While the housing market is slowly picking up steam, there is still a very large inventory of distressed loans that pose a potential risk to the mortgage industry.
These loans threaten to suppress home prices for many years to come unless the issues surrounding them are resolved. The most effective way to reduce this backlog of distressed inventory is to outsource to organizations specializing in dealing with troubled loans.
According to CoreLogic’s National Foreclosure Report, the shadow inventory or pending supply of homes consisted of 1.9 million homes with an approximate market value of $293 billion at the end of July 2013.
While this is a refreshing 22% inventory decrease since July 2012, that figure is still no cause for celebration. The existing backlog continues to plague the industry and threaten another backward spiral. A solution is outsourcing to an REO specialist who can perform these functions faster, minimize interruptions to financial organizations and maximize profitability.
As we have learned over the past several years, outsourcing to established REO vendors puts the burden of dealing with distressed assets squarely on their shoulders. These vendors have performed quite well with fewer mistakes and quicker disposition of assets directly attributable to their skills and experience. They rely on the industry’s best practices to ensure the most profitable business decisions are being made, eliminating expensive mistakes that require additional time and money to correct.
Outsourcers also manage many back-office needs so banks can focus on their front-end revenue-generating priorities. Plus, there is no need for internal departments to manage these assets as outsourcing converts fixed costs into variable costs.
Another critical component to outsourcing is increased regulatory compliance.
Some banks do not have the resources to manage and cope with the growing number of regulatory changes, and this is often a primary focus of specialized firms that maintain teams of highly qualified compliance staff responsible for continually monitoring ever-changing regulatory requirements.
Specialist firms have already incorporated the latest requirements into their procedures, and now the tsunami of regulatory changes has been fully absorbed into the DNA of their corporate structures.
The successful specialized firms rely on a higher level of training and experience, which further helps speed the processing of distressed loans. For instance, Chicago-based Fay Servicing utilizes a unique system of employee selection to improve defaulted homeowners’ ability to save their homes.
“We focus on hiring mortgage originators who have years of experience dealing with borrowers,” says Ed Fay, CEO and founder of Fay Servicing. “Our employee training transitions employees into a successful career in special servicing and enables them to build cases for loan modifications when less experienced bank staff might only see foreclosures. This benefits both the bank and the homeowner.”
Yes, the market is improving, but the mortgage industry still has a long way to go. The most effective way to deal with the volume of distressed loans and defaulted homes is clearly to rely on the expertise of specialist firms.
Roger Beane is CEO of LRES, a national provider of valuations and REO asset management for the mortgage, banking, credit union and real estate industries.