Post-Sale Loss Mitigation and the Effects on the REO Process
While economists document the first tentative signs of a broad economic recovery, the current recessionary cycle and concurrent mortgage crisis continue to impact the residential real estate marketplace. Like a slow-moving ocean liner, a national course correction has been made, but it will be some time before passengers notice a new direction. Significant change has taken place in the default servicing industry, particularly in the area of loss mitigation before and after the foreclosure sale. An evolving perspective The evolution of the loss mitigation process, and its extension into the post-foreclosure and REO world, has come as part of an overall industrywide emphasis on keeping borrowers in their homes. The general consensus is that the high volume of foreclosures is bad for the economy and the country and, as a result, loss mitigation resolutions are being embraced.
The implementation of a wide range of innovative new loss mitigation strategies and a renewed emphasis on clear and consistent communication before, during and after the foreclosure process is clear evidence that not only does loss mitigation work well, but that strategic improvements in policy and practice can pay literal and figurative dividends. The growth of post-sale loss mitigation is a significant component of this larger trend.
In today’s environment, even though the property has been struck off to the lender, there is still the possibility of a loss mitigation resolution to keep the borrower in the home. Formerly, the post-sale process was a race against the clock to get the debtor out of the house as quickly and efficiently as possible in order to have a marketable REO property.
In this brave new world, the renewed commitment to loss mitigation persists up until the last possible moment — and sometimes even beyond. Other options have emerged, and the default servicing industry is working closely with all parties involved to sell to the tenant, work out a payment plan with the borrower, or implement some other mutually acceptable compromise.
The mechanics of post-sale loss mitigation vary. In judicial states, a post-sale redemption or ratification period allows time and room to negotiate a post-sale resolution. Nonjudicial states without a redemption or ratification process can be more difficult, but mechanisms are coming online to promote post-sale loss mitigation in even the fastest sale states.
What is consistent is a change in mentality among default servicing professionals. Successful post-sale loss mitigation preempts the need to spend sometimes significant amounts of money maintaining and marketing a property, can allow the lender to regain an important client relationship with the borrower, and, in cases where rental tenants are in place, sidesteps a number of complicating issues regarding tenants rights.
One of the biggest obstacles to successful loss mitigation in general, and to post-sale loss mitigation in particular, is communication. Confusion can arise when people communicate with the borrower independent of one another, with sometimes very different priorities.
These sometimes opposing forces — foreclosure professionals doing their best to move the process along and “get it to sale” and loss mitigation representatives telling the same borrower that they want to work closely with them to (ideally) keep their house, can generate understandable confusion on the part of the borrower. The classic confusion that arises from conflicting messaging and communications that may alternate between focusing on avoiding sale and actively seeking sale can be an impediment to successful loss mitigation.
The effectiveness of both pre- and post-sale loss mitigation is enhanced when the borrower is kept fully informed of the status regarding a foreclosure sale, and the odds of successful post-sale loss mitigation improve when borrowers and tenants are kept fully informed of their available options.
Simply communicating to the borrower that, while a sale may have been completed and options might be somewhat limited, the door to loss mitigation is not closed and there are ways to work together to reach an agreement can have a dramatic impact on the chances for successful post-sale loss mitigation. For mortgage banking professionals, clear and consistent communication between departments is also vital.
Many mortgage banking entities have two different departments — one for default servicing and for post-sale operations — and a breakdown in communication between those two can be an impediment to post-sale loss mitigation efforts. Improving interdepartmental communications can avoid embarrassing and avoidable oversights and greatly improve the chances for a successful post-sale loss-mitigation resolution. Practical steps With the recognition that post-sale loss mitigation initiatives can work — and work well — the number of ways in which a satisfactory agreement can be reached between lenders and borrowers has increased. Leasing agreements for former mortgagers are on the rise, as legislative changes have opened up new avenues for borrowers to lease back their property after a sale for a limited duration. Similarly, more foreclosure attorneys are aware that banks may be able to pull back the sale to facilitate a successful loss mitigation resolution, whether during the redemption period or through a friendly suit to set aside the foreclosure sale.
“Cash for keys” offers, where renters or borrowers are given a one-time cash settlement to vacate a foreclosed home, remain popular, and avoid unnecessary expense and delay in situations where the borrower is unable to remain in residence.
Default servicing professionals are also working closely with their REO vendors, whether REO companies, closing facilitators or brokers, to implement new policies and procedures that maximize the chances of post-sale loss mitigation success.
Many REO companies have now added an extra step in the process, taking the time to confirm the occupancy status of the property in question upon receiving a new file, including checking with the assigned broker to make sure the property is vacant. Adding this audit step to standard procedure can save the cost and delay caused where a successfully marketed property is found to remain occupied. Additionally, if the property is found to be occupied, potential loss mitigation can be pursued to either keep the borrower in the property or expedite the vacancy.
The bottom line is that up until the moment of a foreclosure sale, anything can happen. And now, even post-sale, options are increasing. The ability to keep a borrower and his or her family in the home, as a paying customer of the lender, saves money and is often the most desirable outcome for all parties.
Absent that, the ability to work with the borrower or other occupant to peaceably obtain possession without damage to the property is the next best thing. Today, lenders and default servicing professionals are working closely with borrowers, meeting complex challenges by embracing a wide range of post-sale loss mitigation solutions. Kip Bilderback is a partner at Millsap & Singer LLC, Daniel Klauber is the vice president and owner of Continental REO Services Inc. and Mary Kathleen Kearns is the director of operations for Continental REO Services Inc.