Drawing On The Wisdom Of Avoidable Loss Strategies

The search for ways to reinvent collateral risk management, avoid long property vacancies and preservation costs keeps leading the industry into the path of preventive strategies.

Today's biggest overall problem, says Stephen Sherman, president of Green River Capital of Utah, is that as the inventory grows the industry has to come up with a proactive game plan that contains setting aside a part of the budget for inspections to gain intelligence about property conditions on a regular basis. Whether it is done in-house or through outsourcing, cost efficiency is the most challenging aspect of collateral risk management.

Sherman argues that as the inventory grows it is important to identify the areas that pose more risk either because of weather, theft or other market risk, and ensure that in higher-risk areas listing agents are required to make frequent visits to the property and file regular status reports. In neighborhoods severely devastated by foreclosures and with large numbers of vacant houses one problem that is turning into a trend is theft, especially theft of appliances such as refrigerators or stoves. "In these cases it is important to consider how often properties are inspected." Solutions vary, he says, but proactive measures that make believe these homes continue to be inhabited are an effective approach. "You leave the lights on at night, maybe offer the neighbors the option to park in the driveway." In other words, REO management also requires a certain level of untraditional creativity just to cover up the fact that a property is not occupied. Sherman recalls how that driveway trick used by one of the listing agents helped protect a property.

Also, the ongoing crisis coupled with unprecedented inventory makes it more difficult to calculate the average time a property remains in REO status.

"It's kind of a moving target that depends on the market." In California it takes about 60 days for a property to get multiple offers, he explained, because the market is doing better and there also is a lot of investor interest, while in some other markets there is first-time buyer demand.

"These aren't new trends, but they are growing trends because there are more and more REO properties out there for sale." And these market conditions "are just one additional reason for the mortgage industry to put its focus on short sales," he adds. For example, statistics from RealtyTrac show that in Phoenix the average sales price of a short sale was $168,000, compared to $130,000 for an REO property. "Apart from managing risk, because if you have a short sale you're more likely to have someone live in the property, and you reduce the time it is vacant even if there's isn't going to be someone there, you benefit from the higher price and the fact that short sales have less of a stigma than an REO has."

Green River Capital started as an REO management company that also offers liquidation services to banks, credit unions. Along the way it saw opportunity in expanding into the short sale and property valuation markets "which tied into the firm's overall expertise." As short sales increased and became a better option than REO, in the past few months the firm established two separate sister companies: GR Financial, which operates as the GRC short sale arm, and Infinity Valuation Services, which is the valuation arm of the company that provides full service appraisals, price opinions and property inspections, a more relevant collateral valuation product. IVS was created in response to "a real market need" for distressed property valuations. "There's a lot of large BPO companies that do a lot of volume and great work but they do not specialize in short sales or REO property valuation. To IVS we also added property inspection services."

His collateral risk management strategy focuses on two criteria. Intensified efforts to do more short sales simultaneously deal with collateral risk management since in most cases homes in short sale are occupied reducing the possibility of damage or theft. There may be minor damage or neglect, he says, but not the same serious consequences as when a property is vacant. "Right now the industry push to find short sales over REOs is our best line of defense from the collateral risk management perspective."

Concerns about the properties that do not have a short sale opportunity and the only option is foreclosure and REO include preservation and protection from natural disasters, and management of the unprecedented REO inventory. So moving forward, as the inventory of vacant REOs grows so is the need "to stay on top of weather issues and natural disasters" and to have in place a vehicle that immediately secures properties that become vacant or vacant after they become REO. Servicers need to winterize these properties, ensure they have power, air conditioning and other services at the level that helps avoid deterioration.

The bottom line, he says, is applying a "trust and verify" mantra. Related cost is managed by outsourcing or allowing brokers to make decisions about the property care. "In management and the REO world I want to trust that we are using well-qualified brokers, but also verify what they are doing."

Another valuable lesson from the road that he has implemented with IVS is consistency. Unless property inspections and follow-up measures are conducted periodically information gaps can affect the accuracy and efficiency of property management.

For example, IVS property inspection forms are designed to include crucial questions such as: Is my broker or the property preservation company doing a good job at maintaining that property in good saleable condition? The form helps track information about the property indicating whether it is in good condition, if the power is on, or if there are damages, since if the property needs repairs it is not ready for sale at the maximum price possible. This way information is available for review by REO outsourcers and any other party interested in verifying the data and pictures.