Most major banks, mortgage loan servicers and asset managers agree that effectively preserving REO assets is a top priority. Yet, despite recent declines in REO volume, there remains a great demand within the default servicing industry for seasoned, best-in-class property services companies that are effective in keeping REO assets in top-notch condition.
Considering the general demands and the costs associated with operating transparently, using advanced technologies, implementing industry best business practices and remaining compliant with the latest regulatory changes, the business of property preservation isn’t exactly for the faint of heart. The challenges associated with the changing industry landscape only add to this burden.
Currently, two trends present significant challenges to the mortgage servicing industry unlike anything seen in recent history: longer foreclosure timelines and increasing regulatory scrutiny.
Longer Foreclosure Timelines
First, longer foreclosure timelines in judicial states are clogging up the courts with years of foreclosure backlogs, according to real estate data provider RealtyTrac. Judicial foreclosure delays in New York and New Jersey—where it takes on average over 1,033 days to foreclose— are burdening lenders, banks, servicers and investors with higher carrying costs, increased legal fees and more risk to local code violations.
Investors should expect timelines to increase in Florida (where it already takes more than 907 days to foreclose), in Hawaii (824 days), in Illinois (817 days) and in Massachusetts (700 days). Florida alone has more than 358,000 unresolved foreclosure cases gumming up the state’s overburdened court system, with no relief in sight according to the Office of the State Courts Administrator.
These elevated foreclosure timelines in the nation’s 26 judicial foreclosure states will present significant challenges not only to banks and servicers, but to the property preservation firms they hire to help them manage, maintain and sell these distressed properties. Longer foreclosure timelines translate into more disposition costs for banks, servicers and property preservation firms due to requirements for regular inspections to determine occupancy status, property condition and other vital information for these entities to protect their assets.
Why are foreclosure timelines growing? The answer has a lot to do with increasing and more restrictive regulation at both the state and federal levels. Regulators and our elected officials don’t seem to understand the fine balance between protecting consumers, which we all support, and creating serious bottlenecks in important real estate markets. In Massachusetts, for example, state and federal rules essentially prevent creditors for contacting a delinquent borrower for a year post default.
Increasing Regulatory Scrutiny
Since the housing crash in 2008, an avalanche of federal, state and local consumer protection laws have changed the REO landscape, moving loss mitigation efforts further upstream and increasing the number of short sales, loan modifications and refinancing efforts while simultaneously reducing REO activity. Additionally, more layers of government regulation have added risk, increased expenses and added delays to the default foreclosure process. Expect more of the same in the near future as Congress, state and local governments—and even city councils—impose greater burdens and assess more fees and fines for banks who own distressed properties.
In California, for example, a new series of consumer protection laws—known collectively as the “Homeowners Bill of Rights”—went into effect in January 2013, restricting dual-tracking foreclosures, instituting a single point of contact for borrowers seeking assistance avoiding foreclosure, and imposing civil penalties on fraudulently signed mortgage documents. In addition, California’s new foreclosure laws make it harder for lenders and servicers to foreclose on delinquent borrowers.
Because of new California laws, more servicers are now going to have to defend their ability to move forward with a foreclosure in court against opportunistic borrowers seeking to forestall foreclosure. In the event of a claim under the HBR, the lender/servicer/note holder may bear the cost of the litigation. Nevada passed similar laws modeled on California’s legislation.
Clearly, these laws have serious implications for servicers and will slow down the disposition of defaulted properties. For investors, laws like the HBR tend to delay liquidation speeds and depress the value of defaulted loans and REO properties. The laws will also tend to restrict the supply of affordable homes, driving up prices in many of the more competitive real estate markets.
Property preservation companies are under increasing pressure from regulators and investors to make sure properties that are foreclosed—or become vacant—are maintained and preserved up to code. Servicers and investors can face heavy fines and penalties from local governments if a foreclosed property becomes a blight, even if deteriorating conditions began prior to foreclosure. Keeping up with the increased regulatory scrutiny will be critical in the years ahead, especially as the new federal agency, the Consumer Financial Protection Bureau, ramps up.
Property Preservation Companies and Change Management
Moving forward, property preservation providers must review and become familiar with constantly changing industry requirements. The use of local property management companies is critical to ensure local market compliance, as well as to build rapport with municipalities. A local presence is essential to providing feedback to the national preservation providers to ensure processes are improved and efficiencies gained.
Mobile technology will also be key to enhancing default field services for clients. Geo-positioning or “GPS” technology, for example, will help improve field services work. GPS technology combined with mobile applications can be used to ensure real estate agents, inspectors, and contractors are at the right property at the right time.
Lastly, effective means of communication and collaboration between servicers and third party vendors will be essential to ensure the effective use of resources and guarantee best business practices and continuity.
Despite an improving housing market, the number of distressed properties remains elevated and property preservation will continue to be vital for the servicing industry. Over 10.7 million borrowers are deeply underwater, owing more than their homes are worth. Moreover, distressed homeowners are redefaulting on HAMP and HARP loan modifications, costing banks, taxpayers and investors billions. More than 306,000 borrowers have redefaulted on HAMP loans, according to a recent report by the Troubled Asset Relief Program. And over 800,000 properties are in the foreclosure pipeline.
Clearly, things are getting better in the real estate market. That said, the still recovering housing sector has pockets of distress, and much work remains to be done in the property preservation industry. All of us need to work together to help get the US housing sector on a stable and sustainable footing.
Kevin Cloyd, a 20 year veteran of the mortgage industry, is President of Carrington Property Services, LLC, a national asset management company specializing in the preservation, management, rental and disposition of residential properties, with a focus on bank-owned properties.