Mitigating REO Losses
Of the 1.3 million inspections field service vendor Safeguard Properties conducts monthly on a nationwide basis, between 20%-28% of presale properties become vacant before they are even referred to foreclosure.
"The borrower, for some reason or another, just decides they are out," said Robert Klein, chairman of the board and founder of Safeguard Properties, during the Mitigation REO Losses panel at the SourceMedia Second Annual Best Practices in Loss Mitigation Conference in Dallas.
From a servicer standpoint, if the information in the loan file is not clear regarding the assignment and title chain, it is worth it to "spend a few bucks" to get a copy of the recorded mortgage and all assignments attached to that mortgage, added Mike Wileman, president and CEO, Orion Financial Group.
"You can start piecing together the chain and what has to happen in order to get it cleaned up," he said.
"Time is money. Even the foreclosure courts say if you can't show a valid recorded lien, many times since you are the owner of that mortgage, they are now allowing foreclosure to proceed."
Real estate-owned assets present innovative opportunities for the investor market, according to panelist Alan Paylor, president of REO Leasing Solutions.
If an individual investor or a portfolio buyer purchases REO homes, Paylor said there is an opportunity to mitigate loss through cash flow.
"You also have the ability to do a little bit of mitigation on your taxes and insurance. A vacant property is the worst thing to have. Communities fail. If you can lease that property out for even a short period of time, you provide a resource for the community and a resource for a person that needs that property," he told the audience.
"It's cash flow, taxes and insurance. If you have an REO portfolio, you can think about bundling it to sell. A fully leased portfolio in the property management world is a product we offer to foreign investors and investors."
The pre-REO Deed for Lease program from Fannie Mae is a "temporary solution," he said.
"They are looking to remove the asset off of their books. If they can do that while they satisfy the Obama tenant possession process, they do. We treat it as 'every asset manager should look at it as an arrow in the quiver. Pull it all out. Shoot that leasing arrow and keep that property occupied.' Keeping the property occupied is the name of the game. Keep somebody in the property and you won't get a vandalized, vacant property where the loss gets greater," Paylor said.
When it comes to marketing bank-owned assets, Klein told conference attendees that these homes cannot be sold today as "REO" because the competition is the next-door neighbor.
These buyers live in the home and are maintaining the property while lowering the sales price.
"If you want to sell that property you have to make it comparable. The industry has taken certain steps to do that," Klein said during the session.
"The lawn is maintained and manicured. The property next door is not. The price is almost the same. My friend has a saying, 'If I have a block that has 10 boarded houses on the block, I want my house to be the nicest boarded house on the block.'"
Safeguard applies a monthly maid service "refresh" to keep the property in marketable condition. This includes a periodical "sprucing up" to remove small amounts of debris, dust and cobwebs that accumulate.
Every cobweb could cost lenders and servicers "thousands of dollars," he said. "To potential buyers looking at these properties in the REO world, they will try every single excuse to lower the price."
The field service industry is making sure the property is comparable and the lawn is manicured. Safeguard clients are rating the company on maid service, including white-glove inspections on these homes.
"You are not going to put $20,000 into a property and not get any money out of it. It makes a much bigger difference when you clean it out and there is no trash, no debris. The fans are clean. There are no cobwebs and it smells good. Use air freshener. A property that smells like an REO is going to sell like an REO. Even though it's not repaired we want somebody, a young couple who is an end user, where they can visualize taking the property and building a future in that home."