Today, mortgage defaults that cannot be resolved through other alternatives and end up back in lenders’ hands are likely to have had to clear a lot more legal hurdles than they have traditionally to get there. But often that’s only round one.
A second and often increasingly intense round of hurdles also stands between the lender’s ownership of the loan’s collateral real estate and any management/liquidation of it, notes Joe Filoseta, president and CEO of default servicing technology provider DepotPoint Inc.
“From the federal level to the state level and even down to municipal level, legal issues are popping out all over the place for many different reasons,” he said.
Whether it is a consumer advocacy goal or a fiscal aim related to managing the costs a jurisdiction takes on due to distressed properties, new as well as existing legal requirements related to building conditions, for example, are still “everywhere,” said Filoseta.
This is “one area that’s intriguing to me that’s really becoming an area of great concern…beyond the title side” of legal issues in foreclosure and default,” he said.
Compliance with local building codes compromised by things that a prior homeowner might have done to a property that would cause the local building inspector to red-ticket it may sound like small details but their individual costs can be “all over the map,” Filoseta said.
“Someone might have hired third-party contracting to do a remodel, for example, on a 1920s house that may have had some asbestos in it. If the city requires a removal of asbestos and if the asbestos wasn’t removed but the construction went ahead anyway [and there was] the addition of a bathroom that essentially has to be torn apart to pull asbestos out of the property, that’s extremely expensive,” he said.
Filoseta said when it comes to a generic circumstance where asbestos was supposed to have been removed and wasn’t, “we’re talking $10,000, $20,000, $30,000 in some cases.”
“That’s real loss,” he said.
These days, even more mundane-sounding things like heating/ventilation/cooling violations, unsafe structural improvements such as the replacement or the addition of a deck put in without sufficient bracing or a required permit can add up. This is particularly true in markets that epitomize the recent tendency toward inordinate amounts of distressed real estate and relatively few buyers.
In this environment, building codes are just one example of burgeoning municipal requirements, he stressed. As another example, he cited what at the time of this interview were requirements on the part of 90 municipalities for servicers to file notification that they are initiating or taking possession of a property.
“These fines can easily, over a 30-day period, amount to several thousand dollars and that becomes rather significant when one looks at the overall cost of an REO property and what you could potentially sell it for,” Filoseta said. “These go right to the loss severity bottom line and come right out of the pocket of the servicer and/or the investor, depending on the circumstances associated with the lack of compliance with the local ordinances.
“These things take many forms and the game is changing week-to-week and month-to-month with regard to municipalities that pass local legislation associated with properties that are in foreclosure and are in the REO state.”
Between the costs and the changing nature of not only REO-related municipal legal requirements but also, for example, the evolving Home Affordable Foreclosure Alternatives program, the industry has paid attention and responding to these concerns, Filoseta said.
Generally, the response has been to manage the concern using the usual combination of automation and third parties, he said. More specifically in Filoseta’s company’s case, he said its use of “cloud” computing has made it possible to make the necessary quick changes to the point where they can be largely transparent to end users.
Particularly because government entities may be under financial strain and because some of the requirements in this area are new or evolving, the bulk of the work communicating with them has to be done by phone or visits to local government offices. This has created an opportunity for third-party specialists in this area. Filoseta’s company works with one, for example, called Code Violation Services.
Government has made some strides in automating in other areas, but in this one, “there’s a lot of work that has to be done,” he said. That being said, he added that he believes eventually “we’ll get to a spot where databases and connections to the requisite majority municipalities will be available.”
In the mean time, “I think people [in the industry] take different approaches based upon the municipality in which the properties are located. There are certain hot spots in the United States that were the hardest hit by the downturn.”
Filoseta said the approach to legal issues in this area can be thought of as “an insurance kind of a game.”
“You’re taking out a ‘policy,’ in a sense by buying a report,” he said, noting that generally only a certain percent or properties have code violations. Only one in ten may have a problem, “but that problem may be so significant that the cost of the report on the other nine homes that had no violations is still the right economic decision.”
