Managing REO “Municipalities Get Aggressive with REO”
Robert Klein, CEO of Safeguard Properties, was recently quoted in an article in Managing REO magazine.
Municipalities Get Aggressive with REO
By Jennifer Harmon
Local municipalities across the country are increasing penalties and fining lenders as much as $100 a day for code violations such as for each broken window on an REO home, according to speakers at a panel on vacant property at the Mortgage Bankers Association’s National Servicing Conference in Tampa, Fla., which had 1,873 attendees this year.
Robert Klein, chief executive of Safeguard Properties, a privately held field service company based in Cleveland, said servicers need to make sure their property preservation units communicate with local code enforcement officials at the city and county levels to open up dialogue and prevent this from happening.
“If you won’t listen, they will look for every legal measure they can to inflict some pain,” Mr. Klein told the audience. “We need to see more dialogue with municipalities.”
Because these ordinances are popping up everywhere, asset managers should work with local real estate brokers across the country to determine the specific requirements in different municipalities. Right now, about 600 cities are using some form of ordinance. He said local brokers are able to gather knowledge and counsel lenders on particular laws in their coverage areas.
According to Berry Laws, a partner with Kansas City, Mo.-based Martin, Leigh, Laws and Fritzlen PC, vacant property lawsuits are likely to occur more and more, because these properties cause problems in neighborhoods. “As values go down, crime increases, prostitution goes up, there is increased vandalism, looting of copper pipes, toilets and sinks, and properties are used for crack houses.”
It is a legitimate issue for the city, he described, because the government is concerned about neighborhoods where these properties are depreciating in value by thousands of dollars and apartment values go down. But the more money a city has to spend on taking care of these properties means less funding for local fire departments, police departments and schools, Mr. Laws added. “The liability is on the investor and servicer. Servicers are subject to the fines for these properties. There are a lot of constitutional problems with these requirements,” he said.
In some places like Kansas City, if the borrower defaults on a loan, after 14 days the lender must send someone out to see if the home is occupied. If it is deemed vacant, the lender must register the property and check on that home every month and sometimes every week.
“The lender is required to repair, secure, inspect and maintain these properties,” said Mr. Laws. “They must have someone change the locks, drain the pool, fix the windows. They have to put a sign on the house to tell everyone it is vacant with the contact name and phone number. Basically, ?Come vandalize me.? This advertisement has unintended consequences.”
The task of tallying the different laws all over the country and what each one says is overwhelming and a daunting task for everyone, he added. There are different laws in all 50 states and Puerto Rico, at the city, county and municipal levels. Each ordinance has significant differences that can be burdensome to the servicer. Fines are $1,000 a day in some cities.”
The speakers all agreed that the responsibility and cost of maintaining these properties has shifted from the borrower to the lender because of the time it takes to do a foreclosure.
In California, Mr. Klein said there are now hazard waste removal requirements regarding cleaning chemicals and solutions, specifically Windex. “In California, any waste — for instance, a gallon of paint — must be removed by an environmental company that is licensed to remove it. Your property preservation company can?t do it. You have to hire a waste removal company.”
It could cost as much as $550 to have a bottle of Windex removed from the property by one of these professionals, he said, compared to a fine of $5,000 if the asset manager is caught removing it. “These ordinances are popping up everywhere. In St. Paul, Minn., there is an ordinance that requires lenders to complete total repairs before it will allow an REO sale.”
Panelists discussed how important it is to make sure an REO property looks and smells inviting. Correction action should be taken on even low-value properties in order to dispose of the homes. Cary Sternberg, senior vice president, American Home Mortgage Servicing, Irving, Texas, said servicers are searching for creative and aggressive strategies to dispose of real estate-owned properties while figuring out the best way to preserve the assets.
His company saw an increase from 22,000 to 37,000 REOs in 2008. He said servicers are partnering up with preservation vendors to update the carpet, paint, and if needed, replace the roof on a particular home, in order to make sure it is in “lendable condition” before someone can qualify for a loan. He said third-party sales are becoming more popular to move REO. He said he is not sure about the chance of rental type programs succeeding, because the lender is not set up to be a landlord.
Caroline Reaves, president and chief operating officer, Mortgage Contracting Services, Tampa, said more mid-value and high-end properties are seeing cosmetic enhancements with furniture staging. Lenders are taking a much more active role here, she said.
The panelists also mentioned how home managers are sometimes being used to maintain the REO property and travel from house to house to occupy and maintain the property. This is happening especially on West Coast high-end properties, they said. This can help the homeowner with security issues as well as decrease marketing time, some suggested.
Michael Blair, chief operating officer of servicing, at Franklin Credit Management Corp., Jersey City, N.J., said lenders are looking into renting out foreclosed and REO properties. His company has started a pilot program with renting foreclosed homes.
“Having someone in the home is a lot better than having the property vacant,” he said. “The large concentration of REO inventory is driving the prices up for all lenders with properties sitting there empty. If you make it a rental property and make sure you add the proper amenities, you get people in to do the work, the values come back. Renting is a win-win for everybody. It helps stabilize values in neighborhoods.”