Now that many experts are heralding the end of the foreclosure crisis, we are seeing fewer headlines about the shadow inventory that servicers are holding in their portfolios.
It would seem that these assets are finally living up to their name and moving back into the shadows, but in truth there is still a great deal of REO inventory on the books of the nation's servicers.
According to CoreLogic's November National Foreclosure Report, servicers are still holding about 1.7 million homes, worth a total of approximately $256 billion. That’s down about a quarter since November 2012, when it was estimated $348 billion worth of homes were still sitting in portfolio.
The good news is that there appears to be a new trend among servicers that sees them taking a more serious and effective approach to disposing of these assets.
Here's what we're seeing:
Servicers are driven to wind down their internal asset management operations in an effort to cut costs now that defaults are falling back to more normal levels.
But with so much REO still in portfolio, many of the servicers we’re working with today are sending more of this business to outside vendors. In the process they are raising the standards they use to judge these operations. The result has been a trend toward moving these properties back into the market as expediently as reasonably possible.
By employing the right strategies, these servicers are holding down both disposition costs and loss severity.
As you might expect, the first step for many of these servicers is to determine what portion of this work can be outsourced most effectively. Then secure relationships with outside experts who have both the bandwidth and the expertise to take on dealing with their distressed inventory.
We're seeing more due diligence on the part of servicers, possibly due to increased compliance concerns and the need to find experienced partners.
At the height of the crash, there were many smaller firms that entered the asset management business to capitalize on the influx of business. Unfortunately, many of these firms performed poorly. Had they been more effective, there would be less shadow inventory still sitting on the books.
There are three key areas of focus for servicers before choosing outsourced partners. The first is the set of best practices employed by the outsourcing firm. The second is the outsourcer's stance on compliance. The third is the training system employed by the outsource partner.
A best practices approach to the business, built on lessons learned during the early years of the foreclosure crisis, leads to better, more profitable decisions and fewer mistakes.
Firms that don’t operate on this basis make mistakes, which can be very expensive in today’s regulatory environment.
And nothing is more important to servicers today than regulatory and investor compliance. Many of the banks that are servicing their own loans do not have the compliance infrastructure in place to operate in today’s environment. Servicers are taking extra time with potential outsourcing partners to fully explore their approach to compliance.
Finally, with so many changes impacting servicers today, they are very keen to know exactly how their outsourcing partners keep their teams up-to-date on all regulatory requirements.
The best advice for REO servicers is to consider the expertise of firms that specialize in REO asset management and disposition, but thoroughly vet their capabilities.
Roger Beane is CEO of LRES, a national provider of residential and commercial valuations and asset management for the mortgage, banking, credit union and real estate industries. For more information, visit http://www.lres.com.