Facing an unprecedented volume of repossessed homes, asset managers for the mortgage industry are searching for better ways to streamline and expedite the process of selling real estate-owned and managing short sales.
The numbers tell how difficult the challenge is. In August, banks repossessed some 95,000 homes nationally, a monthly record that was up 25% from the same month a year earlier, according to RealtyTrac. Fannie Mae and Freddie Mac saw 521,000 new foreclosure starts in their portfolios during the first half of this year. The two agencies completed nearly 200,000 sales of repossessed homes in the first half of the year.
And recently John Burns Real Estate Consulting estimated that the “shadow inventory” of homes headed toward foreclosure will reach 4.7 million. So what is being done to make the process smoother and more efficient? Leading servicers and technology firms say the key is developing workflow and communication platforms that ensure everyone is working from the same page.
Connectivity Is King
Richard Kaye, president of Red Rock Servicing, Irvine, Calif., which serves as an asset manager and servicer of distressed assets, said his company’s experience in direct-to-consumer debt counseling paved the way for Red Rock to develop a short-sale and REO platform that can create economies of scale to alleviate the backlogs.
Most servicers lack a connected and intelligent platform for managing their growing asset management burden, he said. Because they rely on disparate data sources regarding REO and short sales, delays pile up as the distressed inventory grows.
Red Rock’s single system of record “provides scale at each pivot point or each disposition of the asset,” Kaye said.
Because foreclosure and REO disposition are more expensive for lenders and investors than short sales, Red Rock is focused on helping move borrowers that don’t qualify for a loan modification into short sales. By establishing communication with borrowers, Red Rock is able to obtain real-time data that help determine the optimal outcome for the lender, rather than relying on outdated data from a loan application that may be years old. The information is then fed into Red Rock’s analytics to examine likely disposition outcomes.
“Really what we’ve developed is a best-of-breed ecosystem with scale,” Kaye said. “This is something that has to be handled in a scale solution.”
Red Rock’s paperless platform can be used not only for analytics but for tracking all the parties involved in maintaining and selling a home, including real estate agents, title companies, and field service contractors that are hired to cut the grass and maintain the property.
“What that does is give us one broad system of record that allows us to track things down to the micro level,” Kaye said.
Kaye said Red Rock’s technology platform was built through collaboration with business partners, with the initial platform being derived from general loan origination software. From there, it was built to specifications determined by asset management clients.
Clients that assign defaulted loans to Red Rock can map data onto its workflow application from existing platforms used by many large lenders for tracking REO. Red Rock’s platform, which currently has 1,500 users not including real estate agents, features “application programming interfaces” to connect with the core systems used by servicers. Clients can also use the Red Rock platform independently.
The platform’s real-time, integrated nature will help lenders respond more quickly to sale offers, Kaye said, at a time when they are under increasing pressure to do so. Red Rock is in the process of developing an online offer management platform to make it easier for servicers and investors to respond quickly to offers made on a home. He said the company is undecided as to whether it will cloak to offer management platform and use it solely for assets under management by Red Rock or license it out to other asset managers as well.
“The gridlock and lack of performance by the current servicers out there is really setting the bar quite low,” he said.
Green River Capital, based in West Valley, Utah, has been focused on improving communication with its clients, according to Stephen Sherman, vice president of the company. GRC offers REO management and liquidation services. It also provides loss mitigation services, including short sales.
GRC has developed technology, REO Connect, which maps critical data from a lender’s system to its own proprietary software, using a “midsource” connection that allows clients to see information about the portfolios they have assigned to GRC.
Sherman believes clients need to be able to focus attention on “exception” properties that require special attention or immediate action. The platform’s dashboard can be customized to meet a client’s own criteria for identifying “exception” cases based on factors such as missed timelines or maintenance needs.
“As portfolios grow, it becomes more important that we develop tools like dashboards and exception reporting to identify the properties that might be the most challenging and pose the most risk,” Sherman said.
He also believes servicers need portals where the various parties involved in maintaining and selling distressed assets can connect together. This connectivity is especially important in the short-sale arena, where the homeowner is still involved in the process and participating in negotiations, he said.
The evolutions in REO technology extend to the field services arena, too, he noted.
“We’ve been looking a lot at what technology is evolving in terms of the use of hand held devices,” he said, noting that realty brokers doing inspections or valuation estimates could upload data and photos to GRC directly from location in real time using devices like BlackBerries and other smartphones, rather than going back to the office to send information via e-mail and fax.
“A lot more can be done when we are working from one centralized system because the delivery of information is just so much quicker,” Sherman said.
Automated Decision Making
Jim Satterwhite, chief operating officer at Infusion Technologies, Jacksonville, Fla., describes his company as a “component servicer” as well as a technology provider. The company has a patent-pending business process system for its National Quick Sale communication and documentation portal to automate asset disposition.
In the short-sale arena, clients build business rules into the sales management platform, and the real estate broker submits offers on a property.
“For all intents and purposes, the rules are negotiating the offer without having to go back and forth with the servicer,” Satterwhite explained. For instance, based on data for a particular home, the rules may direct the system to respond to any offer below 70% of the asking price with a counter offer at the full value. By electronically managing the offer/counteroffer process, approval of deals is completed more quickly.
The system also has a bidirectional interface with the LPS servicing automation platform to pull and push data back and forth systematically.
Today, the NQS system is used to facilitate deeds-in-lieu of foreclosure and short sales, but Satterwhite said the technology could be extended to REO activity as well. Separately, the company offers REO Sentinel, a wireless device that can be placed in repossessed homes to detect hazards such as fire, water damage and property damage. The company soon plans to add a video component to REO Sentinel, which will help lenders monitor activity in repossessed homes and detect break-ins. The company also plans to add mold sensors to the device.
When the REO Sentinel sensors detect something, it “sends a message to the mother ship,” Satterwhite explained.
“The device basically sits there and waits for something to happen—noise, moisture, temperature change, etc. It e-mails it to wherever you want it sent.”
REO Sentinel is currently used by one of the GSEs and two top-five servicers.
Guy Taylor, CEO of Equi-Trax Asset Solutions, Santa Barbara, Calif., said market conditions have fueled a big increase in demand for outsourcing of asset management and disposition services. Equi-Trax provides valuation services and inspections in the default arena.
Equi-Trax has developed offer management workflow that posts all offers made on a home where all parties can see it, to avoid confusion and manipulation of offering prices by the listing agent. Lenders are also using multiple valuation estimates, broker price opinions and hybrid models that incorporate automated valuation estimates, to ensure they know what homes are really worth. Red flags alert a lender about discrepancies that suggest a home’s valuation seems unreasonable.
The company also provides clients with rental estimates, so they can assess the economic benefits of renting a repossessed home instead of selling it.
Taylor, who also services on Red Rock’s advisory board, believes home prices nationally may still fall another 5% to 10% as the industry grapples with the huge volume of mortgage defaults in the pipeline.
“The valuation analysis process has become much more complex today than in the past,” Taylor said. “Our challenge is making sure we have the most accurate valuations possible from a BPO standpoint.”
Because a short sale is typically about 25% less costly to the lender than a foreclosure sale, lenders are motivated to migrate more of their defaulted loans into short sales, according to Joe Filoseta, president and CEO of DepotPoint.
He said that for the first time, automation enabled by the Internet is fueling improvements in short sales, in part because consumers are comfortable using the Web to shop for distressed homes.
“This whole idea of creating an inclusive environment for a transaction which was typically handled by people on phones and by fax to one in which servicers engage with consumers directly is new,” Filoseta said.
Not only can all parties to a transaction communicate via a common platform, but all documents can be directly uploaded to the servicer. Filoseta says this “extended electronic enterprise” can bring all parties together and make transactions more efficient, and that includes second-lien holders who often have been an impediment to quick approval for short sale offers. Mortgage insurers also often have a say in short-sale transactions as well, he noted.
“There are lots of things moving around and that is the reason workflow is so important.”
DepotPoint recently unveiled “AgentConnect,” a service that gives real estate brokers that have expertise in REO and short-sale transactions visibility to DepotPoint’s default management clients.
DepotPoint monitors the performance of REO and short-sale agents and gives them a performance score, helping servicers determine which agents are most successful at completing deals.
Tara Williams, vice president of field services at Altisource Portfolio Solutions, has taken on new responsibility for overseeing the company’s short-sale and deed-in-lieu of foreclosure activities. Altisource, a spin-off from subprime servicer Ocwen, provides default management and asset management services to lenders.
Williams said the company’s goal is to help servicers identify borrowers in their portfolio who have exhausted their loan modification options and may benefit from a short sale.
“Ultimately, once we have support and buy-in from the borrower, then we really move into the stage of managing the transaction.”
Williams believes that negotiating with second-lien holders and communicating with troubled borrowers are the top impediments to completing a short sale before the home is repossessed. Altisource aims to provide a central contact point and end-to-end life cycle management to clients.
“Generally speaking the challenge is that you have a labor intensive process and you don’t have one party who owns the end-to-end result,” Williams said.
The key to successfully navigating short sales and REO disposition, she says, is partnering technology with strong workflow to automate as many processes as possible and expand visibility to the various parties involved in the transaction. She also said servicers need to be more proactive in pursuing short sales.
“The first primary challenge has been that the servicers are reacting to short-sale offers without even knowing that property has been listed,” Williams said. Only then does the servicer begin trying to qualify the borrower for a short sale that is in compliance with investor and regulatory requirements.
She believes servicers can expedite the process by delegating the authority to take action on short-sale offers to an asset management firm.
Having delegated authority would make short sales more feasible and to some extent, more similar to REO transactions. With delegated authority, firms like AltiSource can market REO via traditional MLS listings as well as websites and time-based auctions simultaneously. Today, servicers are more likely to provide automatic thresholds for responding to a sale offer on the REO side than on short sales.
Karun Khanna, COO of IndiSoft, Columbia, Md., which provides software to facilitate communication between servicers and troubled borrowers, said that the short-sale process is being redesigned to help offer a “graceful exit strategy” for homeowners who cannot afford to keep their homes.
The industry has suffered from a lack of uniformity and standardization of forms for getting short sales done, he said. Standardization will help ensure that borrowers are treated fairly and that rules are consistently applied, he believes.
Today, servicers are overwhelmed by the documents submitted by realty brokers and homeowners, which often get lost or misplaced.
IndiSoft’s technology helps loan counseling agencies work with borrowers to complete loan modification packages, and Khanna believes the company can play a similar role in the short-sale space.
“In the real estate side, I look at the counselor as being replaced by the real estate agent,” he said. “I now get a case. I now get updates from the real estate agent, and when an offer is in place the servicer is able to get the offer electronically from the Realtor.”
He said IndiSoft is in the process of talking to outsourcers about extending its platform to be used for short sales. He also says the company’s communication platform could be extended to manage workflow in the REO space, even though there is no homeowner to deal with at that stage. The volume of short sales and REO coming to market will force lenders to seek greater efficiencies, he said.
“Look at the scale we are dealing with. You can’t keep throwing people at the problem anymore,” Khanna said.
