Aggressive Approaches to Rehab

As cities across the nation get creative in handling vacant properties, there are plenty of things that asset managers can do to improve the movement of their REO properties.

While in the past, mortgage servicers had the option to be selective about the repairs being done, today, they are much more aggressive in their approach to marketing REO properties, evolving beyond basic cosmetic repairs, according to Allan Martin, chief executive offer of Mortgage Contracting Services.

Larger repairs, such as roofing and replacement of appliances, have become more commonplace, but with the growing amount of work, the entire industry is quickly reaching capacity.

"That can be very dangerous. As everyone feels the pinch of an increased workload, asset managers must retain firms that have the expertise and experience to properly rehab their REO portfolios, from the accurate allocation of staff to financial resources," he said. "Doing the minimum is not enough in a market that is saturated with vacant properties."

Where do asset managers even start? When it comes to REO properties, asset managers must use analytic tools that enable them to balance bid pricing, said Mr. Martin. Historically, these tools have been used by insurance agencies to balance bid pricing, giving asset managers the ability to estimate project costs with modifiable data. A tailored computer program assesses an entire portfolio quickly with cost estimation and bidding that enables servicers to make better decisions based on accurate data.

Asset managers that outsource the work may use this as criteria for selecting a third-party provider, deciding to work with companies that provide software tools for the analysis of bids.

As a positive for asset managers, the robust market has led to a more competitive environment, he added. "When the mortgage industry boomed in the beginning of this decade, there were huge opportunities in real estate, which led many - some unqualified - to become Realtors to turn a profit," said Mr. Martin.

"A parallel can be drawn to the default servicing market, which is having a boom of its own, as every day more contractors and subcontractors enter the field."

While there is certainly enough work to be done, asset managers must be sure to hire qualified, licensed contractors who are properly insured and experienced in rehabbing homes.

As the housing market struggles, construction has also suffered, which has left many in the industry looking for "handyman" type work, for which they may not be completely qualified. According to Mr. Martin, this is where outsourcing to a third-party field service provider can be a huge benefit, as the requirements to become a vendor can often be stringent. "Asset managers cannot afford to take a risk in hiring unqualified candidates, especially as their portfolios grow in scope."

Whether outsourcing or managing the rehab process in-house, Mr. Martin believes it is essential to monitor a contractor's capacity, volume and quality of performance. "This is one of the biggest issues in rehab today - because it can significantly impact the speed and accuracy with which REO properties are rehabbed, which can have financial ramifications," he said.

For MCS and the other property preservation firms, prospective contractors go through a rigorous and comprehensive approval process. Applicants must go through a state criminal background check. References are verified and are usually accompanied by a phone interview with the owner of the company. Contractors also complete an oral and written exam to confirm industry knowledge, experience, HUD guidelines and requirements.

He said contractors should also participate in software training, industry training and due diligence training. Insurance certificates and state-specific licenses must be received and verified. It is also important to monitor a contractor's timeframes, quality of work and performance.

Monthly scorecard performance should also be used for quality control, according to Mr. Martin. "Consistent measurement of capacity, volume and performance will ensure quality service is always provided and upheld."

When looking at rehabbing such a large volume of properties, it's vital that asset managers have a way to drive costs down through competitive bidding and have comfort in the high level of work being performed. Mr. Martin anticipates that inventory will continue to grow, at least in the short term.

"In order to be effective at management and disposition, asset managers must be more proactive about doing everything they can to move the properties quickly. With virtually every mortgage servicer being more aggressive about rehabbing a property, the advantages in the market will now come from their ability to drive down costs and benchmarking contractor work."

The issue of rising foreclosures and REO has touched every member of REOMAC and in the mortgage market as a whole, including every lender no matter how cautious they were with their loans, says Shelley Kaye, president of REOMAC.

"It's mind-boggling to see the transition in the industry," said Ms. Kaye, who worked at First Option Asset Management as a senior asset manager for 11 years before becoming a consultant at ECC Capital. "I remember [at First Option] in the beginning assigning 300 files. When I left in May there were 17,000 files. It's hitting every aspect of the economy. You only have to read the paper and understand."

Outsourcing is increasing and lenders can't hire fast enough, according to Ms. Kaye. "When you have volume fluctuating, you can't just hire 20 people. If volume lessens in six months lenders can't get rid of those 20. An outsourcer is responsible for the volume and allows the lender to stabilize his staff." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/