The real estate owned (REO) market looks very different today than it did five years ago at the height of the foreclosure crisis. Inventory levels are down overall, but more so in the markets that were the most depressed. The new properties coming onto the market are increasingly located in remote, rural areas and in judicial states with very long foreclosure pipelines.

Following billions of dollars of settlements, the level of scrutiny on servicers, REO management companies and their vendors has never been higher. Heightened concern over compliance, coupled with improving real estate and job pictures, is affecting disposition strategies and prompting REO managers to rethink their business models.

What hasn’t changed is the hyper-focus on performance. An analogy that comes to mind is NASCAR racing. Rarely is the victory margin measured in laps. More often, it’s by seconds and, sometimes, even fractions of seconds. This is often the difference between first and third place on clients’ REO scorecard - a razor-thin margin that determines whether an REO manager gets a large or a very small allocation of future properties.

To keep winning deals and serving the changing needs of servicers and the new breed of institutional buyers, REO management requires teamwork, precision and accurate data to demonstrate both sales performance and compliance.


Where we are now

According to the latest CoreLogic foreclosure report, there were about 629,000 properties in some stage of foreclosure at the end of August. That’s down 32.8%, year over year, from August 2013, when the foreclosure inventory stood at about 936,000 properties. It was also the 34th consecutive month in which foreclosure inventory had declined.

Commenting on the market, Sam Khater, deputy chief economist at CoreLogic, said, “Clearly, there has been an improvement in the market over the last five years, but five years into the economic expansion, the foreclosure inventory remains at nearly three times the normal level.”

Less shadow inventory, improved home price appreciation and a brighter outlook for employment are good news for the economy, lenders and the real estate market. At the same time, however, they are reshaping the landscape of the REO market.

In the once-depressed states of Arizona and Nevada, for example, foreclosure inventory is now 0.5% and 2.3%, respectively, according to CoreLogic. One reason for this is that institutional buyers have absorbed many of the most attractive REO properties and turned them into single-family rentals (SFRs).

The new properties that are coming to market in those areas, for the most part, are more rural and less urban or even suburban. Managing these hard-to-sell, hard-to-service assets often requires finding new real estate agents, title companies and boots-on-the-ground property managers. In more remote areas, Realtors are often less familiar with REO transactions and what they can entail. For example, unlike the retail engagement, a Realtor may not know that they have to get the utilities and homeowners’ association documentation in their name, which requires upfront money that they typically don’t have to worry about when they are selling a retail home.

New inventory is also beginning to come to the market in judicial states where foreclosure timelines can easily take up to three years. This is finally happening in New Jersey and New York, for example, where, according to CoreLogic, foreclosure inventory is 5.8% and 4.2%, respectively. The REO ecosystem in these states is often less developed than in non-judicial markets, which have been dealing with this issue for years.



Compliance is paramount

While inventory levels have been falling, anxiety over compliance has been increasing exponentially. As the Consumer Financial Protection Bureau and regulators step up their audits of servicing shops and enforce new requirements mandating that servicers manage third-party vendors, additional reporting and vendor management requirements are created for REO managers.

On a quarterly basis, it is not uncommon to receive a flood of questionnaires asking for detailed information about policies and procedures; the experience and tenure of employees and vendors; information security policies; diversity programs and even sustainability initiatives. The most challenging questions are the following: “How do you know what your employees and Realtors are really doing? Can you document this?”

To answer these questions, REO managers must now maintain databases on their vendors - primarily real estate agents - tracking licensing, errors and omissions insurance, complaints, and sales performance.

As has always been the case, individual transactions must also be monitored to make sure that these deals were done at arms’ length and no fraud or collusion has taken place. Flip reports are one way to do this, but REO managers must also be vigilant for other kinds of unethical behavior (e.g., a Realtor giving rehab work to a relative).


Short sales fading

Compliance with new servicing standards is one of the many factors that is curtailing short sales activity. As recently as last year, short sales made up a significant percent of all distressed sales and were a popular tool for asset management. However, new single point of contact requirements have made many servicers less comfortable with using doorknockers and other component servicers to acquire the borrower information and cooperation needed for short sales.

Rapid home price appreciation in many markets has also made short sales less attractive, or at least less urgent, for many distressed homeowners. Increasingly, these owners are saying, “Instead of doing the short sale, let’s see if we can ride it out and get more money for this property.” Likewise, as the economy in some areas improves, borrowers are getting better-paying jobs and are working on modifications, if they haven’t already.

Many Realtors are leery - or at least, less than enthusiastic - about short sales, given their unpredictable timelines, which can be extended by servicer inaction as well as second-lien issues.

For doorknockers and single-facet firms that specialized in short sales, the fall-off in these types of transactions has been especially challenging. It has also served to reinforce the importance of being able to perform a number of different services for clients.

As volumes decrease and “know-your-vendor” concerns increase, servicers are beginning to question the value of dealing with a separate short sale company, separate REO vendor and separate valuations provider. From compliance and logistics perspectives, that’s three vendors that have to be vetted, on-boarded and monitored as opposed to a single, multifaceted provider.


To measure is to know

Obviously, knowing the rules and following them precisely is vitally important. However, at the end of the day, so is the price that the servicer gets for the asset. Having accurate broker price opinions (BPOs), calibrated to the properties and changing market conditions, is critical to the REO sales process.

Interestingly, our firm has found that the demand for high-quality BPOs from both sellers and new institutional buyers continues to grow, despite the decline in transactions. One reason for the uptick is that changing home price appreciation tends to invalidate older BPOs and necessitate new ones. Also, investors and issuers of new SFR bonds frequently order repeated BPOs to determine current valuations of the properties. Over the past two years, for example, our firm has valued more than $16 billion in SFR properties for investors.

The good news, thanks in part to the appetite of single-family aggregators, is that the demand - and prices - for REO properties continues to be strong. While it is true that some of the first entrants into the SFR space have been dialing back their purchases, there continues to be a demand for assets that meet certain investor profiles. These criteria, from markets to cap rates, are continually evolving - so it’s a moving target.

To succeed in the REO market today, an asset management company needs to be able to help its clients understand the current value of a property, the market conditions and then demonstrate that it has the team to execute flawlessly and compliantly. For example, our firm recently analyzed more than 18,000 assets that we sold during the last 12 months and found that our sales price was, on average, 96.8% of the BPO value (very little deviation).

Yes, the landscape of the REO marketing is shifting, but the formula for winning hasn’t.

As NASCAR driver Jeff Gordon put it, “Teamwork is everything. It takes all of us working together. We win and lose together.” s


Brent Taggart is senior vice president of client relations at Green River Capital, offering asset management, loss mitigation and portfolio valuation/due diligence services. He can be reached at btaggart@greenrivercap.com.

REO Marketing

The REO Landscape Is Shifting, But Formula For Success Is The Same

By Brent Taggart

Heightened concerns over compliance, coupled with improving real estate and job pictures, are affecting REO disposition strategies.




































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