Declining REO Inventory
August 30, 2016
Until the recent housing crisis in the U.S., most people did not know the property preservation and mortgage field services industry existed. Perhaps many still do not understand all of the work that goes into preserving a property that has gone into default, been abandoned, or been reclaimed by the bank or financial institution holding the mortgage. “Real estate owned,” or “REO,” also is a term that was not commonly known to the public at that time that may be more recognizable today.
An REO property is one that is owned by the servicer, lender or, at times, investor. This happens after the home has gone into foreclosure. Generally, these properties are handled by an asset manager that contracts with a mortgage field services company to preserve and prepare the property for sale. The process of safeguarding, cleaning, repairing and marketing foreclosed assets is typically referred to as REO management.
With new pressure points the housing industry faces today following the crisis, mortgage field services companies need to continue to provide excellent service to the mortgage servicing industry. They need to ensure national standards are met regarding property maintenance and eliminate neighborhood blight so that their mortgage servicing clients can properly market and sell REO properties in their portfolios within a reasonable period of time.
Rapidly shrinking volume
According to the Federal Housing Finance Agency’s (FHFA) Foreclosure Prevention Report, as of the fourth quarter of 2015, the number of properties owned by Fannie Mae and Freddie Mac was a third of the peak during the crisis. With the continued decrease in the default rate, inventories will continue to decline. Overall, the government-sponsored enterprises report a total of approximately 72,000 assets in this status, according to the report. More recent reports from February put the default rate on mortgages at the lowest level since pre-2008 almost at “normal” levels of 1% of total loans.
Rapidly decreasing volumes put a spotlight on each individual home. In contrast to REO sales, there is a significant increase in the sales of owner-occupied properties. During the crisis, an REO property was one of the few that might actually get sold, whereas in this current market, REOs are competing against standard flow.
Another pressure point on the REO business is the alternative disposition of properties to investment or private equity. Rather than go the traditional REO route of taking the asset from foreclosure sale and selling it on the market, these entities are dispositioning the assets through third parties.
One of the risks of this approach is that an investor may or may not have the same quality standard for neighborhoods and communities. An investor is going to ensure it maximizes its return – and this could result in less consistent care for REO properties across areas. Although the ownership transfers, many lenders and investors still have sizable stakes in the remaining properties in a neighborhood. By relinquishing control to other parties, those entities lose the ability to ensure that a decision on an REO property doesn’t negatively impact another property where a loan is still being paid.
The preceding sections define the market, rapidly declining volumes due to the improvement of the housing market and the utilization of alternative vehicles for loans. However, care for neighborhoods remains paramount. With the rebounding of the real estate market, it has become, in some ways, easier to sell properties. However, the overall competition level is stiff. The REO asset is competing with properties in the standard flow to a degree not seen in many years.
Debris and cleaning
A trend that the market has seen over the past several years is an increase in the amount of debris left in homes after foreclosure. Prior to the mortgage crisis, a typical property had approximately 10-15 cubic yards of debris consisting of yard waste, old clothes, uneaten food, etc. In recent years, the amount of debris in properties during the initial services has more than doubled. Much of this is attributable to the downsizing trend seen over the past decade. Individuals in foreclosure are moving from very large homes to smaller homes or apartments. They simply do not have room for all of the items accumulated.
Additionally, the Multiple Listing Services (MLS) have reported that pricing of properties has returned to pre-crisis levels in most markets. This creates an opportunity to ensure that, in properly preparing and selling a property, the REO process does not create significant financial losses. During the post-mortgage-crisis period, the Federal Reserve Banks of Boston and Cleveland and the Federal Reserve Board published a study in 2010 called REO & Vacant Properties Strategies for Neighborhood Stabilization. The study concluded that REO property sales caused price depreciation in 31 of 34 states. As the volume of REO has declined, and overall prices have stabilized, this impact has been greatly reduced.
At times, an REO asset may be handled directly by a local broker. The asset manager may contract with brokers and set target pricing and returns. The broker is responsible for getting the property into marketable condition, often setting the price and completing all work with trades to complete necessary property repairs or upgrades. In this scenario, the entity holding the loan effectively outsources the control over property condition and rehab to many individuals who may have differing opinions and standards on how to best market a property.
Field service companies are different. By utilizing a national company to manage REO field services, asset managers gain significant procedural and activity benefits. The general processes as defined by the FHFA in its Report to Congress 2012 on REO include securing the property to avoid theft, vandalism and unauthorized use; maintaining and repairing to protect the value of the property, ensure marketability and minimize the negative impacts of foreclosures on communities; pricing appropriately; and selling in a reasonable period of time. Let’s examine how each of these core processes is managed effectively by a mortgage field services company.
National mortgage field services companies utilize vendors throughout the country to deliver services to homes that have completed foreclosure sale. They have broad reach and depth to ensure that as soon as a property can be serviced, it is. These entities have large training departments to provide their vendor networks with training through the use of videos, online job aids, mobile technology and regionalized training throughout the nation.
Typically, after a property transfers to REO status, the initial services required to secure the property are completed within five business days. Best practices for these activities go beyond just ensuring locks work, windows are secure and opportunities for unauthorized use are minimized.
Properties are cleaned, including the removal of all trash, to ensure they are safe to be marketed. Additional best practices for the asset managers include ensuring all exterior fixtures – such as lights, handrails, concrete steps and yards – are in marketable condition. Ultimately, the goal should be to make a property that is for sale due to the REO process indistinguishable from a standard MLS listing.
Maintaining and repairing properties
National field service companies have national standards. Best practices for this include a complete work order describing every activity that must be completed by individuals working at the property and enforcing this through the use of mobile technology to direct work and document results. By utilizing consistent work order standards, a property in a rural area gets the same treatment as a property in an urban or suburban area. Effectively, this means that the grass cut and landscaping work is consistent, repairs are done on time and blight to communities is minimized.
Additionally, the mortgage field services companies have extensive records and photo documentation of work completed so that evidence of the efforts to maintain the neighborhood can be shared with all interested and affected parties.
Pricing appropriately for quick sales
Mortgage field services companies may or may not participate in the price setting process. Where value is created is in ensuring that assets serviced by the field service vendors are properly cleaned, repaired and shined to deliver the best value possible.
Brokers are busy people. Their general expertise lies in evaluating, marketing and selling properties. By utilizing a national field service company, brokers are freed to manage the business of selling the property versus acting like a general contractor to source, complete and ensure quality of work done at the property. A national mortgage field services company can have up to thousands of vendors that it works with to get this done – a core competency of acting to collect, distribute and ensure quality across properties.
Future of REO properties
The REO business is here to stay. Although prior to 2008, many people were unaware of this part of the mortgage process, lenders and investors need a way to disposition properties when they return to their ownership. Alternative disposition, such as selling loans to private equity, has become more difficult, as the price to purchase such loans has increased, reducing returns for those investors.
Additionally, communities increasingly are holding not just the current property owners, but also the initial lenders and investors accountable and liable for proper maintenance and upkeep. This liability and the shrinking potential profit margins for buying large amounts of loans or properties will likely provide additional requirements for a servicer or investor to take homes through the REO process. Mortgage field services companies, specifically those with national standards and reach, are a key solution to ensure that an REO property is properly maintained and sold within a reasonable period of time.
Joe Iafigliola is the vice presi¬dent of vendor management for Safeguard Properties, a national mortgage field ser¬vices company. He can be reached at joe.iafigliola@ safeguardproperties.com.
Source: Servicing Management (Declining REO Inventory [pdf])