Even with Few Quakes, Servicers Shaking

WE’RE HEARING that the housing bust isn’t the only thing driving an increase in demand for “field services” like home inspections and maintenance in recent years. Natural disasters, including Hurricane Sandy, also have mortgage servicers scrambling to check on the status of their collateral.

Natural disasters caused more than $60 billion in property damage during 2012, according to CoreLogic. Some estimates have put the property damage from Hurricane Sandy alone at more than $50 billion. (EQECAT, a provider of catastrophe loss modeling services, pegs insured losses from Sandy at between $10 billion and $20 billion.)

Just before Sandy struck, CoreLogic estimated that the Category 1 hurricane would put 284,000 residential properties on the East Coast at risk of damage. But getting a handle on either the number of properties damaged is difficult. New Jersey Gov. Chris Christie said that 346,000 homes in his state were damaged to one extent or another, while 41,000 New Jersey residents remained displaced from their damaged or destroyed homes in mid-January, nearly three months after the storm hit. That’s a big servicing portfolio, or actually a big chunk of a bunch of servicing portfolios.

And it’s not just hurricanes that pose a risk for loan collateral. A record nine million acres were consumed by wildfires during 2012 across the U.S., mostly in Western and Southern states. And a widespread drought in the West and Midwest is estimated to diminish economic growth by $75 billion to $150 billion, shaving between .5% and 1% off of GDP growth. While the drought doesn’t damage property value, a prolonged drought could depress values for farm and ranch land in affected areas.

All that during a year when the country was spared the severity of tornadoes seen in 2011 and did not suffer as much inland, fresh-water flooding as in some recent years. There were also few domestic earthquakes that affected heavily populated areas.

Bad news, of course, sometimes turns into big business for companies that help mortgage servicers manage and monitor collateral and real estate owned assets. So where do servicers turn to find out how much of their collateral has been damaged by a natural disaster and how severe is the damage? The same people they rely on when a borrower defaults on a loan, it turns out: field services companies. And advances in geo-coding technology are making it easier for lenders and their service providers to pinpoint what collateral might be affected when Mother Nature turns mean.

George Mehok, chief information officer at Safeguard Properties, said identifying what properties a client has in areas affected by a disaster and assessing the damage for them is a cornerstone of Safeguard’s business. In many cases, borrowers are still current on their mortgage in the immediate aftermath of a disaster, but the servicer still wants to know what the condition of the collateral is.

“We are the boots on the ground for our clients,” he said.

He said technology from companies such as Google to identify the geographical location of properties is improving, but at this point it isn’t always reliable enough to ensure that inspectors or maintenance crews are at the right home. As a result, Safeguard has employed its own technology and logic in its quality control processes to identify the location of properties.

When a disaster occurs, he said Safeguard can quickly and accurately inform the servicer of what assets may have been damaged. The client can then decide if they want to order inspections or other field services related to those homes. In many cases, servicers want a “FEMA inspection” so they have a better understanding of how their portfolio is affected. While big national disasters like Sandy won’t escape a servicer’s attention, smaller disasters like a local tornado or localized flooding may not even be on a lender’s radar until a field services provider alerts them to the fact that they have collateral in an area affected by a local disaster.

“We can actually tell them where the affected areas are, and we give them a list of all their properties that are in that area,” Mehok said.

But defaults remain the largest source of the field services visits. Marc Hinkle, an SVP at Mortgage Contracting Services, told me that more than 90% of the company’s business is related to loan defaults. Still, when a disaster strikes he said servicing clients want to know what REO or foreclosed property they have in the affected area.

And he said field inspectors can play an important role in helping servicers make sure that insurable claims are handled correctly. In the wake of a hurricane, for instance, there are often questions about whether damage was caused by wind or water, which affects what insurance covers the damage. Real-time photos or video delivered from tablet devices can help servicers manage insurance claims in those cases, he said.

Evaluating damage in the immediate aftermath of a disaster is the first concern of servicers, but in assessing the health of their portfolio, they also need to think about the long-term ramifications as well. A major storm, flood or earthquake can sometimes not only put pending home sales in limbo, but it can depress property values in areas suddenly deemed risky for years to come.

The degree to which a disaster dampens values depends on a long-term basis depends upon the nature of the disaster and how it affects people’s perception of risk. For servicers, a disaster on the scale of Hurricane Sandy may be a factor affecting their delinquency rates for years to come. In the aftermath of Hurricane Katrina, the real estate market in lower elevation parts of New Orleans and the surrounding area remained depressed for years.

Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.