Excellen REO’s Cary Sternberg Assesses Asset Management Challenges

PERSON OF THE WEEK:Â Managing distressed assets requires the ability to also manage investor expectations, says Cary Sternberg, president of Titanium Holdings' recently launched subsidiary, Excellen REO. In this week's Q&A, MortgageOrb.com talks to Sternberg about policy changes at the Federal Housing Administration, asset managers' disposition methods and the ever-interesting topic of tenant relations.

Q: What do you believe are the biggest challenges facing real estate owned (REO) asset managers today?

Cary Sternberg: There are a growing number of challenges facing asset managers today. The first and foremost of which is understanding expectations. An asset manager may be working on assets from different servicers and investors. They must be clear on what is expected. Do they have to get approvals for repair costs and at what threshold? Do they need approvals for cash for keys, list prices, price-reductions offer acceptances and many others? Unless the expectations are clear and easily retrieved, the asset manager exposes its company to potential risks.

The next challenge would be valuations. The asset manager must be able to get accurate valuations that are consistent with each client's disposition policy. The asset manager must be familiar with the disposition policies of each investor and be prepared to have disparate valuations reconciled and documented. Values should be updated frequently within the guidelines provided so that list and sales prices can be justified if they're ever challenged.

Another growing challenge relates to approval authority and response times. Asset managers are usually given approval levels based on loss or value. If that approval level is exceeded and approval must be obtained from the investor or servicer, delays may occur. These are usually a result of the caseload the servicers and investors have now, and as a result, the response timeframe is lengthened. This may cause buyers to move on instead of waiting for an answer, with a negative side effect being a decline in value.

Q: The Federal Housing Administration (FHA) recently issued a one-year waiver on its rule that prevented homebuyers from using FHA financing on recently acquired REOs. How meaningful is this policy change, and how will it affect asset managers' selling strategies?

Sternberg: This change is significant, and I applaud the FHA for taking the step. Many asset managers are using a repair strategy that includes bringing the property to a lendable condition so that it might be sold to an owner-occupant. This type of sale will always yield the highest price paid.

Since much of the financing opportunities are FHA-driven, the rule change will make it more enticing for the asset manager to do the repairs knowing that they will not have to wait those 90 days in order to sell. This will result in more assets being put in lendable condition and being sold faster and for higher prices.

Q: How do you envision auctions will play into REO strategies moving forward? Have you observed any changes in the way that servicers utilize the auction piece?

Sternberg: Auctions have always been a valuable tool in the asset manager's arsenal. There are different types of auction options available, as well. Ballroom auctions are a staple, as they gather large groups in a single location where expert auctioneers and floor managers make the process exciting and try to build a competition between the bidders that may bring higher prices in the end. Most ballroom auction companies have now added an online component allowing online users access to a live auction feed and allowing them the opportunity to participate with the on-site attendees via the Internet or by phone.

Lawn or green-grass auctions are conducted at the property itself, and the attendees can tour the property right then. The experienced auctioneer plays on the fact that the buyers who came and kicked the tires, so to speak, are very serious and can create interest and competition among those in attendance.

Internet auctions offer asset managers the ability to offer their assets to anyone in the world who has access to a computer. There is a growing numbers of these types of auction opportunities, and each one may have its own set of procedures and opportunities that fit the asset manager's targets for liquidation. The most important part of the process for the asset manager is knowing what the rules are for each servicer and investor and what their policies and tolerances are for the various types of auctions.

Q: Turning to the subject of eviction, last year's Protecting Tenants at Foreclosure Act (PTFA) sparked major operational changes. Moreover, several states have added their own layers of tenant protections to what's already provided under the federal act. Thus far, which aspects of the PTFA appears most burdensome for servicers?

This question is a difficult one to answer. However, it is fair to say that the principle that underlies it is commendable. Making sure that bona fide tenants are not unduly affected by the foreclosure from the landlord of the property they occupy is, by any reckoning, a worthy goal.

That being said, the feedback that I have received from eviction attorneys around the country is relatively unanimous. The act is not written in such a way that invites either easy or definitive interpretation. As a result, asset managers may be getting conflicting opinions from attorneys in different areas about how they think the act should apply. This makes it hard for the asset manager to be sure that they are doing the right thing. At this time – not even a year since the act's enactment – there has been no litigation that helps clarify the provisions from a legal perspective, so no one is sure how this is going to pan out in the long run.

Aside from the foregoing, the asset managers are faced with challenges stemming from occupant identification. Is the occupant the former owner, a bona fide tenant with a verifiable written or oral lease, a Section 8 or rent-controlled tenant, or an occupant whose right to be there may be in question? The key challenge is time: the time it takes to identify and verify the occupant and their standing, and then the time that must pass before the owner can begin an eviction process that enables them to get possession of the property and sell it.

In today's market, anything that lengthens this process affects the ultimate value of the property. With values still declining in most markets, the delays are costly to the investor from a holding and value standpoint.


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