MortgageOrb How Creative Disposition Can Aid Communities
Robert Klein, CEO of Safeguard Properties, contributed an article to MortgageOrb.com and Servicing Management magazine about the challenges facing communities and servicers with the high number of REO properties on the books.
How Creative Disposition Can Aid Communities
By Robert Klein on Wednesday 29 April 2009
Every day, more statistics are released that confirm what most of us in the industry already fear: The mortgage crisis probably has a way to go before it reaches the bottom. It would be difficult to find an economist willing to predict that the worst of the country’s entire financial crisis is nearing an end. Most believe it will continue well into 2010.
RealtyTrac reported that more than 3 million foreclosures were filed in 2008 – an increase of 81% from 2007 and 225% from 2006. Nearly 2% of all homes in the U.S. received at least one foreclosure filing in 2008, and banks repossessed more than 850,000 homes in 2008 – more than double the repossessions in 2007.
Even when the crisis ends, it will take some time – maybe years – for servicers and investors to clear the glut of real estate owned (REO) properties from their portfolios. Not only is the sheer volume of REO properties difficult to move, but these properties face stiff competition from traditional-sale homes that have languished in a weak real estate market, even as sale prices fall and interest rates drop to levels not seen in decades.
Meanwhile, the longer REO properties remain unoccupied, the greater the risk is that they will incur some sort of damage, even though the vast majority of servicers and lenders act responsibly to protect properties and respond quickly when issues come to their attention.
In these challenging times, it is essential for the industry to rethink its practices relative to REO maintenance and disposition. There are no fewer than three areas of critical concern:
effective preservation and protection of REO properties,
enhanced marketability to return properties to occupancy more quickly, and
creative disposition of properties with limited marketability.
Even the most regularly inspected, maintained and protected REO properties can fall victim to vandalism, theft, weather damage and other problems. They key is to identify problems as quickly as possible so that they can be addressed before the situation becomes worse.
For years, the industry has posted stickers on the doors of vacant properties with contact information so that code enforcement officials, neighbors, law enforcement officials and others who identify conditions can make property preservation contacts aware of them. More recently, door hangers placed at neighboring properties have begun to show promise, inviting more sets of eyes to watch out for and report issues when they arise.
On another level, the industry also has attempted to reach out to code enforcement officials to overcome the challenges of outdated or inaccurate court information that has resulted in delays and even failures of code violation notices reaching responsible parties.
As a resource for code enforcement officials, the Mortgage Bankers Association (MBA) has posted property preservation contact information for the major mortgage service companies on its Web site. While this resource has been effective in many instances, too many code enforcement officials still have been unaware of its existence. As a result, in many cities, too many code violation notices have failed to reach the right party in a timely manner.
Despite industry efforts to help, the fact remains that vacant properties continue to pose challenges to city code enforcement officials. This reality is what has driven many cities to consider or enact vacant property registration ordinances.
The difficulties with these ordinances for the mortgage servicing industry have been well documented. Their monumental volume makes compliance difficult, and the parties responsible for the most troublesome properties often are the ones least likely to comply. The majority of servicers that are both proactive and responsive incur the largest burden of paperwork with which to comply, and cities are beginning to realize they are investing much time and significant administrative resources for very little return.
This is why the MBA convened a Vacant Property Ordinance Committee to identify a better alternative. The committee is now piloting a program with the Mortgage Electronic Registration System (MERS) in which the MERS database, which contains current information on more than 60 million properties, will be made available to city code enforcement officials across the country.
Mortgage servicer companies that participate in the MERS system will be considered compliant with vacant property registration requirements of cities and will not have to file additional paperwork for their vacant properties.
Since December, this pilot has been under way in the cities of Boston; St. Paul, Minn.; Chula Vista, Calif.; Stockton, Calif.; and St. Louis County. Due to the promising results of the initial pilot, in March, the program expanded to 50 additional cities.
Protecting and preserving vacant properties is one thing; returning them to viable family ownership is another. One only has to drive down virtually any street in the country to know that the real estate market is soft.
According to the National Association of Realtors, existing-home sales in January fell 5.53% from the previous month and 8.6% dropped compared to January 2008.
With traditional home sales languishing and sale prices falling to levels not seen in years, REO properties face stiffer competition to sell. Long gone are the days when an REO was simply cleaned out and sold at a reduced market price. Today, REO properties have to stand up to traditional market homes and offer the same level of curb and nesting appeal in order to attract a desirable family-home buyer.
Property preservation specialists are increasingly being asked to perform higher levels of maintenance and repairs on REO properties. These services include landscaping, interior and exterior painting, new carpeting, updated lighting and other cosmetic upgrades rarely done in years past.
Even with lower-value properties, low-cost maintenance services are important to make an REO property more inviting. On the outside, a neatly manicured lawn and yard cleanup can help REO homes move more quickly and at a more favorable price.
On the interior, cleanliness doesn’t cost much, but it can have a significant payoff if a family-home buyer can envision living in the home. They key is for the house to look and smell as fresh and clean as possible. At a minimum, floors, carpets, windows and walls should be scrubbed, and counters, plumbing fixtures, cupboards and closets should be wiped clean. Finally, investing a few dollars in light bulbs can make a world of difference in the perception that a home is bright and well maintained.
Despite all efforts to enhance a property’s aesthetics, the reality in some neighborhoods is that, from the mortgage servicer’s perspective, many REO properties have limited or no residual market value when carrying costs are considered. These properties are often located in neighborhoods with an abundance of vacant homes and in areas where changing market conditions have significantly reduced their marketability.
Yet, from a community standpoint, these REO properties offer tremendous potential. They can become homes for lower-income families and first-time buyers. As part of larger land parcels, properties can be repurposed into neighborhood green spaces or made available to businesses to spur economic growth.
Although land banks have been around for decades, they haven’t always been used to their full potential. Recently, many cities have begun to revitalize their land bank efforts to acquire and repurpose vacant properties. The goal is to prevent vacant properties from blighting neighborhoods and to instead use them to facilitate the rebirth of communities.
Genesee County, Mich., created a model land bank in 2003. More recently, the state of Ohio, under an initiative led by Cuyahoga County Treasurer Jim Rokakis, passed legislation permitting the creation of land banks involving numerous municipalities. The Ohio legislation allows governmental bodies such as Cuyahoga County – which includes the city of Cleveland, one of the cities hit hardest by the foreclosure crisis – to create self-sustaining entities that accept foreclosed homes in both the city and suburbs.
While land banks offer mutual rewards for cities and servicers, they can only be successful if both sides have an effective and efficient way of finding one another. Most servicers manage national portfolios of REO properties and find it difficult to connect with hundreds of individual municipalities around the country. At the same time, cities and community development agencies interested in acquiring surplus properties do not know where to start in reaching out to servicers.
Imagine the potential if the industry could somehow come together to create a “one-stop” resource where servicers could post their surplus properties, allowing cities and community agencies to access them.
By pooling large amounts of data on many servicers, municipal and community development groups would be able to identify individual homes that could be offered to lower-income and first-time buyers. They also would be able to identify and assemble larger tracts of properties with the potential to attract retail and housing developments, or be transformed into recreation areas, public gardens and other green space.
The nation’s mortgage and housing crisis is likely to be with us for some time. At the moment, our greatest challenge is to work together to protect properties and to ensure that they do not contribute to crime or neighborhood deterioration.
Looking ahead, the crisis offers communities across the country the opportunity to retool and repurpose their land spaces based on shifting populations and housing preferences. Studies show that home buyers today, especially the coveted Generation Y, prefer walkable, environmentally friendly neighborhoods close to their workplaces, with nearby parks and green spaces.
Every city has the potential to breathe new life into their communities with the help of the mortgage and mortgage servicing industries. By working together, REO properties could help to spell a new American Dream.
Robert Klein is founder and CEO of Safeguard Properties Inc., a Brooklyn Heights, Ohio-based company specializing in property preservation and REO services. He can be contacted at firstname.lastname@example.org.