Minimize Loss Through Enhanced Disposition Strategies
July 21, 2020
Source: Property Preservation Executive Forum (Second Quarter 2020 Newsletter PDF)
Created in 1987, Conveyance Without Clearance of Title (CWCOT) is an alternative property disposition strategy created by the U.S. Department of Housing and Urban Development (HUD). CWCOT provides mortgagees with procedures for bidding and payment claims under the Single Family FHA Mortgage Insurance Program.
Following the 2008 housing crisis, HUD adjusted its guidelines to give the CWCOT program more flexibility. The revised program allowed mortgage servicers to accept offers for less than the full debt owed on the loan by utilizing a HUD-approved discounted value.
This value-based pricing strategy allowed sales to occur at or below a property’s market value as opposed to requiring the full debt as the minimum acceptable sale price. However, servicers are required to make up the difference if the sale price is below the floor set by HUD.
CWCOT as a core strategy for servicers re-emerged recently due to the low cost of money coupled with the emergence of web-based auction companies in the mortgage servicing space that started to aggressively market this route. HUD reports saving more than three billion dollars in holding and other related costs due to this program. Because of the savings, HUD offers its “Second Chance” program that kicks in if the property does not sell third party at foreclosure. The auction company will continue to list the property and try to find a buyer.
When a property is actively being marketed at auction, HUD will grant two sequential 60-day extension approvals to give the servicer more time to either get the property in conveyance condition (ICC) or to sell via auction. That is a primary incentive for having an auction program — it automatically grants 120 days to the post-foreclosure sale process.
Some mortgage servicers prefer to sell via auction to avoid the complexities of going the traditional “Part A” path of conveying the property to HUD REO and having them sell the property via normal channels. The Part A path runs the risk of reconveyance if convey condition standards are not met.
While the CWCOT and auction strategies are effective, the volatility of the market can create the potential for losses. If it shifts and property prices begin to decline, servicers may have to come out of pocket to make up the difference when the demand for housing decreases.
This uncertainty within the market makes it imperative for servicers to sharpen their Part A strategy, not abandon it. When properly managed between a servicer and property preservation provider, the conveyance path is generally a more cost effective route in housing markets that do not have robust demand for housing at auction.
The partnership between servicers and their property preservation provider has proven to be critical when evaluating properties for both the CWCOT and traditional Part A processes. Property preservation companies, like Safeguard Properties, have been successful in aiding servicers during both through continued inspections and maintenance, in addition to ensuring damages are mitigated properly so the property sells with minimal losses to the servicer.
For the Part A conveyance process, Safeguard has developed strategies to streamline and minimize losses for servicers. Techniques to speed up the conveyance process and ensure work is completed as quickly as possible have been implemented and successful for servicers.
There is no doubt that the CWCOT has been successful in the current environment of a hot housing market and cheap money, however servicers need to continue to build and enhance their disposition playbook. Servicers can minimize their losses by remaining prepared and engaging their partners.
Joe Iafigliola is the Chief Financial Officer for Safeguard. Joe is responsible for the Control, Quality Assurance, Business Development, Accounting & Information Security departments, and is a Managing Director and Operating Partner of SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets. Joe has been in a wide variety of roles in finance, supply chain management, information systems development, and sales and marketing. His career includes senior positions with McMaster-Carr Supply Company, Newell/Rubbermaid, and Procter and Gamble. Joe has an MBA from The Weatherhead School of Management at Case Western Reserve University, is a Certified Management Accountant (CMA), and holds a bachelor’s degree from The Ohio State University’s Honors Accounting program.