe from massive losses. A terrible case in point was provided by Hurricane Katrina.
Since the disaster struck, many thousands of flood insurance claims have been filed with the Federal Emergency Management Agency. Thousands of families were forced to evacuate their homes, with the vast majority of these properties still serving as collateral for mortgages.
Even before the storm subsided, servicers across the country began sending downloads and spreadsheets to their field services vendors, filled with information about every property in the affected ZIP codes. Of course, this information was all hopelessly out of date. It fell to the field services companies to provide the most current property condition information and get that data back to the servicers quickly so they could make effective decisions.
At Safeguard we scheduled a series of conference calls to identify and attempt to resolve servicing issues in the mortgage field service industry that occurred as a direct result of the damages caused by Hurricane Katrina. The calls were attended by hundreds of participants from all sectors of the servicing industry, including investors, servicers, field service providers, forced place insurance carriers and representatives from the Department of Homeland Security, Freddie Mac, Fannie Mae and HUD. These calls were an essential communications strategy. They aligned everyone on the same page to formulate a consensus in the industry on how to handle a crisis of this magnitude.
Our central staff was able to update the thousands of records our clients were sending by learning everything we could from our crews in the field (whether the properties had light, moderate or severe damage; whether they were accessible or inaccessible; etc.) and relaying that information to our clients in a spreadsheet format that could be sorted by category and applied to their entire portfolios. Frequent e-mail updates back to the servicers and special Web pages completed the communication loop.
The disaster response continues. In all my years in this industry, I have never witnessed such cooperation on the part of everyone in this business. The industry is now in the process of re-writing the book on how we deal with a disaster of this magnitude. Success in this difficult endeavor will hinge on how well we all communicate. In that respect, field services companies must be well equipped, as their successes have always depended upon this important skill.
We will feel the impact of this disaster for years to come (if not forever) and effective communication between the field service vendor and the servicers will be a key component of this national disaster recovery process. While a single foreclosure cannot be compared to a disaster like Katrina, the same skills are employed by the servicer and field services vendor to ensure the servicing process moves smoothly and the recovery process can be an organized and successful one, for the field service vendor, the servicer, and the investor or insurer.
1 Nov 2005
published in REOMAC Magazine, November 2005?
By Robert Klein
CEO, Safeguard Properties
Hurricanes Katrina and Rita recently ravaged the Gulf Coast of the United States, fundamentally altering the landscape forever. As a company in the business of property preservation, Safeguard Properties has been intimately involved in the aftermath of these storms.
All across the region, homes have been destroyed, damaged, flooded and often plagued with toxic mold. Entire towns in Mississippi and Louisiana were, for all intents and purposes, ripped off the map. The cities and towns lucky enough to have escaped total obliteration still saw unprecedented levels of property damage. Many homes, even if not totally destroyed, are nonetheless essentially lost, destined to be razed rather than repaired, preparing the way for rebuilding.
Understandably, much of the focus will be on rebuilding in the wake of such devastation, and a great many millions of dollars have already been earmarked for that reconstruction. In many cases, homes and businesses will have to be built anew. But what of the properties still standing and of residents searching for new homes? Reconstruction will not begin for some time, several months at the very least. Gulf Coast residents have been flung far and wide, and many are eager to return back home; if not to the physical properties they left behind, at least to the cities and towns they fled.
A New Landscape
In the aftermath of this historic disaster we have found that more than the physical landscape of the Gulf Coast states has been altered? the real estate market itself has undergone a climactic shift as well. The real estate market post-disaster bears little resemblance to what it was before. In terms of the market, it?s a simple matter of numbers, the law of supply and demand. Tens, if not hundreds of thousands of displaced homeowners are now suddenly in the market for new homes.
A spike in the number of buyers, particularly one of this magnitude, is bound to alter availability, demand and therefore prices. This is exactly what Safeguard Properties has found to be the case. Change also comes with regard to matters of marketability, in that buyers are placing primary and immediate importance on purchasing structurally sound homes rather than looking for any certain design, ideal location or level of amenities.
In speaking with agents and appraisers in affected communities across Louisiana, Mississippi and to a lesser degree Alabama, it has become plainly apparent that valuations in this post-disaster environment have been significantly affected. Appraisers have seen a marked increase in demand for their services, and time is of the essence; many properties are selling quickly, without much if any negotiation between buyer and seller.
In fact, there seems to be a near total disassociation from accepted standards, not with regard to professionalism, but in terms of market forces and valuation techniques as well. Lenders? who require appraisals before releasing funds ?are often being sidestepped as desperate buyers are paying cash, at or above listed prices, for whatever surviving properties are left on the market.
A Buying Frenzy
People in this region are actively seeking properties that are still standing or at the very least salvageable. With so much of the coast left in rubble, there is now a premium placed on any piece of property left. Real property appraisal in such an environment has proved to be difficult at best. Market forces are erratic and nonstandard, with values being determined by a historic and sudden increase in demand and the appraiser is often left to fend for him or herself. For instance, comparable sales, the traditional key to an accurate and effective valuation, are simply no longer available for the vast majority of saleable subject properties.
On the whole, property values are increasing across the board. In places of relatively less devastation, the increase is negligible, perhaps a percentage point or two. Conversely, in more hard-hit communities appraisers are determining values 10-15% above normal. In fact, many homes? even some which had been on the market for three or more months before the hurricane ?are netting as much as 20% over the initial asking price. Some brokers refer to the scene on the ground as a ?free-for-all,? and that is actually an accurate assessment.
Lenders on the other hand, are still looking for pre-hurricane values on which to base lending decisions. It?s understandable that they?re hesitant to be pulled into what may prove to be an irrational housing market spike, but unfortunately that?s just not the reality on the ground. With property availability driven so far down and with such a dramatic increase in the number of home-seekers, pre-disaster values no longer apply. Bidding wars are driving up prices even on homes that sat dormant before the disaster. While not the most lucrative properties before the fact, in the aftermath they?ve become highly desirable commodities ? simply because they still exist.
Demand Dwarfing Supply
Both speculative investors and locally-based companies trying to find homes for displaced employees are currently adding to the volatility of the situation. Many companies are buying up properties “site unseen,” even without having access to sufficiently appraised market values. Even the rental market has been decimated as landlord investors, rather than renting their vacant units, are instead selling them for a profit. As this occurs, the price of the remaining rental units is rising. All of this brings a substantial tightening to the market.
For example: properties listed at $179,000 before the storm are now selling for $191,500 on average. That?s actually one of the more reasonable increases. At the extreme, one house in Kenner, Louisiana listed at $400,000 before Katrina is now listed at $1.2 million. To account for the increased demand, appraisers are increasing their value estimates by an average of 5% to 10%, with some adding as much as 15% to pre-disaster value. It is, as stated earlier, changing the face of the market. But is this a long-term phenomenon, or is it as the lenders seem to think, that we are simply in the midst of a passionate, irrational spike?
The Days Ahead?
If there is any lesson to be learned from the aftermath of the natural disasters, it is that the industry needs to take a careful look at the evaluation of properties following disasters, particularly one of Hurricane Katrina?s (and to a lesser extent, Rita?s) magnitude. Perhaps there needs to be some level of standardization applied to property appraisal that takes into specific account the volatility of post-disaster market forces. As always, market forces will determine fair value for a property, and when an area has been demolished, sharply curtailing the availability of properties, prices are bound to rise sharply as well.
It is likely that in the affected communities, the market will eventually readjust to pre-disaster levels, with the expected associated decrease in property values. This is precisely why lenders are hesitant to base long-term investments (mortgage origination) on short-term market realities. A lender outlaying the funds for a disaster-inflated loan amount may very well lose money when the market stabilizes and returns to a semblance of normalcy (however long that may take).
In a time when the importance of the collateral to the lender has never been higher, there needs to be some understanding and agreement amongst all players as to how to best address the appraisal and evaluation of properties post-disaster. In the midst of crisis, traditional standards are pushed to the side. This does not serve anyone?s long-term interests.
1 Oct 2005
Published in MBA Magazine, February ’05?
REO Disposition Begins in Delinquency
By Robert Klein
During the past fifteen years, like so many other veteran default industry professionals, we have witnessed countless changes within our dynamic industry, including, but certainly not limited to; increased consolidation of lending and servicing institutions, widespread proliferation of third-party outsource vendors, a myriad of procedural and investor guideline changes, and shifts in local and federal laws governing the industry. As a result, within the mortgage loan-servicing arena this often-expressed aphorism holds true: The only constant is change itself.
A great many of these changes have to do with an increasingly global view of the industry, a recognition that as business models change and more processes are centralized within national servicers and their service providers, there needs to be a growing interrelation between different sectors and interests within mortgage servicing.
One important change that we, and many of our colleagues see beginning to materialize within much of the mortgage loan servicing industry, is with regards to the relationship between the foreclosure process and REO disposition. Today, we are observing senior and executive servicing managers throughout the industry addressing the reality that final disposition of non-performing real estate assets begins with the first delinquency. That the entire default process should be a continuous flow of intertwining and efficient business processes, which allows for continuous inventory tracking capabilities that are designed to manage and streamline the entire process.?
With the remarkable technological advances that have appeared over the past several years, REO managers, their staffs, and their superiors can now find out much more than ever before about the history of an REO property prior to its having gone to foreclosure sale.?In addition, with vastly expanded contractor networks, national field service providers, with their specialized P&P personnel, have dramatically increased their ability to complete REO services in the timely, consistent manner that is critical to all REO managers, their staffs and institutions. These expanded networks enable national property preservation service providers with the ability to successfully service the lenders’, servicers’, and investors’ properties from urban inner cities, to ultra-rural localities, and virtually everywhere in-between, all across the country.
This nationwide service capability is further enhanced by the improved quality control and reporting technologies that these national companies have developed over the years. Providing repair and maintenance estimates, filing insurance claims (on damaged properties) and so on, are also streamlined in this process. Couple these factors with standardized flat fee pricing structures, greatly simplified bulk billing capabilities, and most importantly, the inherent, magnified accountability that a national service provider must have, and one can easily begin to recognize the myriad of measurable benefits for lenders, servicers and investors alike from this “cradle-to-grave” concept.
For years within many loan-servicing organizations, it has been reported that a virtual, and sometimes actual barrier had existed between the foreclosure and REO departments, especially in the larger shops.?This barrier not only impeded cooperation between the foreclosure and REO departments, it also wasted valuable time and contributed to higher losses for the institutions.
Foreclosure specialists work closely with their property preservation (P&P) vendors to ensure that their institution’s non-performing real estate assets are being maintained and protected against deferred maintenance, vandalism, adverse weather conditions, and so forth.? When these properties become vacant and/or abandoned, the P&P vendors are also charged with the responsibility of securing them.?Since the P&P vendors inspect these properties on a regular basis throughout the collection and foreclosure stages of default, they become very familiar with property condition, the surrounding market, and property value.
The foreclosure specialists also develop an internal information base and familiarity with these properties.? In the past, this knowledge sometimes stopped at the door (or barrier), between the foreclosure and REO departments.? REO specialists took in properties without the benefit of having complete access to information about loan/property history, or even the services that were provided during the foreclosure process.? As a result, many preservation services, like lock changes, winterizations, damage reports, repairs, etc., were actually performed two or more times on many properties.
Dave Gibson, a national loan servicing consultant, who has worked for several of? the nation’s leading mortgage loan servicers over the past three decades, also knows most of the top default managers in the nation, and has first-hand knowledge that the “barrier” existed, and may still exist in some institutions. Mr. Gibson has witnessed this issue more in larger organizations. As we alluded to earlier, these larger shops have different? departments that are sometimes not only separated within an institution’s offices, but can even be separated geographically.
“Effective communication starts with effective leadership from management,” according to Gibson. “If management emphasizes close communication, the staff will follow.”
Mr. Gibson also feels it is important for managers of the respective areas to get in front of each other and articulate the common ground and common goals of the global organization.
“If properly aligned, the areas can be of great benefit to each other,” he added. “The REO department can help with values, bidding strategies relative to the foreclosure sale, and can even offer advice on challenging properties. The REO department in turn can benefit from advice received from the other areas about problem properties in advance of their coming to REO.”
Ultimately, it is the institution as a whole that benefits on the bottom line when these areas have their objectives aligned, and they effectively, and frequently communicate well with each other. It’s hard to believe, but in some institutions the staff members from one department didn’t even know how what they do can impact other departments, and vice versa. Today, nearly all default managers agree that communication, cooperation and a collective singleness of purpose is what is needed to improve efficiencies and lower costs in default management.
Situations such as the discovery of mold or conditions that could lead to mold growth that are not communicated in a timely manner from the foreclosure departments to REO can prove even more costly to an institution.? Additional valuations ordered on new REOs, when multiple valuations were already obtained just prior to the foreclosure sale, also create measurable and unnecessary costs to the servicer or investor. These redundancies and omissions are only a few examples of circumstances that can contribute to increased holding time and decreased net recovery on assets – losses that are avoidable.
Over the past several years, several leading P&P service providers came to the realization that overall field services and property preservation should not end with a successful foreclosure sale, but rather could (and should) be carried through all the way to settlement or the close of escrow on REO properties. In a perfect world, one vendor for pre- and post-sale services could be relied upon to ensure “cradle-to-grave” continuity in the preservation of each asset.
The major benefit of this approach for mortgage loan servicing clients is the ability to eliminate duplicative work and associated costs, better reporting and tracking capabilities, and the acceleration of the entire default process, thereby increasing efficiencies and lowering expenditures.? By centralizing all P&P work, including REO-related services (reporting occupancy status, re-keying locks, securing properties, performing trashouts, and completing ongoing maintenance and repairs) with a national P&P vendor, quality control is improved and efficiency in providing services is increased.? An additional benefit is that the direct relationship between the care of properties during different stages in the foreclosure process, and REO disposition, becomes clear. When all of the parties involved in the entire process better understand the roles of other departments and how each division’s actions can affect the others, the result is a more cohesive and efficient team-focused environment.
Servicers who have chosen this inclusive route realize that many benefits are to be derived from the fact that national P&P service providers have built large nationwide networks of property inspectors and contractors, experienced preservation experts, who can act in concert with the REO brokers as the servicers’ “eyes and ears” in the field. The national vendor visiting the properties within the servicers’ portfolios on a regular basis before the foreclosure sale can easily continue this monitoring post-sale and through to closing, providing a reliable and consistent history of property condition and preservation activity. In addition, diverting the administrative burden of managing day-to-day preservation activity to third-party outsource partners will help servicing institutions minimize operating expenses, while empowering internal staff to focus on their core competencies. This is particularly true relative to the billing process, which can be remarkably burdensome.
Many servicers have already enthusiastically embraced this all-encompassing approach to property preservation, al?though not everyone in the industry has immediately welcomed the change with open arms.? For example, some real estate brokers, who have traditionally been called upon by REO specialists to provide services such as re-keying properties, securing bids for and supervising trashouts and repairs, performing lawn maintenance, etc., as well as listing, selling, and helping to close sales on REO properties, are sometimes resistant to relinquish control over these services.? To some brokers, this additional work, although outside of their specific area of expertise, can be a means of generating additional cash flow on properties they are listing, by marking up the costs. These brokers have become attached to this extra income, despite the associated carrying costs of providing these additional services and waiting, interest free, for reimbursement from their servicer clients.
The truth is however, at least according to Ira M. Mizell, a seventeen-year veteran REO Broker with GoldTree Realty in Skokie, Illinois, most brokers who provide maintenance services on REO properties do not make money doing so, but actually are lucky if they break even.
“The billing alone is a monster,” said Mizell. “We have to cut three- to four-hundred checks each month, check the invoices for accuracy, make copies of the checks, and account for every penny.
“It’s a monumental task that I’d gladly give up to a national property preservation company that could consistently do this work and be as responsive as we have been to our lender clients.”
Mizell, who manages a rolling inventory of between thirty and fifty REO properties in any given month, has to carry nearly $40,000 worth of maintenance expenses that he has paid out, for which he awaits reimbursement.
“I like having control of these properties, because I’m being held responsible for them,” Mizell added. “But under the right circumstances, I’d give it up if I could.”
The Servicers’ dependence on local REO brokers for providing post-sale property maintenance was brought on by other changes in the real estate market that began to take shape in the last decade of the 20th Century.
During the early and mid 1990s there was a backlash that followed the booming second half of the 1980s with respect to property values. Favorable economic conditions fueled increased employment and increased income, due not only to rising wages but also from many types of investments, such as the stock market, and, of course, real estate. In addition to many people having disposable income to purchase these investments, the advent of ever-increasing numbers of “creative financing” programs and the improved economic conditions propelled many more “average” Americans into the market for home ownership. As a result of the higher and higher demand for real estate, in a market economy, prices could only rise, and rise, and rise. Exponentially it seemed… for a while.
Well, what goes up… you know the rest. There truly is a ceiling to most every price increase, and the housing market in the early 1990s not only hit that ceiling, it broke its neck in the process, creating the downward spiral of real estate values that continued on through most of the last decade.
This downturn, and the severe drop in property values all across the nation, fueled an unprecedented increase in loan defaults and foreclosures, ultimately glutting whole neighborhoods of their economic stability and increasing the number of bank-owned homes that went on the market. Real estate professionals got into the REO business because it offered them an alternate revenue stream that was coming to many of them in the early ?90s unsolicited. There were far more REO properties out there than there were experienced REO brokers to list them. For many, their incomes rose to previously unheard of levels.
As more and more real estate people entered or tried to enter the REO business, many servicers and investors decided that they could reduce the commissions that they had been paying to these individuals. “After all,” the thinking went, “the brokers will make it up in volume.” For many REO brokers, however, volume is a relative term, and lower income is lower income. To make up for this reduction in income caused by more and more competition, as well as a diminished inventory of REO properties in the early 21st Century, many brokers began to rely more and more on providing their clients with “value-added services” like the property preservation and maintenance services mentioned earlier, to make them more competitive and to gain more business. In a sense, they got trapped into doing the work because it made life easier for the servicer or investor to deal with as few individuals on a given property as possible.
However, a growing number of REO brokers in our industry today recognize that the changing trend toward national P&P service providers doing post-foreclosure work is not only better for their clients, it also yields real benefits for themselves. Relieved of the responsibility of obtaining bids or contracting for repairs, not to mention the administrative and financial burdens of carrying and documenting the preservation expenses they incur until they can be reimbursed at the time of the closing of the sale, brokers can devote their time and resources to their primary obligation, goal, and true expertise: successfully marketing and selling non-performing real estate assets.?
One veteran REO broker we spoke to recently, Faith Rosselle, owner broker of Rosselle Realty Services, Inc. in Maryland, commented that in many ways this new trend is benefiting her.
“While I have always liked having control of the REO maintenance process, I do not miss carrying the expenses until reimbursed,” said Rosselle. “Having someone else responsible for the utilities is a big help, and as the national P&P companies get better and better, as they have recently, I’ll gladly let loose of the control, too.”
In fact, as the inclusive approach to pre- and post-sale preservation has caught on, and more and more brokers have encountered it, we’re hearing that many brokers today actually recommend to their servicer clients that they consider using national P&P vendors to provide the aforementioned REO services.
Since wanting control of the process was a recurring theme as we talked to REO brokers, we decided to ask another top REO broker, Anngel Benoun, Director of REO Sales for Dilbeck Gibson Realtors of Encino, California, for her perspective.
“The hardest thing for any Real Estate Agent to do is give up control over their transaction, because we always believe we can do it better than anyone else,” said the veteran REO professional. “But what a relief not to have to concern ourselves with the Property Preservation aspect of REO disposition.
“I believe too many times REO agents are reluctant to communicate with either the Property Preservation vendor or their Asset Manager for fear that any criticism or complaint will damage their relationship with their lender client,” Benoun added.? “With the national P&P vendor I worked with, however, I found that they encouraged our honest dialogue, and that actually helped to make the process a great success.”
There is little doubt among progressive members of our industry that this latest change in the property preservation arena will bring new opportunities for all concerned, from the REO brokers, who can focus on their specific areas of expertise, to the national P&P service providers, who have expanded the scope of services which they provide, and more importantly, to the servicers and investors, who will realize measurable savings in time and expense.?
Foreclosure rates are on the rise nationwide, dramatically so in states such as Ohio, Illinois, Michigan, the Carolinas, Alabama, and others as well. Servicers and investors must therefore continue to look for innovative, effective ways to minimize holding time and maximize net recovery on their REO assets. At a recent servicing management conference, it was reported that servicing costs actually rose by 4% industry-wide in 2004, which is the first increase in many years. This is more evidence that cost reducing methodologies such as the one discussed here are more likely to be embraced more universally in the coming months and years ahead.
A change in mindset with regard to nationwide cradle-to-grave property preservation, an approach that allows work performed by national field service providers to continue in a seamless fashion throughout the entire life of a defaulted loan, can only serve to benefit America’s lenders, servicers, and investors. Implementing a consistent and properly channeled workflow from first delinquency all the way through to the final disposition of each REO property will result in higher efficiencies and better overall communications that will produce shorter holding times, lower costs, and most importantly, higher recovery on aggregate portfolios of non-performing real estate assets.
Robert Klein is the founder and CEO of Safeguard Properties , the largest privately held mortgage field services company in the Country. For information about Safeguard, or to contact Mr. Klein, please visit their web site at www.safeguardproperties.com
1 Feb 2005