Field Servicers Coming to the Rescue
Servicers facing untraditional compliance requirements in addition to capacity issues and the need to "do or die" are relying on outsourcing to minimize operating costs and manage foreclosure risks.
Adaptive internal changes by servicers are resulting in new partnerships that help supply services for the current demand.
For example, the growing number of the properties at risk of foreclosure or bank owned is increasing servicer demand for property preservation service providers like Tampa, Fla.-based Mortgage Contracting Services. Newly appointed CEO Caroline Reaves told this publication it has also affected the way MCC does business.
Among others, new customer protection laws that require servicers to act as landlords demands frequent contact and assistance offered to tenants of foreclosed properties.
"There's been at least two recent changes due to the tenant bill. Servicers have been looking for assistance in this process," Ms. Reaves said.
"We provide a 24-hour hotline so tenants can call in when they have problems with their property."
Sometimes their requests for assistance are about garbage disposal or other property maintenance issues that servicers are not used to dealing with. Now, she said they have to answer such questions and tend to certain building emergency issues like plumbing in the middle of the night, air conditioning, heating, tree falls and roof leaks during the winter.
"These certainly are not the types of services mortgage servicers had to deal with on a 24-hour basis. If over the years brokers used to help them from the real estate standpoint on REOs, now they have to do it on properties that are tenant occupied."
If before the bill's passage tenants were evicted, now they are allowed to stay in the property for a period of time. According to Doug Licker, vice president of MCS, servicers are faced with interpreting their landlord responsibilities from passage of the Helping Families Save Their Homes Act of 2009. "They must be cautious, but also thorough in their new role to manage tenant-occupied foreclosed properties, as well as maintain awareness of the risks associated with the liability of these tenants. Otherwise, adhering to state and local landlord/tenant codes could prove troubling and costly."
Servicers are tasked to find meaning in the federal legislation affecting landlord/tenant law, he said, "designed to implement another solution to help relieve some of the mounting pressures on the economy and housing market spawned by the steady, if not growing, number of foreclosures."
Its goal is to define uniform standards for dealing with tenants of foreclosed properties, he said, but at the same time it has burdened servicers with responsibility for untraditional services they were not prepared to provide.
Concerned servicers often choose to transfer their "landlord" services to a third party.
"The fact that tenants are still there makes it so much more difficult for servicers. It turns into emergency issues for a lot of issues that would not have been emergencies in the past," Ms. Reaves said.
"It has changed the way we do business along with the servicers who have to adjust to the new law requirements. Servicers becoming landlords are looking at us for property management."
And that has triggered business changes among field servicers as well.
"We've been looking into partnering with some property management company to assist our servicers so they do not have too many vendors to work with. It just changes our way of doing business. We have been very involved in that process," she said.
Over the years the company has mostly focused on ensuring properties are properly managed to preserve their value and avoid irreparable damages.
"These days we've been seeing demand for more rehab work. So if before we would see more demand for preservation services such as replacing windows, cutting the grass and other services, now it is more rehab work. We're getting a lot of that, but it is helping communities a lot more. Also, it has helped bank-owned or REO properties to be able to compete with regular residential mortgages that are being sold by real estate brokers for the owners."
Another relatively new cause-and-effect change in the relationship between servicers and their field services provider partners relates to requirements to comply with the Department of Registration and city code rules and regulations. What they see in the trenches, she said, is that corporate advances are getting really large because cities require that servicers register properties "and do a lot of rehab type work on them that they normally did not have to do, which of course always falls back on us, since mortgage firms expect property preservation companies to stay on top of such situations."
It means MCC has a co-compliance department that monitors city compliance requirements, attends related informatory events and reports back to servicer clients to ensure they comply.
"We try to stay on top of ordinances and have great relationships with city officials in several cities, and we do that to be able to serve our customers better," she said.
While finding solutions for these internal challenges helps improve the quality of service, it also translates into higher processing costs for MCC and other third-party providers, which ultimately are faced by their servicer clients and investors if and when they are involved.
Sometimes property preservation costs increased by other, unpredictable costs. For example, servicers may even have to cover utility costs when tenants fail to pay.
"We have increases in costs because now we have compliance departments. With servicers it is the same thing, just tenfold more, they have to deal with these issues long before we do. Plus there are the advances that we do on behalf of the servicers. … It's a very significant amount of advances with other firms that we have done on behalf of the clients. Servicers and investors are losing money, too."
Furthermore, these developments are changing the landscape of risk management, she said, since servicers and field service companies have evolved to respond to the need to process more government-backed loans and comply with government requirements. The future of vacant properties in 2010 and beyond remains everyone's concern.
"There's always a lot of risk involved when you own tenant occupied properties. That's why insurance on rental properties tends to be higher."
She expects to see more servicers rely more on outsourcing to take care of property preservation and all the other post foreclosure services.
"They just don't have the capacity to do it," she said.