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Upfront Upgrades Need Will Further Test Servicers

Banks are dealing with the vicious circle of finding the right balance between lack of liquidity that makes necessary both the discharge of nonperforming assets from their books and investments that make foreclosure sales possible.

If one of the biggest challenges in marketing REO properties is to move these properties off the books as quickly as possible. Success in minimizing losses depends on the willingness, or lack thereof, of the lien holder (the bank, servicer, an investor or another party) “to bring that property into a marketable position, because it’s really becoming a dollars and cents issue,” said Brian Daily, the new VP of business development of Bayonne, N.J.-based property preservation provider REO Allegiance.

Most REO property values have depreciated significantly and banks have limited capital for marketing. “It really becomes a cost mitigation issue, or whether the REO departments are willing or not to put their dollars there,” says the 15-year mortgage veteran. The issue is “the servicers’ unwillingness to invest upfront” to begin the process of upgrading these distressed properties so they are attractive to buyers.

REO Allegiance works with contractors who offer repair and construction services. Before they engage in such a process lenders and servicers have to use different strategies to ensure they get the right return on their investment. The unprecedented volume of REOs is changing the demand for services. If traditionally REO owners were reaching out to local REO management firms, which due to business management differences may provide inconsistent service quality and costs, the growth of national companies like REO Allegiance is part of an effort to offer a more convenient solution. These companies aim to offer flat-fee pricing that helps mitigate the cost associated with the sale of such properties. Also technology may help provide a more credible property valuation process and data acquired through the REO value analysis reports. For example, if a BPO evaluates a property at $100,000 they may decide to spend $5,000 on updates and repairs to increase its value to about $120,000. It means there is opportunity to gain $15,000 in added value and also get a property analysis.

“We’re trying to capture a lot of data utilizing the best vendors in the marketplace and technology to justify costs required to bring that property to a marketable position.”

It is still in its infancy stage because new strategies are required. “The markets are not reacting” to the old way of marketing these properties that have been in the sales lists for a very long time.

There also is a psychological element that adds to the downward pressure on housing values and sales prices in many markets where REOs compete with other properties that are not foreclosures but equally affordable. Foreclosures have a negative connotation in many buyers’ minds.

Besides cost analysis and efforts to add value to REOs servicers are focusing on real estate agents’ scorecards that measure their premarketing efficiency.

Traditionally, he says, servicers “would not do a lot of due diligence” on the efficiency of Realtors and measure or follow up what they could do or communicate with the agents.

“Now servicers are putting the agents more under the microscope, analyzing their scorecards and making sure that action is being taken, such as organizing community events, open houses, networking with other agents about difficult properties. Servicers are more prudent today than they have ever been in than past in order to influence the sale of these properties.”

In the past servicers would follow up on a for sale property every week or other week, but it is not the case today. The REO asset managers are challenging the agents out there pushing them to come up with different action plans.

Who is the buyer? Who are servicers targeting in their marketing? Investors, private prospective buyers?

“From what I’m hearing from the asset managers and REO groups,” he said, the primary targets are the first-time buyers and some other types of qualified buyers including current residents in owner occupied properties.

Some servicers are seeing value in selling REOs to investors although the challenge is to mitigate costs and minimize losses since investors always ask for deep discounts on asked prices.

Investors are becoming very active in the REO market right now because they are not buying a few properties, instead investors target properties in areas where they can purchase larger number at wholesale prices.

“Not all banks are doing that, not all servicers are doing that, but they are becoming more and more part of the conversation than we have seen in the past.”

Is this recent investor appetite for REOs a good short-term solution that helps banks but creates a long-term affordability problem for future borrowers, including former homeowners, renters and potential first-time buyers?

As long as the price is maintained, if these properties are sold at fair market value there may not be negative long-term effects, he says. Downward pricing pressure associated with increased investor interest in purchasing foreclosed properties is concerning the mortgage servicing industry especially for the short term. “There’s still price disciplines that have to be instilled in the REO market.”

Typically so called broad-based investors who buy large portfolios of REO properties deal with the banks that own large REO portfolios so their strategy is “to start significant bulks of such properties to REO investors it can have a negative impact on distressed communities.” This approach, however, appears to be relatively new as most servicers are maintaining more conservative price disciplines, “which in turn helps the goals they are trying to achieve,” which is stabilizing neighborhoods.