PERSON OF THE WEEK: Few folks have as good a handle on the impact of foreclosures on communities as field servicers and asset managers. With that in mind, MortgageOrb.com recently checked in with Cheryl Lang, president and CEO of property preservation and loss mitigation provider Integrated Mortgage Solutions, to see how servicers are coping with their distressed inventories.
Q: More than three years ago in a Person of the Week feature, you told MortgageOrb that municipal code-enforcement officials will be depending on servicers to be responsible and to be good neighbors. In the time that's elapsed since then, how have the industry's efforts evolved in terms of property preservation?
Cheryl Lang: As a member of the American Association of Code Enforcement (AACE), I had the opportunity to meet with many of the members from across the U.S. during the 2010 annual conference held in Phoenix. We saw firsthand the collaboration of code officials teaming with preservation companies and each trying to come up with solutions.
No doubt, sheer volumes and lack of monetary resources are stretching all parties involved with vacant properties to the limit, but with communication, understanding and a willingness to do the right thing, I think the industry is trying to be a good neighbor. And with vacant-property registrations being enforced by hundreds of municipalities, you can't help but be a good neighbor!
Q: A lot has been made of the negative impact that bank walkaways have on communities. How big a problem are walkaways, and what can be done to combat them?
Lang: The problem appears to be getting worse, according to recent census reports. CNNMoney reported an increase to 13% in residential vacancies – up almost 100 basis points compared to 2007. The census report takes all vacancies into consideration: summer or second homes, empty homes for sale or rent, homes that are sold but not yet occupied, etc.
The bureau's reasoning behind including all vacant properties in the statistics is a person can only occupy one home at a time. But even after backing out the vacation properties and second homes from the statistics, some states still have very high vacancy rates: Florida is 10%, Arizona is slightly higher at 10.7% and Nevada holds the record at 11.4%, while California is one of the lowestm at 9.2%.
Irresponsible investors can also contribute to the blight by flipping properties. According to the Federal Reserve Bank of Cleveland, cities are hurt when an investor pays cash at the foreclosure sale and resells quickly at a profit, creating more vacant properties that municipalities are forced to handle. Once the new buyer finds out the amount in past-due taxes and homeowner-association dues are required to be paid once the title transfers, the home with the "too good to be true" pricetag is suddenly not such a bargain, and the new owners opt to abandoned the property.
In January, the Woodstock Institute put together a study on the walkaway topic by examining the situation in the city of Chicago. Though this is only a snapshot of the entire issue, the points brought forth in that study apply across the board. Many of the homes sited in the report had been in the foreclosure process for over a year, and because the foreclosure process had not been completed for any number of reasons, the homes were not registered as vacant properties with the city. This population of properties was not secured, and many advanced quickly into disrepair.
The report offers several suggestions on how to best combat the ill effects of vacant and abandoned properties:
- keep the homes occupied for a long as possible,
- hold servicers accountable through more stringent regulation,
- increase the authority of agencies saddled with the enforcement of vacant property registration to impose and collect penalties for noncompliance, and
- use data and data sharing to track vacant properties.
Q: Foreclosure timelines are obviously lengthening, and data show that delinquent borrowers are staying in properties longer than ever before. How do these trends ultimately affect the condition of properties that go into REO?
Lang: The longer the homeowner stays in the property, generally the better condition the property is in when the foreclosure is completed and it converts into REO status. Servicers and investors prefer that the properties be occupied as opposed to abandoned, as the incidences of vandalism are greatly reduced. According to Malcolm Gladwell, author of The Tipping Point, vacant properties tend to suffer from "broken-window syndrome.’Â
If someone walks by an abandoned home, throws a rock and breaks a window and the window is not quickly repaired, the assumption is made that the property is uncared for, and more rocks are thrown at windows, creating more blight. What starts as a broken window quickly spreads to an entire community. Even though servicers may be diligent in their efforts to have preservation and rehabilitation work completed, it is still an empty structure subject to crime that is the inevitable result of disorder.
Q: What are your impressions of the shadow inventory that remains, and how much backlog do you believe has been created as a result of judicial and regulatory pressure on servicers to go back and re-examine foreclosure files?
Lang: Standard & Poor's has recently estimated it will take up to 49-plus months to clear the shadow inventory as of the last quarter of 2010, which is up by 40% from a year ago. This number is not so much a reflection of a growing number of REO properties, but of the protracted timelines to clear the existing inventory off the market.
The good news is, as the overall levels of diligent home-retention efforts have been put into play as a direct result of loan modifications there has been steady improvement since mid 2008. The bad news is, credit is difficult to obtain, and with new Qualified Residential Mortgage standards that will come into play, fewer people will qualify for a mortgage, which will place more downward pressure on the movement of REO properties and short sales, as well as on U.S. home values.
Though the robo-signing debacle certainly slowed down the time it takes to complete foreclosures, the only material effect it had was to lessen the number of REO properties and potential shadow inventory added to the equation.
