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Recently, the Cleveland Plain Dealer featured an in-depth look at the efforts of? the loan servicing industry to?mitigate the potential consequences of?the increasing number of vacant and abandoned properties. With the initial condition of these properties deteriorating (as increasing reports of “property stripping” surface), superior maintenance of these properties is vital to?protect them from ?further damages and return the properties to productive use.
24 Feb 2008
A recent article in The Buffalo News chronicles efforts by the servicing industry to return abandoned properties to productive use.
3 Feb 2008
Industry collaboration leads to adoption of Best Practices
published in Servicing Management, June 2007
By?Robert Klein, CEO, Safeguard Properties Inc.
The Department of Housing and Urban Development (HUD) recently issued HUD Mortgagee Letter 2007-03 (ML 2007-03).?The Mortgagee Letter provided a revision to the Preservation and Protection Requirements and Cost Reimbursements for properties that serve as collateral for mortgages insured by the Federal Housing Administration (FHA). These requirements entitled, “General Requirements for Preservation and Protection of Properties Securing FHA Insured Mortgages”. This guidance supersedes the policy requirements of ML 2002-10, ML 2003-05, ML 2004-07, and ML 2005-22, and parts of ML 2002-19. The revisions went into effect on April 30, 2007.
The issuance of ML 2007-03 was a culmination of a cross industry collaborative effort between HUD, Loan Servicer’s and Field Service organizations. Building on the momentum created during the National Property and Preservation Conference in November 2006, HUD was extremely proactive in reaching out to the industry to discuss “best practices”. The Conference Theme “Its About Time” provided the initial forum and framework for the Industry to discuss these best practices with a focus on creating an environment of efficiency and collaboration.
Many of the guideline revisions were as a result of a number of industry conference calls, issues raised at Industry conferences, and working groups formed to address guidelines that were in place. Within HUD ML 2007-03 , there are several changes that affect the way that the Industry is now expected to preserve and protect FHA properties. Highlights include:
- An overall increase in cost reimbursements for many P&P services and standard pricing for securing, boarding, and inspections;
- A definition of five different types of inspections;
- Triggering events that necessitate an inspection have expanded to include property conditions that may signal a non-monetary default;
- An increase in the maximum allowable securing fee to allow for the re-securing of a property without prior approval and a differentiation of the securing timeframes for pre and post-sale properties;
- Clarification of the distinction between temporary and permanent roof repairs, clear guidance when each is appropriate and an increased emergency roof allowable;
- Simplification of the winterization requirements
- Clarification of securing timing requirements for pre (15 days) and post-foreclosure (5 days) sale properties;
- Clarification of conditions under which HUD will accept conveyance of a property with mold;
- A new requirement for the use of digital photographs and a new flat-fee reimbursement;
- Revisions of the requirements surrounding initial grass cuts and an update allowing a Mortgagee to submit one bid per growing season for recurring lawn maintenance on an oversized lot rather than submitting new over-allowable requests each time the yard is mowed;
- Specific language that excludes normal household cleaning products from the definition of hazardous waste;
- Removal of the requirement for installation of the Reduced Pressure Zone (RPZ) device, except in areas where it is a state or local requirement;
- Instruction to immediatelyaddress damages upon discovery, such as flowing water and collapsed roof andapproval to submit an O/A request after the work has been completed;
The Property Inspection and Servicing Requirements within HUD ML 2007-03 provided a definition of five (5) inspection types. ?These include Occupancy Inspections, Initial Vacant Property Inspections, Vacant Property Inspections, Voluntary Pre – Conveyance Inspections, and Eviction Inspections.? The guidelines provide a succinct definition and requirement for each of these inspection types. The revised inspection guidelines also provided some additional requirements and clarifications.? In this regard:
- All inspections are now photo required;
- the Initial Vacant Property Inspection fee is now charged at the time of the initial secure;
- Interior inspections on vacant properties are now required on all visits following the initial secure;
- HUD now provides reimbursement for a total of 15 inspections within a calendar year;
- All inspections must be completed within 35 days of the completion of the last inspection;
- Reimbursement for Inspection Fees are now determined by the type of inspection (interior vs. exterior or gained access vs. did not gain access)
- The previously identified Hot Zones have been updated to include 13 zip codes in Chicago and 5 zips in Los Angeles.
- Properties deemed to be “Vacant but obviously being maintained” will no longer be secured
For years, the industry has lobbied for mandatory interior inspections to ensure early detection of issues that if not detected and mitigated, could lead to a material loss to the value of the property. Issues identified during these inspections often represent high risk matters that can, if not detected early, escalate and lead to a major loss to the property value. Common examples of issues identified during these interior inspections include new damage, worsening of previously reported damage, and the presence of a sump pump not properly maintained.? With the issuance of HUD ML 2007-03, Interior Inspections are now definitively required.
It has always been imperative that property condition be reported and documented with photos at the time of the initial secure.? The new Guidelines provided further clarification or requirements when an imminent source of property damage or a health and safety hazard is identified during an inspection. The following examples were provided by HUD but were not meant to be all inclusive:?
- Flowing water
- Collapsed roof
- Gas leak
In these (or similar) circumstances, the Mortgagee is required to take immediate action to remediate the damage or hazard following the receipt of emergency permission.? In instances where emergency permission cannot be obtained in advance, the mortgagee is instructed to submit and over allowable request immediately following the remediation action and must substantiate the emergency nature of repairs.
The Guideline revision clarified that wet/radiant heating systems are no longer required be up and running allowing for a material cost and time savings for the Industry.? Specific guidance was provided to define the requirements for each system type when performing winterizations.? New allowables were established for:
- Replacement/installation of electric and gas water heaters.
- Installation of an RPZ valve if required by local code
- Repair/installation of heating equipment if required to properly winterize the system.
A number of guideline revisions were addressed as well.? These include
- Mortgagees are no longer permitted to disconnect water meters
- Winterization steps have been clarified by system type; and
- Winterization season has been changed in several states
Debris and Hazard Waste Removal
HUD ML 2007-03 included a number of revisions and clarifications as to the requirements for the removal of debris and hazard waste. Interior debris removal is no longer permitted in Florida and Oregon.? Allowables were also established for large appliance removal, tire removal, and bug/pest infestation removal in order to improve efficiencies and eliminate bids. Importantly, debris removal allowables have changed. and a debris removal cost schedule by state has been provided.
HUD has also clarified the definition of hazard waste to eliminate “normal household” items. Specifically, the guidelines established that the following products, if found in quantities consistent with normal household use, are not considered hazardous waste for purposes of debris removal under this section.
- Non-flammable materials including reasonable quantities of paper and fabrics (unless stored near flammable chemicals),
- Common cleaning products and household chemicals such as insect repellent,
- Up to five gallons of paint and paint products,
- Lawn and garden products and fertilizers,
- Pool chemicals.
Bids to remove these items are not necessary but it is still required to report the presence of these items on updates submitted.
The issuance of HUD Mortgagee Letter 2007-03 provided evidence that Industry collaboration and cooperation is working.
1 Jun 2007
Published in Servicing Management, February 2007
By Robert Klein
Quality Assurance can be defined as a planned and systematic pattern of actions necessary to provide adequate confidence that a product or service optimally fulfills customers’ expectations. As the Default Services industry has matured, we have seen a diligent focus on the completeness and comprehensiveness of quality assurance processes and procedures.? Compliance with investor guidelines has been the main driver of these quality initiatives however the industry has made great strides in utilizing quality control techniques to safeguard their client interests.? Increasingly, we have seen a collaborative approach to quality processes and procedures as field servicer’s, loan servicer’s, and investors (HUD, VA, FNMA, and Freddie Mac) have coordinated their approaches to ensure consistent quality of efforts.?
This spirit of cooperation was never more evident than at the Third Annual Property Preservation Conference held in Washington D.C. in November 2006.?? The Conference theme, “It’s About Time!”? highlighted the renewed partnerships within the industry as the attendees focused on long term goals and opportunities in streamlining the conveyance process, thus saving investors, servicers, and M&M contractor’s time and money.? This collaboration led to proposed resolutions and the establishment of focus groups to cooperatively work with the investors on reducing the inefficiencies in the current processes and improving the quality of work efforts.
Field Service companies are typically the first line of defense for the default service industries quality assurance efforts.? The primary goal is to assure that all contractors working with Field Service companies are thoroughly educated about and compliant with the industry and client requirements, and that their quality of work is consistent and sound.? Contractors are the eyes and ears of the Field Service companies.? Therefore, it is imperative that contractors deploy quality assurance techniques to ensure that work is performed competently, comprehensively, and proper supporting documentation is available.? From a contractor standpoint, quality assurance efforts include:
- Field quality efforts include maintaining adequate equipment (ladders, air compressors, generators, etc.) to accurately and comprehensively complete the duties they are contracted to perform.
- Use of digital cameras to provide photo documentation of the before, during, and after status of the work performed.
- Utilization of office quality assurance efforts to ensure work order updates are timely and thorough and are adequately supported by documentation
- Increased utilization of GPS and handheld inspection tools to ensure that not only are their employees physically visiting the property,? but are comprehensively completing and gathering the proper inspection data
Field Service companies conduct comprehensive quality assurance efforts as well. In addition to investor guidelines,? Field Service companies must also deploy quality assurance techniques to ensure they are meeting client and service level agreement requirements.? Quality Assurance efforts common to experienced field service companies include, but are not limited to:
- Comprehensive vendor recruiting and training policies and procedures designed to ensure that recruitment is properly managed and resultant work products are consistent and in accordance with client requirements
- Increasing use of technology allowing for process “scripting” that provides a roadmap for the contractor in the field to gather sufficient and complete evidential matter including photo documentation
- The use of Contractor Report Cards and follow up procedures to ensure remediation of quality deficiencies
- Comprehensive review procedures designed to ensure the adequacy and reasonableness of submitted bids
- Comprehensive in house industry training to ensure that the in house personnel are properly trained and have access to the latest investor guidelines
- Completion of random quality control inspections.? These inspections are typically performed after the inspector has completed their inspection and are deigned to determine whether or not the inspection was a true representation of the physical condition of the property at the time the inspection took place.
- Assignment of “phantom” inspections to ensure that field inspectors are actually visiting properties and reporting accurate information.
- The completion of interior inspections to ensure early detection of issues that if not detected and mitigated, could lead to a material loss to the value of the property.?
- Critical path timelines and exception reporting established and consistently monitored to ensure timely completion of activities
- Internal quality control audits designed to ensure that adequate photo documentation is available to evidence the work performed and an audit trail is maintained that evidences all work performed
- Use of non-performance and demand letter issues to identify quality deficiencies and implement timely corrective action to prevent future occurrence
- Pre Conveyance inspections designed to document issues at the time of conveyance in order to ensure the minimization of reconveyances.
Loan servicers have also implemented quality assurance measures designed to assure compliance with investors and the mortgagee’s own origination or servicing requirements.? These activities are designed to protect the mortgagee and investors from unacceptable risk, guard against errors, omissions and fraud, and assure swift and appropriate corrective action is implemented.? In this regard, the servicers have implemented quality assurance activities such as:
- Utilization of Vendor Report Cards based on a representative sample of work orders performed designed to quality review work activities.
- The assignment of High Risk Field Officers to work proactively with field service vendors and municipalities to ensure compliance and timely remediation of code issues
- The increasing use of Service Level Agreements (SLA’s) that provide for financial disincentives for breakdowns in quality service
- Utilization of automated invoicing applications to properly ensure that claims for insurance benefits are accurately prepared, properly calculated, fully supported, and submitted in a timely manner on a loan level detail
Investors have also renewed their focus on quality assurance and have proactively worked with servicers and field service companies in a collaborative manner.? At the Property Preservation Conference in November 2006, HUD identified their “top ten” ways to save time and improve efficiencies.? As an illustration of their focus on quality assurance, these included:
- A recommendation that the industry take advantage of voluntary pre conveyance property inspections to minimize reconveyance risk
- Ensure that quality efforts include the submission of a timely HUD-27011 form, and that all non surchargeable damage is properly documented
- Their representation that “It’s all about Quality Control” when providing a comprehensive mortgagee/servicer audit trail.? HUD commented that servicers must perform periodic quality control audits to ensure that preservation and protection requirements are consistently met.
The Veterans Administration also announced strategies to improve efficiencies and quality at the Conference.? VA stated that they are now taking actions to address the servicers’ concerns of consolidation of cost schedules, streamlining and automation of claim payments, making information available online, instituting incentive plans for servicers, and implementing post-claim audits. Fannie Mae and Freddie Mac have also stepped up their quality assurance activities in accordance with the new industry focus. Both agencies have recently created a central office and email address for processing P&P requests nationwide.? These central offices track all bid requests by type and amount, making the reporting and auditing of data more efficient. Additionally, Fannie Mae has developed a servicing guide intended to assist the servicer to make quality decisions on their behalf.
In summary, the Default Industry has made tremendous strides in improving the quality of their work effort and has been working collaboratively to coordinate efforts.? A comprehensive quality assurance plan and process means cost savings to loan servicers, field service companies and ultimately the investors.? It should be apparent that if you cannot measure the quality of your efforts, you cannot improve it.? Industry quality assurance efforts need to focus on continuous business process improvement in an ongoing effort to enhance our products, services and processes.? However, these efforts cannot be undertaken in a vacuum and the industry must continue to collaborate on quality measures if we are to be successful.? The establishment of solid Quality Assurance plans will reinforce the investors confidence in loan servicing and result in renewed cooperation for all involved in the Industry.
1 Feb 2007
published in USFN Hurricane Article January e-Update
by Robert Klein, CEO
The trio of hurricanes in 2005 brought devastation and despair to many residents of the Gulf Region. Non-insured and under-insured homeowners experienced a financial shortfall severely impacting their ability to rebuild both their homes and their lives. To assist with the rebuilding efforts, a number of federal, state, and local initiatives were created and funded to ensure that resources are available for those in need.?
In?Louisiana, ?The Road Home??program was designed to help residents get back into their homes as quickly as possible. Funded by the Department of Housing and Urban Development (HUD), this groundbreaking program represents the largest single housing recovery program in U.S. history. The program affords eligible homeowners up to $150,000 in compensation for their losses to get back into their homes. The?Louisiana Recovery Authority (LRA) is responsible for administering the funds earmarked for the program. LRA is utilizing an escrow system to distribute approved funds in a similar manner that loan servicers utilize in the handling of insurance loss-draft proceeds.?
In Mississippi, the ?Hurricane Katrina Homeowner?s Grant? program was designed to provide financial assistance to those homeowners outside the flood plain whose homeowners insurance did not cover structural flood damage. The?Mississippi Development Authority?(MDA) is responsible for administering the funds earmarked for the program, and it issues grants directly to the affected?homeowners.??
Over the course of recent months, the Mortgage Bankers Association has been diligently working with the LRA to ensure servicer and investor concerns are addressed. A number of investors have issued recent releases providing guidance regarding the programs and their approval to participate. Participation commences with the submission of the?Memorandum of Understanding, and participants are required to abide by all covenants, including the subordination of the mortgage holder?s lien position to the program.
1 Jan 2007
Published in Aug?2006 Managing REO Magazine
By Robert Klein, CEO
Management personnel continually struggle to efficiently deploy resources to accomplish organizational goals and objectives.?? In order to compete most efficiently in today?s business environment, many organizations are now utilizing third parties to outsource ?non? core business activities thereby allowing management to focus on the core activities that drive the growth and revenue of an organization.?
Outsourcing ?non? core business activities eliminates the necessity for investing in hiring, training, equipping, and providing space and benefits for new employees. It provides management the flexibility to focus on core operations and new service offerings that generate revenue. There are a number of benefits to outsourcing in the mortgage loan servicing industry that deserve careful consideration, specifically in the mortgage field services function that is the focus of this article.? Potential benefits include insulation from liability, efficiencies provided through the streamlining and customization of business processes, and the ability to outsource services through the entire lifecycle of a loan to a single source provider.
Mortgage field service companies will typically assume the liability for incidents related to activities they perform.? When cleaning out debris for instance, proper handling and disposal of the mortgagor personal property can avoid potential costly litigation.??? Importantly,? the mortgage field services provider will also insulate their clients from liability incurred for the failure to adhere to rules and regulations of investors such as HUD, FHA,? and the VA. Reputable field service providers will insulate their clients from such liability saving the mortgagee the from such legal entanglements.?
When selecting a mortgage field services partner to outsource their field services function, the mortgage services company must take great care to select an organization with adequate insurance, extensive business process management capabilities, and comprehensive policies and procedures that provide adequate documentation and evidence to ensure adherence to applicable rules and regulations. Comprehensive supporting documentation that includes digital photographs and electronic field reports, adequately maintained in accordance with applicable records retention policies will ensure that risks are mitigated and liabilities minimized.
Streamlining and Customizing Processes
The mortgage industry as a whole is extremely process-oriented, making it among the most paperwork-intensive industries.? Even in today?s business environment where the use of paper is minimized through electronic content management applications, comprehensive file and business process management activities can be extensive. In order to ensure adherence to applicable rules and regulations, the potential field services outsourcing partner must demonstrate the ability to automate business activities to ensure the efficient and effective compliance with an organizations policies.? When selecting a field services partner, it is important to validate the potential partner?s ability and commitment to customize their processes to meet organizational needs. This includes:
- Business process flexibility in accepting and processing orders
- Efficiency of pricing, bid, and invoicing procedures
- The level of automation provided to facilitate real time service updates and supporting documentation
Industry practice has traditionally allowed for Orders to be placed in bulk using spreadsheets or individually via email or uploaded through a secure web site.? All orders should be acknowledged within one business day.? To maximize efficiencies, the mortgage industry has seen a material increase in the automation of business processes between Field Servicer systems and Loan Servicer systems. This greatly improves the efficiency of activities by eliminating duplicate data entry and minimizing error rates inherent in manual processes.
Likewise, receiving, reviewing, and approving invoices can be automated and streamlined for the loan servicer when the field service outsourcer? has the flexibility to? customize its billing process to integrate? with the client?s accounts payable processes.? This reduces the asset managers? work load related to invoicing, allowing them to focus more on property care quality and marketing effectiveness.?
The leading field service providers are increasingly working with their clients to expand the service offerings available to meet outsourcing needs when, where, and how required.? Examples include creative pricing structures and expanding responsibility to include servicing of the Real Estate Owned (REO) portfolio, Many times the field service provider can provide all the necessary services for a portfolio of properties more cost effectively that can be accomplished in house or through multiple service providers.
The industry has seen a marked increase in pre-established fixed fee pricing that allows for a one time fee to cover a flat-fee bundles of regular services.? These fixed fee prices can typically be negotiated based on quantity of order and/or the number of services contracted for.? Such a contractual arrangement allows the mortgagee to eliminate a repetitive and time consuming bidding process.? Exceptional cases can still call for a bid, as needed.? Opportunities exist to establish contracting formats that provide for this fixed fee? ?cradle to grave? package of services? from pre-sale to re-sale.
Many national mortgage lenders and servicers deal with thousands of properties in default.? Typically, they also manage an extensive Real Estate Owned (REO) portfolio as well. When outsourcing these activities to a third party, the field services partner is engaged early in the process to safeguard the value of the collateral before and after foreclosure until disposition. This includes maid services, cleaning, and maintaining the ?curb appeal? of the property for marketing and sale.?
As the mortgage services industry looks to the future, it is in their best interest to look closely at potential outsourcing relationships, either by evaluating the cost effectiveness of the services they currently perform in house, or by expanding the role of their current partners.? Management will do well to evaluate these potential outsourcing opportunities to ensure ongoing cost containment and revenue maximization.
1 Aug 2006
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