REO Properties a Sticking Point for Servicers, Municipalities
Robert Klein, CEO of Safeguard Properties, was quoted in an article on mortgagebankers.org regarding the challenges faced by servicers and municipalities when dealing with vacant REO properties.
REO Properties a Sticking Point for Servicers, Municipalities
Wisniowski, Charles
TAMPA, Fla. — Lenders and mortgage servicing firms must ensure that every real estate owned property that comes into their inventory is preserved and protected or risk a hostile and costly confrontation with local government officials, property preservation experts said here at the Mortgage Bankers Association’s National Mortgage Servicing Conference and Expo.
As high default rates and increasing numbers of vacant properties expand the industry’s REO inventory, servicers find themselves increasingly in the cross-hairs of disgruntled and cash-strapped local governments, said Cary Sternberg, senior vice president of REO with American Home Mortgage, Irving, Tex.
“There has been a huge increase in the amount of activity initiated by local governments in an effort to try to stem urban blight,” Sternberg said. “In many locations throughout the country, the tax base is dropping and the amount of revenue being raised by localities to take care of city services is also dropping. They need to look for ways to keep their cities going. It’s a difficult problem to deal with and servicers like us are dealing with cities and municipalities all over.”
Unfortunately for the industry, municipal officials don’t always understand legal complexities involved in supervising REO properties, nor do they grasp convoluted constraints under which servicers operate. Often, Sternberg said, they don’t care but they do understand that they want vacant property problem solved.
“[Municipalities] are absolutely very well-meaning and they are very concerned about their areas,” Sternberg said. “We try to understand that, but they are also singularly focused on their own areas and a lot of time they don’t realize the impact [of their actions] on servicers.”
In addition to ignorance of servicers’ duties and responsibilities, Robert Klein, CEO of Safeguard Properties, Brooklyn Heights, Ohio, said a lack of communication between servicers and municipalities can prompt frustrated local officials to strike back, via onerous legal actions such as fines or mandate servicers to make often expensive repairs to bring the property up to code.
“These citations requiring the lender, the title holder, the investor, to repair the property is the big stick that code enforcement officials carry. They know they have a big stick in their hand and they know they have the power to do that,” Klein said. “Their concerns are to maintain the property so it doesn’t deteriorate in the community and so it does not become a base for illegal activity. They want to protect the neighborhood and they will use that big stick and [they will] issue those $70-$80-$90,000 fines when there is a lack of communication.”
By contrast, when open dialogue exists between servicers and local government officials, “most of the issues go away,” Klein said.
Marc Hinkle, vice president of loan servicing with PHH Mortgage, Mount Laurel, N.J., agreed, noting that it’s incumbent on servicers to keep abreast of all local codes and ordinances, as well as new laws passed by local governments. He suggested inspecting the property immediately, documenting its condition, and conduct periodic follow-up inspections to ensure it remains in good condition.
Mike McKeever, managing director at Goldbeck, McCafferty & McKeever, Philadelphia, said it’s in servicers’ best interest to go the extra mile to communicate both with local government and with the current or former home occupants. He suggested servicers post a notice on the property as soon as falls under the servicers’ domain. This serves to both cut down on the “surprise factor” by residents that generate the most complaints but it also gives code enforcement officials a point of contact.
“Code enforcement officers need to know who to get in touch with,” said McKeever.
McKeever warned that pain for servicers managing REO properties will likely get worse before it gets better this year, as the growing trend of enforced foreclosure moratoria leads to property disposition delays. In turn, servicers could face additional costs and more complaints by localities as properties deteriorate.
Sternberg noted that servicers must realize that once they assume an REO property into their inventory “the buck doesn’t stop there.”
“It really doesn’t make any difference that the code violation on this property occurred when the previous mortgagor owned the property and it had been that way for three years and the city is just now getting around to saying-okay we’ve got a lender on the hook so now we’re going to slap a $1,000 a day fine on them until they get it fixed,” Sternberg said. “I can tell you it’s not going to do any good to go back and argue that ‘we didn’t create the problem.’ You have got to get that thing fixed at the earliest possible time in order to mitigate the circumstance and to mitigate your own loss.”
The good news, Sternberg said, is that servicers who communicate with local officials and who express an interest in solving the problem for them will find those officials cooperative.
