Preserving Asset Value Through 'Graceful Exits'

Servicers keep fine-tuning rental strategies and systems that help borrowers gracefully exit their property and preserve property value.

Efforts to avoid foreclosures or help borrowers stay in the property for a period of time until they regain employment or deal with other issues that put them into financial distress are closely related to a clear goal: Anything but a vacant property.

"Once Fannie released the deed-for-lease program, it really stepped up the industry interest," says Alan Paylor of REO Leasing Solutions. "Servicers were saying: If the GSEs are doing this, I can stop the bleeding if at least I lease these properties for a period of time. And that stabilizes the REO portfolios as well, while they're doing it." Many in the industry are contemplating how can asset managers ensure they use property leases as a property preservation tool.

"When you move a secured debt-secured instrument into landlord tenant law, you step into another set of parameters that are not in most servicing systems," he said.

Technology is helping by adding up skills for asset managers, allowing them to determine what is best for borrowers and investors. "It's an opportunity to add value and stop the bleeding."

The tendency among asset managers is to temporarily manage their properties through the foreclosure process, if it goes vacant they need to take care of it, but once it is under the landlord-tenant law the requirements change, he said, due to state-level regulation mortgage bankers are not used to comply with.

When dealing with inherited and new tenants, servicers can decide what is best for their business: hold the property until the market turns around, with multifamily properties fill the vacancies with tenants and hold it as an investment, or once the lease expires to move it into an REO, argues Cheryl Lang, president and CEO of Houston-based Integrated Mortgage Solutions, which is easily doable if the infrastructure is in place.

There are two aspects of that process. One is turning a mortgagor into a tenant or mitigating loss by writing a deed and lease, which is a renamed deed-in-lieu, says Paylor, after the servicer evaluates what liabilities are involved if the property is taken over. The second is when the property is foreclosed and vacant and the servicer/lender needs to quickly occupy it with a creditworthy tenant. Among other things, for example, once a mortgagor turns into a tenant, the servicer needs to run a criminal record check because the law that applies is this situation is different.

Dealing with these properties the challenge remains in the high volume at hand, the size of this segment of the market, as much as in trying to preserve the value of these assets.

Good management enables servicers to instead of eventually having to sell an REO asset, sell a pool of performing assets and get a higher market value, which is good for investors.

"The one thing you do when you analyze a property is look at the economic conditions around the neighborhood," says Paylor, "and if conditions have not improved in the past two to three years, do not lease that property. It is best to look at markets that are stabilizing where there is hope for return on the investment."