One effect of the current default crisis is that servicers are squeezed for fees. To compete, they need to differentiate their offerings by providing more value than their competitors. How can servicers add value?
The best way in the current housing environment is to understand the local market to minimize losses for the investor. It’s one thing to say that servicers should understand the market trends to minimize default loss and maximize revenue. But what should servicers be looking for? How are current market trends leveraged to best evaluate portfolios and make servicing decisions?
One thing every servicer should do is benchmark portfolio performance against the rest of the market. This ensures that servicers can help maximize value on distressed sales and limits exposure to fraud. Servicers should leverage analytic solutions to minimize costs and the time needed to manage foreclosures and real estate owned properties.
When comparing to market performance, pay attention to the impact REO inventory has on local prices. REO inventory is usually a leading indicator of home price changes. As REO volumes rise, expect prices to drop soon thereafter. On the flip side, as REO inventory decreases, expect to see prices begin to rise again.
Another metric to compare against the local market is the days on market of the servicer’s own REO liquidation activity to the average for the area. Servicers that are able to show above average performance can better minimize carrying costs and reduce losses for the investor.
The flip side, of course, is to effectively monitor all REO liquidations for post-liquidation resales where the property has sold for significantly higher than the original REO liquidation. Unusual bumps in price in particular buyer-seller arrangement might also indicate possible fraud by showing where post-REO sales depart dramatically from other sales in the area. Tracking post-liquidation sales versus home price indices and sales data helps servicers evaluate how effective their sales are at maximizing market rates.
Of course, the key to this is accessing local data. Relying on national, or even metropolitan-level data, does not provide the detail needed to accurately assess properties in a portfolio. As the below chart shows, even within a county, prices can vary wildly.
In addition, our analyses also show significant differences in distress discount rates between and within counties, and across time. This is also true for other important housing metrics such as pre foreclosure activity, price stability, and market recovery metrics.
Ultimately, knowledge is power when it comes to understanding a portfolio. Servicers who can access valuation tools and critical distress market metrics to understand local, city, state and national sales trends are better able to serve investors and maximize default decisions.
Yong Kim is the analytic product line and technical sales manager for San Diego-based DataQuick.