Dangerous Time for REO Asset Managers and Servicers
A number of new trends in the U.S. home mortgage industry are impacting servicers' ability to move problem loans efficiently through the default resolution process.
These trends, from chain of title concerns to the foreclosure approval process in place at some mortgage servicing companies, are likely to also impact servicers' ability to effectively move delinquent loans through collection, loss mitigation and as a last resort, the foreclosure track. They will also adversely impact the effective disposition of real estate-owned assets in the near term.
After the housing crash, many industry watchers assumed, and with good reason, that the housing market was about to be flooded with REO. That didn’t happen to the degree many believed that it would for a number of reasons including those mentioned above. Many properties haven't even made it through the entire foreclosure process yet and the fear of a shadow inventory is still present and very real.
For many borrowers in default, the relief options that are appropriately in use to keep them in their homes, when possible, will run their course before the end of next year. It has been reported that nearly half of borrowers with HAMP modifications are falling back into default. The final numbers will probably be higher than that.
Servicers are under heavy pressure from the industry's largest investors to perfect their files and efficiently move seriously delinquent loans through to foreclosure.
Eventually, many foreclosed homes will hit the market. But who will be there to handle the volume?
At the beginning of the downturn, sensing an opportunity, a number of former industry executives with experience in REO asset management started new REO outsourcing firms. But with relatively little work to be done for servicers to date, many of these firms have expended their capital resources just staying in business, hoping to last until the log jam breaks. A rising tide lifts all boats belief.
While there has been some business from the smaller and midtier servicers, most of the available opportunities are with the GSEs and HUD.
This could create a challenge for servicers if it takes much longer for the industry to return to some form of normalcy in regard to processing delinquent loans for foreclosure. It is quite likely that if it takes more than two more quarters to resolve the problems keeping REO from making its way back onto the market, some of the asset management firms in existence today may be out of the business, leaving servicers with fewer vendor choices and the industry with a shortage of operating capacity.
To make matters worse, some of the remaining outsourcers will have weakened balance sheets. Some may be slow to pay their vendors for property level maintenance and repairs and, as a result, receive a reduced level of attention from those vendors. If an outsourcer goes out of business, it could have a significant impact on the servicer and the investor. Using financially weak outsourcers simply isn’t worth the risk.
To avoid these problems, servicers should take extra care when hiring REO asset managers. Always check the company's financial condition. Determine if they have at least six months worth of operating capital, the condition of their receivables, and payables as well has the length of time it takes them to pay their vendors.
Due diligence should always involve calling on client and business (banking) references. It's important to find out what level of REO assets the company has been managing throughout the downturn.
Hopefully, pressure the industry has faced to delay the foreclosure process will abate so that troubled borrowers can be relieved of loans they cannot repay and new borrowers can invest in REO properties. If that happens soon, the industry could avert this crisis. If not, servicers must move with great care in the future as they choose the partners that will eventually help them dispose of these properties.
Frank Marshall is president of Default Resource, Frederick, Md.