What will happen when the shadow inventory's release valve is turned? Volume, of course – lots and lots of volume. To get an idea of how servicers and their vendor partners will cope, MortgageOrb this week caught up with Field Asset Services (FAS) President and CEO Dale McPherson.
Q: So much regulatory and investor attention has been paid to pre-foreclosure sale activity, including loss mitigation efforts and foreclosure processing. When it comes to REO, what are investors' and regulators' chief concerns?
Dale McPherson: Speaking of investors, there are two types, each with different concerns. First, there are wholly owned servicers and those that are servicing as third parties. These firms need to be certain their collective portfolios do not have an inordinate number of regulatory violations or that a higher-than-normal percentage of their properties are out of compliance. Given the size of these portfolios, there will always be some code issues, but the investor needs to feel confident that the servicer and the companies the servicer hires are making significant improvements to mitigate losses and minimize advancing exposure.
The other types of investors are wholly owned investors who are buying large numbers of properties as a means to diversify their portfolio and leverage the possible high returns. These investors are fixing and flipping or fixing and leasing, or some combination. In their due diligence, their primary concern is that the properties they are acquiring do not have any major code violations or, in the event that they are leasing, pass all occupancy requirements.Â
With regard to regulators, their primary concern, as I see it, is simply to keep up with the large number of vacant properties with a limited set of resources.
Both types of investors and regulators all benefit from an approach that embraces the need for compliance and improvements. There needs to be a high degree of confidence in the firm that is working on the property, identifying potential problems, addressing them and documenting the remedy quickly, cost effectively and with a high degree of integrity.
Q: How have the costs of field services changed since the outset of the housing crisis? Are there any particular property-preservation functions in which you believe servicers are over- or under-investing?
McPherson: Living in such a volatile and dynamic economic time, predictability is hard to come by, particularly when it comes to cost. For field services, there seems to be a greater uptake and interest in the flat-fee pricing concept.
Flat-fee pricing eliminates subjectivity in the field-services bidding process and offers servicers and banks consistency, stability and improved time to market for their property portfolios.
The services from the time a property is first reported vacant through the time it is sold to a new buyer or inhabited by a tenant can be numerous. Some are essential, including securing the property, making repairs, preparing it for resale or rent, and ongoing maintenance. But given the volume of REO properties on the market today – many of which are vacant – it's essential that servicers begin investing more in remodeling.Â
FAS conducted a study of foreclosed and REO properties comparing the number of days on market (DOM) for remodeled properties versus those that were not remodeled. The results showed a dramatic 68% reduction in DOM for properties that underwent rehabilitation. By tailoring each remodeling project to its market and desired resale price, servicers and banks can target points of differentiation and make their properties more desirable to potential buyers.
Q: A recent study from the National Fair Housing Alliance found that REOs located in predominately white or racially integrated neighborhoods are generally in better condition than REOs located in minority neighborhoods. What are your thoughts on the study's conclusions? Do you lend credence to the suggestion that there is discrimination in field services and property preservation?
McPherson: Without knowing the details and history of the properties that were considered for the study, it's difficult to say whether, in fact, it exemplifies discrimination in the field services industry. I can say that many factors could contribute to a property's condition, though. First and foremost, the stage of foreclosure must be considered.Â
It's staggering to think that in 2008, the average time from default to foreclosure was seven months. That time has more than tripled in less than three years, to 22 months. There are strict guidelines as to what a bank or servicer can do to a property depending on where it is in the foreclosure process. And, with such a large shadow inventory, some of those properties considered for this survey could very well have been in a particular part of the process that does not allow for a higher degree of property preservation.
At FAS, we have not been asked by any of our customers to provide a lesser degree of service to a particular property given its location, size or worth. Our pricing and scope of services are fixed, nationwide with our clients and, therefore, no benefit could be derived. In addition, FAS has a strict code of quality that all of our vendors must adhere to when providing property preservation services on behalf of our clients, regardless of location.
Q: More generally, what are your observations on property-condition trends?
McPherson: As the inventory of vacant houses remains high, we expect to continue to see a rising number of homes that are in need of some repair or remodeling work. Even occupied homes need regular maintenance, and this need is exacerbated if the home is left vacant for any period of time. So, for the large number of homes in the shadow inventory, I think that it is a safe assumption that regular maintenance items fail to survive the budget cut. It is important that servicers use field-service firms that are able to identify repair issues, fix them and document the repair with efficiency, speed and an eye on maintaining the quality of the neighborhood.
Q: What observations do you have in terms of the volume and composition of REO product that flows to your organization?
McPherson: Even though all reports suggest a stagnant level of foreclosures, we are continuing to realize significant growth in various parts of our firm. As I mentioned earlier, a focus on remodeling is growing in importance, and we are seeing an increase in orders to fix or renovate properties on behalf of our servicing, asset management and investor clients.
In addition, as industry guidelines and regulations become more stringent so are our clients'requests for higher guaranteed levels of quality. For example, we're experiencing a greater acceptance of new technology platforms, such as proof-of-performance reporting from the field, that offer clients peace-of-mind that the work they've ordered, whether inspections or general maintenance, is being performed to the right property, at the right time and to the standards expected.
Q: What do you think will be the biggest concerns for field servicers in the year to come?
McPherson: Undoubtedly, it will be managing the volume of properties expected to swell the market from the growing shadow inventory. While the forecasted estimates vary widely – anywhere from 1.8 million properties in shadow inventory, according to CoreLogic, to 5.3 million homes, according to Capital Economics – there is no question there are several years' worth of supply yet to flood the market.
To help banks, servicers and investors successfully navigate and manage the multitude of properties, field service providers will need to implement consistent processes and offer property-preservation services as part of a comprehensive suite. Providing services piece-meal and at dynamic prices only perpetuates the instability in the market and decreases banks' and servicers' ability to turn their REO assets quickly.Â
Greater alignment with the vendor network will be imperative. Vendors are the eyes and ears of a field-service provider's business. By providing them with the right tools, training and incentives, vendors will be able to get their jobs done more quickly and with higher quality.
Also, more sophisticated and uniform REO processing and workflow management systems will be needed. In addition, proof-of-performance reporting directly from the field will become a requirement.Â
Finally, objectivity and reliability will need to become pillars to work and live by in the coming year. With so much doubt and uncertainty in the market, being able to trust and rely on your third-party vendor will become essential for banks and servicers to successfully manage their REO assets.
