Local Level Can Add to Servicer Woe
States and municipalities have the power to ease up or increase servicer headaches.
The current government push that motivates servicers to expedite short sales and deed-lieu transactions is also enhancing the need for better cooperation at the state level.
According to an insider, municipalities hold the key to a servicer's success in distressed property management since property code violations can turn into a stumbling block in their management and processing efforts including title transfers.
Tara Williams of Altisource sees an increasing number of challenges servicers, and inherently field service providers that are supporting them, face when managing distressed real estate properties.
"We are seeing an increase in servicer efforts to offer the Fannie Mae deed-for-lease program introduced in late 2009," she said. It gives homeowners in distress an option to sign a deed and stay in the home while leasing the home back to Fannie for a period of time and also provide lenders benefits by allowing them to market these properties while they are still inhabited and some residual income is generated by the rent they pay. Furthermore, the neighborhood benefits because this solution prevents the increase of the number of vacant homes.
As the effect of the Obama administration programs wind down, REO inventory is expected to grow for the remainder of 2010. HAMP loss mitigation programs effective since April 5 created a new push for short sales and deed-in-lieu programs, Williams says, leaving homeowners with fewer options that avoid foreclosure. The REO asset inventory creates challenges for servicers who not only are responsible for managing the foreclosure process but "face the daunting task of disposing of these properties as quickly as possible at a fair price that the investor is going to be pleased with."
In this market, Williams warns another important trend servicers need be aware of is a rise in the number of code violations that are in effect on vacant properties, such as property registration "and other trivial issues" related to local code requirements. It requires that every servicer, or their field service provider, establish a relationship with local code enforcement officials.
"They should be reaching out to the local municipality, introduce themselves, offer contact information and make sure these local entities are aware of the existence of these REOs so the municipality office knows who to talk to if something goes wrong with the property.
"Many servicers really struggle to manage that outreach effort to establish and maintain that point of communication at the city level," she said. "Often these officials receive complaints from homeowners that live in a subdivision of the property, since there may be an REO property, or a vacant property connected to it that may create an endangered environment for the neighborhood."
If county and city officials receive feedback from their constituents complaining that a property is not being maintained it can lead to the issuing of code violation fees that are incredibly costly to servicers. To avoid that, she says, servicers need to ensure they periodically send to the ground inspectors and notify code enforcement officials who are these property managers as a way to mitigate some of those issues and also ensure them contractors will be provided to provide needed repairs and services.
Another challenge for servicers is that if these local code violations go unnoticed, Williams explained, "they become liens that are attached to the property" which in time turn into impediments that can stop servicers from transferring the property title "as part of an asset disposition strategy, because you need to clear up these liens placed by the municipality, while all of it could have been avoided."
An as important part of the REO servicing process is efficient inspections. "The initial inspection is absolutely critical. It gives the field service company as well as servicers and investors, an opportunity to understand the exact state of the property at the time it was foreclosed."
Catering to that need Altisource has updated its services to include detailed information to servicers so they can make an informed decision about how they want to market that property, whether it is to cash only buyers, or for example, buyers who qualify for FHA financing, which have quite specific qualifying requirements for both the borrower and the property. "In certain areas we have seen clients interested in making repairs and updates that would bring the property up to the FHA standards...It also allows them to determine what type of buyer they can attract."
Initial understanding of the condition of the property is as important as periodical updates.
Tracking the property periodically throughout the REO life cycle "is now seen as a protracted sale cycle." If in 2009 the average time on the market was 90 days, this year is going to be extended to an average of 120 to 150 days.
Because of the huge amounts of inventory flooding the marketplace, because of supply and demand, she said, buyers have more options that to buy an REO property. "It is going to be more difficult for REOs to compete, so asset managers have to figure out how to become more competitive and how to prepare these properties for sale," Williams says.