Servicers Brace for Another Foreclosure Challenged Year
How to use resources more efficiently is a longstanding issue that is bound to challenge servicers as they face another year where foreclosures dominate the marketplace.
The sometimes necessary evil of transferring homeownership from the borrower to the lender is recognized as a loss for the economy at large, but the challenge starts with choosing between the twin evils of a foreclosure and short sale.
REOs are a necessary evil the industry “should be ganging up” against and do everything in their hands to avoid it, Greg Hebner, president of the MOS Group, told this publication. “It's bad for every single player, every single community, and it can be avoided. That's where I think the taxpayers are benefiting and the borrowers are benefiting. That's really where the industry has to crack that code.”
Sound familiar? The industry has been trying through modifications that help keep borrowers in the home, leaseback programs, short sales and other creative solutions that “keep the thing out of the courts,” he says. Meanwhile millions of foreclosures “are just draining enormous industry resources” that servicers could have been using “to focus on helping” distressed borrowers.
In the third quarter when Fannie Mae and Freddie Mac reported on the ratio between foreclosures and short sales most, about 200,000 were foreclosures and about 40,000 short sales.
And while the reasons may vary, insiders say servicers often are torn by the dilemma of what consists of the best strategy in today’s market: Should servicers be driven by the model where the foreclosure process is outsourced or should it be in-house? Should large banks, Fannie and Freddie hire a third party service provider to do a process that they know how to do and know well? Is that the best path taken?
Currently, according to Hebner, “unfortunately, the economic incentives” are aligned to effectuate a foreclosure process and a foreclosure sale “far ahead” of any loss mitigation solutions because there is a rational moneymaking operation. “Those particular paths to resolution yield a higher and quicker return on money. Good or bad, that's tended to be the easiest path of resistance.”
So the industry and the economy at large have to deal with twin evils, he agrees.
The fact that foreclosures are outsourced to companies that “only make their money on a successful execution of an REO” helps accelerate the process since everybody in the REO chain, from the real estate agent to the asset manager, is “driven by getting a transaction executed.” In other words the formula includes incentives and a proven process to complete a transaction. “You put those two together, you got a five-to-one ratio of REOs to short sales.”
It indicates that despite all the talk about servicers needing to further improve their operational efficiency, the system is serving servicers well.
Jay Loeb, vice president of strategic business development of National Creditors Connection Inc., argues that both the processing delinquent loans that go into foreclosure or enter a bank’s REO inventory, and REO management including cleaning these properties up and selling them, “has been a very efficient process in the industry for a very long time.”
The mortgage veteran who over the years has followed how different financial service providers manage their REO portfolios says REO management is not much different when compared to the years past. Short sales, however, are “a very different process than it used to be.”
In his view the industry has now stopped the brakes so prior to foreclosure and running down that process, “we've got to actually engage the borrower.” His firm specializes in doing just that, yet he is one of many in the industry who agree that it is a crucial part of the loss mitigation process, whether it is about a loan modification, a short sale or a deed-in-lieu.
Plus, it is a politically charged issue and “we just had an election,” he adds. Similarly, it is unclear what will be “the fallout of robo-signing” and the new political balance in Washington and the new direction and it will give to loss mitigation processes “or concentrating on the loss mitigation effort that Greg's talking about.”
A new mantra coming out of these changes could be about just getting “to the bottom” of the pain, foreclose the houses that need to be foreclosed on, and move forward, he says. “Doing the latter might be the standard moving forward.”
The big question mark going forward will be about the GSEs and whether they will continue to have an open checkbook, or continue to operate business as usual, adds Hebner, or will there be a new Congress and new people leading important committees now driven by different behavior or different motivations?
Time will tell.