REO Disposition Begins in Delinquency
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