Property Management Solutions Improve Portfolios, Provide Borrower Options
Fannie Mae recently rolled out its Deed for Lease program, which enables homeowners facing foreclosure to lease their property for up to one year by deeding the property to Fannie Mae. "The Deed for Lease program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Fannie Mae's VP. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."
While the Fannie Mae program and others like it are needed, and should be applauded for the positive impact they provide, this program fails to adequately address those borrowers that do not qualify under HAMP or do not possess a Fannie Mae loan. With 2.9 million foreclosures predicted for 2009 alone, according to the Center for Responsible Lending, the industry as a whole needs to develop foreclosure alternative offerings for the remaining group of distressed borrowers. A wider scope of possibilities can and should be explored by all asset managers.
Calling All Asset Managers
As more REO properties flood the market, asset managers should be looking at options for property management. They must investigate alternatives for those properties that fall outside of HAMP parameters and are not a Fannie Mae or Freddie Mac asset. Property management options exist for predicting short-term market values and repairing properties. By repairing a property and leasing it asset managers increase the market value of both the property, which can eventually be sold, and their portfolios. First, and foremost, a performing asset is infinitely better that one that is continuing to decline in value. As property values stabilize and even appreciate, the asset can be introduced at a later date into a much more hospitable real estate market. By repairing a property to habitable standards and leasing it there is an immediate lift in market value, and that property also creates added value within a portfolio that may eventually be sold.
Property Management Solutions for the Rest of Us
Because the Deed for Lease program is not a one-size-fits-all solution, it requires a certain degree of analytics on a loan-by-loan basis to determine which properties are suited for the program and which properties are best marketed as REO. If the servicer is looking for a new tenant, it is imperative to look at those borrowers with the highest FICO scores. These borrowers are more likely to maintain the property and make their payments on time.
If the property is tenant occupied, the asset manager needs to ensure the borrower can produce the lease in order to determine if the lease is reasonable and the terms of the lease can be upheld. If it looks like the tenant is creating problems the lender may opt to pay the renter a set amount to move out. In certain cases, borrowers are commanding large amounts of money to vacate the property, as they are well versed in the Tenant Protection Act, which permits them to remain in their home until the lease expires. Borrowers are hearing about their neighbor's loan modification and are considering this option as well. And of course there are attorneys out there that will help borrowers receive compensation from the lender.
Asset managers need feet on the ground to know what is going on with their properties and conduct risk vs. rewards assessments. In many cases, borrowers have renovated properties in a manner that creates a code violation, whether it be converting a garage into a bedroom or making other additions without first receiving a permit. Code violations must be repaired by asset managers and, if a tenant is in the property, those repairs have to be made while the asset manager also performs landlord duties. Asset managers have a lot on their plate, so the more they rely on a trusted partner and advisor, the more productive and efficient the business model.
Strategic Default: Waiting for the Other Shoe to Drop
Unless some option is providing to borrowers that fall outside of HAMP, more borrowers may decide to walk away from their property and cut their losses. Though it is not common practice today, there has been a marginal increase in what is known as "strategic defaults." Strategic default occurs when a borrower is 25% or more underwater on their mortgage and they choose to stop making payments and vacate the property.
Brent T. White, an associate professor at the University of Arizona's James E. Rogers College of Law, recently published a paper in which he argues that borrowers who are underwater on their mortgage and strategically default are making a "financially prudent" decision. The common thought leading up to this is that borrowers are morally obligated to remain in their properties, and that those that walk away are irresponsible. In viewing strategic defaulting more like a business decision, the borrower chooses to maximize profits and minimize losses by walking away. White asserts that borrowers are shamed into remaining in their homes even though many stand to gain hundreds of thousands of dollars by walking away. Though strategic default is not currently being widely adopted, more borrowers may trend toward this option if not given an incentive to remain in their home.
As unemployment remains at near record levels the industry must consider options for relieving pressure on the housing market. Loan modifications are not the industry's silver bullet. The industry needs to consider doing some type of principal reduction with properties that are 25% or more underwater. These borrowers currently have no incentive to remain in the property and pay the rent. What the industry has not done to date is give them a reason to stay and continue paying. Lenders and servicers that are willing to meet the borrower half way will come out on top at the end of the crisis, having improved their portfolios significantly.
Cheryl Lang is president and chief executive officer of Houston-based Integrated Mortgage Solutions and founder of No Paws Left Behind. She can be reached at 281-994-4538 or at firstname.lastname@example.org.