Dealing With Declining REO Volume

The Federal Housing Finance Agency (FHFA) recently reported that September marked the seventh consecutive month of inventory decline for real estate owned (REO) properties. In early October, Freddie Mac reported a 30% decline in its REO inventory from 2010's peak levels. Neither of these announcements came as a surprise – reports have been indicating that inventory numbers are dwindling and that short sales now outpace REO sales in many parts of the country.

Servicers need to keep in mind the chain reaction created by the fluctuating REO market. Today's reduced REO inventory weighs heavily on many other real estate companies and the agents that work with servicers.
One explanation for the reduction in REO properties is the growing focus on loss mitigation strategies, including short sales. A driving factor for the increase in short sale completion is pressure from federal and state regulators for servicers to actively pursue foreclosure alternatives. Additionally, lenders and servicers are promoting more short sales in an effort to minimize their losses while helping homeowners in financial distress remain in their homes.

While REO numbers decrease, expectations – as well as liabilities – for servicers only increase. Managing REO properties has become more difficult, as mortgage servicing organizations and asset managers are under heightened scrutiny from auditors and under constant pressure to accommodate a bevy of new rules. Servicers now need additional personnel to manage compliance and each task requires double the time it once did – a scenario resulting in smaller margins for the work accomplished.

Servicers must understand that the impact of a smaller REO inventory extends far beyond their organizations – it generates a ripple effect throughout the industry. The changing REO supply requires multiple participants to adapt their business efforts, including vendors, asset managers, agents and attorneys, as well as the supporting software providers.
As servicers find their margins dropping, agents are also frustrated with how their portfolios look today. Many agents that were accustomed to receiving several houses to list each month are now down to just a handful, and while they only have half – or even less – of the business they once did, they are working twice as hard to accommodate new regulations and the added checks and balances. Experiencing less gain for their efforts and fearing what the future holds can drain the motivation of agents and has caused many to flee the industry altogether.

Robert Smith, president of The Realty Team Inc. in Anaheim, Calif., and a Master Broker with the National REO Brokers Association, is one of many prominent agents who have seen the overall REO inventory decline since the middle of 2009. At that time, he said frequent updates from the major loan servicers indicated that an incoming surge of properties ‘was imminent’ – but that prediction never came to fruition.

Smith feels that agents new to REO in the past few years or who only manage a few assets are hardest hit by the declining inventory. Understanding the challenges these circumstances pose for his colleagues, Smith is often asked to provide advice and coaching, which always includes the following three tips:

First, it is important to practice diversification. In today's unpredictable market, it is not wise to put all eggs in one basket. Instead, REO brokers should take opportunities to attend events and conferences to network with other brokers and explore other options, such as working with investors or listing short sales that broaden your scope of knowledge and experience.
Second, use technology to leverage new business. Technology solutions can enable agents to efficiently manage their listings, both REO and traditional, as well as receive additional exposure by giving homeowners and other industry professionals access to their profiles and certifications.

Third, run an efficient business operation. In a cyclical business and uncertain environment, it is crucial for agents to manage their time, expenses and resources well enough to consistently remain profitable.

The current declining REO volume exemplifies today's unpredictable market, and having a strong grasp on the widespread affect of this trend will help servicers better understand and work in collaboration with other real estate companies and professionals as they make their own crucial internal adjustments.

Todd Mobraten is president and chief operating officer of RES.NET, headquartered in Lake Forest, Calif. He can be reached at (949) 598-9920.


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