NOV 20, 2012

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REO Reality

The Case for a ‘New Normal’ in REO Invoicing

NOV 20, 2012 11:14am ET
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When it comes to certain things in the default industry, many folks seem to equate “leading edge” with anything paperless. Nowhere is this more true than in REO invoicing.

If it’s electronic‑if people are writing checks with their accounting software or online banking tool‑ many figure that’s progress. But when you consider that approximately 66% of all U.S. consumers paid bills online in 2011 (according to comScore, Inc., a Reston, Va.-based marketing intelligence firm), and that more Americans now use debit cards instead of cash, you understand that there’s no longer anything special about electronic payments. It is the “new normal.”

Here’s the rub, though: For REO managers, being “normal” is not enough – especially not for those dealing with large portfolios and blizzards of invoices, and in an environment where every dollar counts. In other words, it’s not enough to receive invoices by email. It’s not enough to use your accounting software to make payments. And it’s certainly not enough to blindly set up automated payments when billing circumstances could change at the drop of a hat.

What asset managers and default servicers need is more. But what does “more” actually mean?

Let’s Start With More Hustle

Most REO managers today pay invoices one at a time. Many dedicate staff specifically to take care of such functions, and nothing else. This strategy is not without reason. Nobody wants to miss an invoice or pay more than they owe. The downside is that this process is not just slow, it’s extremely costly–and that’s not sustainable, particularly when it’s possible to do more with less.

The key to more nimble invoicing is automation. Whatever system is used, it needs to be capable of automatically generating payments as well as allow vendors to submit invoices electronically. Before widespread use of the ATM machine, consumers had to go to the bank during business hours to get cash. But today, ATMs can read and accept personal check deposits without the assistance of a teller. Why should our invoicing processes be any different?

More Precision

With the right technology, invoicing becomes nearly instantaneous. But what happens to accuracy? While some level of human oversight is necessary, today, rules-based technology is lifting much of the burden. “Rules-based” describes the manner in which a technology solution can be set up to automatically handle specific invoices and determine a proper course of action. For example, an electronically submitted invoice can be “proofed” against an REO firm’s financial accounting software to determine whether payment has already been made or whether the invoiced amount is within a previously agreed-upon rate.

Rules-based invoicing systems also allow managers to set their own rules for tracking invoices, such as segregating invoices per location and property type, or sending out automatic notifications to specific team members who may be needed to review and approve the expense.  This gives REO companies improved control and fewer mistakes–and keeps their vendors happy.

For example, let’s imagine you have a property in your portfolio which needs the lawn cut once per month. You receive an invoice not every month, but every two weeks–or the same original invoice is resubmitted. The servicer’s invoicing system can be set up so duplicate invoices are automatically declined. Users can also set up specific cost parameters on various types of invoices, so if a utility bill comes in higher than expected, it will be flagged and sent to the appropriate staff person for review.

More Intelligence

While most Americans buy products and services and simply pay the bills when they become due, a smaller group uses financial accounting tools and software to get greater understanding about where their money is going. This allows people to make smarter long-term choices about their spending habits. With invoicing technology, REO managers can do the same–and more.

For example, are your REO invoices within Fannie Mae’s or Freddie Mac’s supported expense claim fee structured? Your invoicing system should be able to tell.

And when integrated with financial accounting software, your invoicing system should let asset managers compare invoices against budgets and see whether tighter cost controls are needed.

Finally, it should be capable of running audits and creating ad hoc reports, which only help REO managers meet predetermined targets but enhances the decision-making process regarding REO disposition.

Invariably, every new innovation in society–whether it is personal computing, hybrid automobiles or human space travel–was created when people raised their expectations of what was possible and demanded more. Today, paperless invoicing is following suit and has fast become the new “normal” in REO management, but the technology exists to do much more.

Properly leveraged, automated, rules-based invoicing technology saves investors and REO oursourcers, servicers and vendors time and labor while reducing loss severity, making them more profitable while creating healthier relationships with their partners.

John Vella is COO of Los Angeles-based Equator, LLC. He can be reached at john.vella@equator.com.

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