Defaults Flow Into REO Inventory
Dallas-Freddie Mac saw 52,000 in real estate-owned inflow in 2008 and about 5,400 properties went through disposition in March. And by the end of 2009, the GSE expects to see 136,000 in REO inflow.
REO inventory at Freddie Mac is being driven by various foreclosure moratoriums, which have led to a 32% vacancy rate in REO, said Ingrid Beckles, senior vice president of default asset management, at SourceMedia's Mortgage Servicing Conference here.
About 12% of that amount is investor owned and the rest is assumed to be owner-occupants. "We have to get to them earlier in the cycle and provide a resolution. That's why it is imperative that we work with servicers to make the foreclosure avoidance activity stick," she said.
"Even though we're doing a high percentage of loan modifications, there is still the residual percentage, 35%-40%, that flows into REO off of our 90-day book that just keeps growing."
Servicers need to put more resources into keeping loans from transitioning into later stages of default. Freddie Mac is watching servicers build capacity in their early collections area and loss mitigation.
"They have been doing this for the past 18 months. We just have so much more to do. It is about building the right capacity to get the programs to the folks, prevent the influx from rolling in, so we don't have 136,000 REO. That would be my dream," she told conference attendees.
"As we are looking at the unemployment rates rise, sometimes the early default population is much more serious. We're seeing more loans transitioning into the 60- and 90-day delinquent states because of the type of situations causing 30-day default factors," she said.
Ms. Beckles encouraged servicers to know what loans are sitting in their portfolios and to use targeted risk-based dialing to connect with borrowers. Use automated tracking and case management, some type of scoring mechanism to get to these folks earlier, she said. Restructure loans by using operational efficiencies and proper risk management, parallel to what happens in the origination process.
"Stop thinking of servicing as a back-office shop that just catches stuff. It's a new concept. Think of it more as offerings and fulfillment. We have to collect documents and get the loan package approved. Our new programs require that you get tax returns," she said. "I would argue that if you set up your servicing shop like you would a front-office operation and understanding that it's a product going through a process, we will get much sharper with our execution as an industry."
Once a Freddie Mac property goes into REO, after three or four days it is assigned to a broker who is required to have it rekeyed and trashed out. They must make sure the lawn is mowed and external repairs are sent in immediately for approval. Marketing strategies are determined within the first 10-15 days of property acquisition. Freddie Mac deploys a property-by-property strategy and does not use auctions to market homes.
"We have seen excellent returns in our loan recovery. We are looking to broaden the approach as it makes sense. For now, the one-by-one basis is working well for us. We are seeing a larger inventory."
Speakers at the REO Super Session at the conference said the price and condition of these properties are the biggest drivers in moving increasing inventory. Because of that, more companies have gone back to rehabbing homes.
"We have always repaired properties. We do believe it's a worthwhile investment. If the homes are in better condition, the property is easier to sell rather than taking the property all the way through eviction. We get a buyer quicker and we get a better price," said Tiffany Davis-Fletcher, director, REO sales, Fannie Mae.
Christopher West, president and chief executive officer, Green River Capital LLC, said it is important to make sure these homes are in FHA condition. A high percentage of seller delays are based on property repairs, but an even higher percentage of delays are because the financing doesn't match FHA guidelines, he said.
"Ninety-four percent of our delays are caused by financing. That doesn't necessarily mean the buyer can't get financing. Either the buyer or the home that you are trying to put them into under the financing he qualifies for, doesn't match. There's been a very strong focus at our company where FHA and Fannie are the loans made out there. If your home doesn't qualify for either one of those, then you better know that," Mr. West told the audience.
"You also better know the types of buyers in that specific area. We spend a lot of time - this has really changed in the last nine to 12 months - in qualifying the home against the buyer in those regions."
He said 61% of his company's seller delays are because of property repairs. "We put this property in the contract. We think they are under the right condition. The mortgage company comes in and says you have to fix these things before we lend on it. That is becoming a very big challenge for us, for the closers, and the frustrations for the buyers, to make sure the home has the correct qualifications as it relates to the contract offer."
Mr. West said his company is finding out that many institutions that offer FHA and Fannie financing don't know the guidelines to the repairs of these homes. One lender may have one qualification and another lender has a different set of guidelines.
"That can be frustrating," he said. "All of these cause delays. Time is money in REO. Shaving days off a large portfolio makes a big difference for your clients."