Robert Klein Contributes Feature Article in DSNews
Worth the Risk?? Managing the Challenges of Vacant, Low-Value Properties in Your Portfolio?
The stories of how vacant properties wind up vacant are almost as varied as the properties themselves. Two years ago, so-called bank walkaways began to make headlines as part of the housing crisis. Since then, the public perception has come to be that mortgage companies are the reason why most vacant and abandoned properties exist.
The fact is, far more vacant properties exist because of homeowner abandonment, not bank walkaways. Homeowners in default often abandon their properties without making contact with their mortgage companies. When this happens, field service companies are tasked with conducting default inspections for mortgage servicers. These inspections have one goal: to verify occupancy on a home in default.
Industry data indicates that 20 percent of the properties inspected are eventually found vacant?abandoned by the homeowner. Once a home is determined vacant, a property preservation team will take steps to secure the property and will continue to inspect and maintain it as long as it remains in the servicer?s portfolio.
In many cases of homeowner abandonment, no lienholder even exists. Vacancies often result when an aging parent with no mortgage moves into a nursing home or passes away and leaves the home to children who may not be in a financial position to keep up with utilities, taxes, and maintenance. The home is simply abandoned.
Regardless of how properties become vacant, the result is that they are at high risk to lose value because of vandalism and deteriorating conditions. They are more likely to create a nuisance and safety risk to the neighborhood, straining already cash-strapped municipal budgets. Beyond that, they also negatively impact the value of surrounding properties.
Ideal World vs. Real World
In an ideal world, if a homeowner defaulted on a loan, the mortgage company would make contact with the owner and discuss his or her financial situation. The mortgage company would talk about the possibility of a loan modification, short sale, or a deed-in-lieu of foreclosure. If those options were not viable, a foreclosure proceeding would begin. The homeowner would remain in the home through the foreclosure and vacate after the foreclosure sale concluded. During that time, the home would be occupied and thus protected. It would not create a nuisance; its value would be maintained; and its condition would not deteriorate. As an REO, the property would be placed on the market for sale.
Unfortunately, the real world presents a much different scenario. More homeowners with underwater mortgages are abandoning properties, leaving the responsibility to mortgage companies to keep them maintained and secured.
The mortgage industry spends billions of dollars a year on field servicing to perform ongoing inspections and maintenance services on vacant properties in its portfolios. This is done not only to protect collateral interests in these properties, but also to uphold property values and protect the well-being of the neighborhoods in which they are located.
However, even a vacant property that receives the highest level of property preservation services will deteriorate because there is simply no better substitute than occupancy for keeping a property in prime condition.
To address today?s real-world housing challenges, the mortgage industry focuses on four key strategies to reduce the numbers of vacant properties, maintain the value and condition of properties that do become vacant, and return vacant properties to viable occupancy as quickly as possible.
1 Reducing Lengthy Foreclosure Processes
Depending on the state, the foreclosure process can take several months?or even years?to complete. The rationale behind a protracted foreclosure process is to protect the homeowner and allow more time for the mortgage company and the borrower to explore alternatives to foreclosure.
That said, when a property is vacant and is without a homeowner to protect it, a drawn-out foreclosure process can be counterproductive. Vacant properties must follow the same foreclosure process as occupied properties. Government moratoriums on foreclosure sales and the recent voluntary halts in foreclosures by mortgage servicers in response to robo-signing controversies only extend the time vacant properties remain in limbo.
Meanwhile, the vacant property is at greater risk despite ongoing field service attention. Squatters may move in, or the property could become a haven for illegal drug activity. Thieves will remove copper pipes, furnaces, ductwork, aluminum siding, and other metals to sell for a few hundred dollars. The resulting damages often render the home valueless. In fact, the property may actually end up with negative value because demoli-tion costs can exceed the market value.
For this reason, the mortgage industry advocated for change in state laws to allow vacant properties to move through the foreclosure process as quickly as possible. This is critical to protect property values and their condition and to prevent them from contributing to neighborhood blight.
Once a property is certified as vacant, it should be treated differently from an occupied property and accelerated to foreclosure. This change helps maintain the safety of neighborhoods, stabilize housing values, reduce the strain on municipal budgets, and uphold a community?s tax base.
2 Code Enforcement Outreach and Collaboration
The mortgage industry and code enforcement officials across the country share a common goal to address code violations and other vacant property issues as quickly as possible. For years, mortgage servicers and enforcement officials have worked to overcome myriad challenges that stand in the way of sending and receiving timely notification when property issues occur.
When many cities enacted vacant property ordinances as a means to identify a current contact for notification of property issues, the mortgage servicing industry offered alternatives to help cities achieve that goal without the administrative burden and at lower cost. By engaging in dialogue at conferences and code enforcement summits, both sides learned to understand each other?s organizational challenges and identify ways to overcome them and connect more effectively.
Today, code enforcement officials in major cities and smaller municipalities alike have access to new resources that provide instant communication with property preservation contacts who have authority to act immediately to address code violations and other property issues.
Field service companies also collaborated with city code enforcement departments to share best practices, such as the most effective ways to secure properties and winterize plumbing to prevent burst pipes.
While it is impossible to calculate the value of such collaboration, the savings to servicers in reduced fines, penalties, and property damages can add up to millions of dollars. At the same time, protecting housing stock and the safety of neighborhoods is invaluable to code enforcement officials and municipalities.
3 Reaching Out to Help Borrowers
Another perception that persists in the minds of the public is that mortgage companies are eager to foreclose on defaulted borrowers. The data tells a different story. RealtyTrac reported that in 2010, 1 million homes were foreclosed. At the same time, the Mortgage Bankers Association (MBA) reported that 1.5 million borrowers received loan modifications.
Why were there 50 percent more loan modifications than foreclosures? It simply makes more sense for everyone concerned. Loan modifications help borrowers keep their homes and stabilize their lives. They help communities by reducing the potential inventory of vacant properties. Lastly, it is more cost effective for servicers to keep bor-rowers in their homes than to foreclose and sell the properties.
Yet efforts such as loan modifications and short sales are not without their challenges. Many borrowers who pursue modification are overwhelmed by the paperwork necessary to qualify for government programs and fail to complete the process. To overcome this, servicers are offering assistance. The long time frames to complete short sales often result in missed sales opportunities, and right now, the industry is discussing ways to reduce the wait.
Among the best practices discussed in the industry is providing a ?one-stop? contact for borrowers to help them understand all of their options?loan modifications, short sales, and deeds-in-lieu. Servicers also contribute financially to nonprofit organizations that provide counseling and assistance to troubled borrowers.
Mortgage servicers recognize that borrowers facing foreclosure are under tremendous stress and are working to help them find the right solution to regain their financial footing.
4 Pursuing New Alternatives for Property Disposition
Unfortunately, in many cities, there are far fewer homebuyers than homes available for sale. In these cities, legislative efforts are influencing urban planners and the mortgage industry to collaborate on new ways to dispose of surplus properties.
For many years, mortgage servicers donated properties on an individual basis to land banks, land trusts, and neighborhood development agencies.
One such market taking advantage of these programs is Cuyahoga County, Ohio, which includes Cleveland. A land bank was established in 2010 that demonstrated early success. Now other cities are studying it as a model for their own programs.
The Cuyahoga County Land Bank already took in hundreds of low-value and distressed properties from large servicers, HUD, and Fannie Mae. These homes will be evaluated and either assembled into parcels for new use, demolished, renovated, or sold. The city of Chicago is in the process of establishing a not-for-profit entity that can function in a similar way as a land bank.
Private investors also are considering ways to purchase portfolios of surplus properties from lenders and servicers prior to foreclosure and allowing borrowers to remain in the homes as tenants.
No one solution will help the country move out of the housing crisis, just as no one factor led to its creation. One element common among the strategies showing the most promise, however, is a willingness and a commitment to address the challenges in a spirit of collaboration. And teaming up to work together toward a common goal is an approach that?s anything but risky.
Robert Klein is founder and chairman of Safeguard Properties, the largest mortgage field services company in the U.S.
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, Ohio and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees and a handful of contractors performing services in the Midwest, to a national company with over 800 employees. Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.