The One Stop Shop Strategy, Personal Approach Still King
Renting to mitigate foreclosure losses is emerging as a work-intensive, yet effective solution for owners of foreclosed homes when delivered by one-stop-shop third-party servicers who offer personalized workouts.
It helps reduce lender/servicer losses, says Michael Harris, president of Carrington Property Services LLC, a residential asset management company that serves as a primary property management provider for the Fannie Mae Tenant-in-Place rental program in several states including Nevada, the nation’s foreclosure capital. And while the strategy serves well large and small banks, he said, community banks and credit unions whose portfolios of real estate owned properties are equally small may be the next market segment to generate demand for special servicing tools.
The reason, according to Harris, is both because regional, community banks and credit unions traditionally have been “member oriented” and more conservative in their lending practices (which helped keep their distressed portfolios small) and prefer a personal touch type of special servicing.
Given their history, he argued, credit unions “will take ownership” of their members who are defaulting by offering to do more short sales, deeds-in-lieu and other high-touch default and other foreclosure management solutions, including REO rental options. “It can have a huge value added impact because these programs will tie in together for them very nicely.”
It is important for third-party service providers to understand their needs and provide cost effective outsourcing opportunities.
“We still are operating in an unusual marketplace,” he said. With about 800,000 sitting out there in addition to another million or so properties in foreclosure and 3.5 million in serious delinquency that the market cannot absorb within a short period of time, “banks and investors will have to find alternate strategies because typical REO disposition just is not a viable solution for all that inventory.”
Carrington is one of many companies currently “going upstream into the preforeclosure activities” that offer borrowers short sales, deeds-in-lieu, or deed for lease to rent, if not lease-to-rent options for those whose goal is to become homeowners in the future.
About two decades ago the most common REO retention practice was standard winterization that entails processes like snow shoveling and manicuring the lawn surrounding a vacated property, says Suzanne Ball, president of America’s Infomart of Dallas. For example, she recalls how inspectors did not go inside to check if mold was growing in the house, which often resulted in thousands of dollars of damage.
Vacant property management requires proactive monitoring that include visits to the property at least one to two times a month, she said. This way as soon as mold starts to grow or there is a running leak inside the house the REO manager can take care of it on time. As a rule when the property is in a preforeclosure status the lender would give the borrower access to the house so they can get their belongings. Sometimes, borrowers who are not pleased with their lender/servicer would cause damages to the basement for instance, she said. Unless processes and procedures are in place “a lot of damage can happen in a very short time.”
Hence, America’s Infomart is one of a growing number of companies that take a proactive approach to mitigating property damage related losses.
It is not simply a matter of physical damage caused by mold. In cities like Chicago, Ball said, because the State Legislature has taken “a very aggressive approach” to REO management granting lender/servicers only 60 days to take case of such damages or face property demolition.
Consequently, lenders who are still working with the borrower to agree on a foreclosure alternative solution often have to rely on third-party service providers and outsourcing to properly maintain the property to prevent damages and the prospect of seeing a bulldozer in front of the house.
Same as legislators, at least in places like Chicago, servicers also have to be very aggressively proactive in their preservation efforts and complying with the requirement to provide property condition estimates.
The best approach as in many other disciplines is prevention and upfront intervention. If servicers secure the property and take extensive due diligence measures upfront instead of just the minimum winterization and curb appeal care, she said, they can minimize losses.
Also, they have to decide how much money they want to invest into the property, “depending on where the property is in the foreclosure cycle,” or what is its value on the books compared to the value reported by a current appraisal and broker price opinion estimated with and without repairs. “All these different aspects define what tools are needed and what they can offer to the borrower in resolution.”
Many government mandates are providing rental opportunities instead of foreclosure or eviction for borrowers and the option to generate a cash flow from REOs that otherwise are either sold at a loss or accrue maintenance costs.
It is a rent-friendly market. Carrington manages all of its rental program transactions (repair-for-rent, leasing, collections and distribution) through its proprietary platform Rental Logistics or RNTL and is incorporating to RNTL a new, company-owned-property-managers feature that benefits managers across the United States. The program enables users to reduce the amount of time Carrington has to invest in subcontracting to third-party property management companies and therefore reduce in-house costs and business risk, as well as reduce REO management costs to clients, he said. And even more than costs, “time is of essence” in all preforeclosure efforts.
This software upgrade is in line with Carrington’s strategy to operate a one-stop-shop loss mitigation service provider. Harris says the goal is “to create a continuum of services” from loan resolution to disposition in times when many third-party servicers are specialized in deeds-in-lieu, short sales, foreclosures, property or asset management disposition and outsource rentals. “More importantly, we do not have to outsource these activities.”
Anticipating market demand Carrington executives market tested the one-stop-shop business approach in the years before a worsening housing crisis indicated special servicing demand pressures were bound to mount. Further, more steps were taken to refine the existing technology and upgrade software programs to improve mortgage and property data reporting and analytics.
“Everyone is talking” about REO rental programs right now, Harris says, “but the truth is that not that many companies have been offering this service so there’s going to be a lot of trial and error in figuring out what types of properties are appropriate and what processes serve them best.”
Carrington is drawing on its years of experience as a special servicer. The challenge is not in the process itself as it is in creating that “continuum of services.” It is the reason why Carrington executives are constantly trying to perfect over time the option to provide bundled and add service types of products while maintaining a single point of contact.