As president of Houston-based Integrated Mortgage Solutions (IMS), a company that specializes in property preservation, loss drafts, hazard claims and related services, Cheryl Lang has a front-seat view of the effects higher default rates have had on the servicing industry and the collateral securing those loans.
Lang chatted with MortgageOrb this week to share her thoughts regarding foreclosure and REO properties, and offer perspective on how servicers can more effectively meet growing challenges.
Q: As foreclosure and REO volumes have increased, what areas have been hit hardest? Can you describe the unique elements in these regions, states or municipalities?
Lang: Foreclosure rates skyrocketed in Ohio, Michigan and Indiana, followed by Florida and California. According to the Office of Federal Housing Enterprise Oversight, California and Florida experienced the highest percentage of house-price appreciation between 1997 and 2006 and now lead the pack for the number of subprime loans originated – and in foreclosure. Both states will experience approximately 18% to 22% foreclosure rates through 2009, further proving that there is a direct connection between exotic loan products and foreclosures.
As metropolitan areas in California and Florida are now showing us, the impact of foreclosures is spilling over into the suburbs and is no longer just a lower-income, urban problem. And these properties are very difficult to disguise. Drive through a middle-class neighborhood in places like Orlando, Phoenix or Chula Vista, and it's easy to spot the foreclosures. Homes with dead grass and landscaping, green pools, and broken windows dot neighborhoods that were once thriving.
Along with the suburban phenomena comes an increase in ‘upscale’ code violations relative to pools and spas. Since these are breeding grounds for disease-carrying mosquitoes spreading the West Nile virus, pools and spas need to be properly secured and maintained.
Q: Property preservation work has obviously accompanied the climb in distressed-property volumes. Looking into the hardest-hit areas (and others), what should servicers know about particular localities' code enforcement or blight regulations?
Lang: Municipalities and homeowners associations agree on what constitutes common causes of blight, but they don't agree on what a violation is and what it is not – and this varies by jurisdiction and region. Kern County, Calif., now uses aerial photos to identify stagnant pools and spas in backyards – this action would not be needed in Toole County, Mont. Code violations also correspond with environmental conditions, as is the case in Wisconsin and Minnesota, where a tree infected with Dutch Elm disease is a code violation.
The effective way to ensure violations are being reported to the servicer is by a physical inspection of the property. It is imperative that the servicers' inspection and preservation partner quickly identify and communicate violations to eliminate imposed fines or liens. Key information, such as the city contact, phone number, date of the posting and date for action to be taken by the city, should be communicated to the servicer along with a bid to cure.Â
Q: How has the investor community reacted to larger numbers of foreclosure and REO properties, and how can servicers play their parts in protecting collateral?
Lang: The investor community continues to place more pressure on servicers as it relates to defaulted portfolios, and continues to target these portfolios for repurchase. Origination and/or servicing errors can shift the responsibility of the nonperforming asset to the servicer. Also, if the asset has signs of mortgagor neglect, whereby the servicer was remiss in protecting the property, the REO becomes the servicer's responsibility to liquidate.
Investors and servicers are taking more proactive approaches to prevent foreclosure and REO and maintain homeownership rates. Reimbursement of counseling fees and incentives to attorneys for negotiating repayment plans are just a few examples of how investors are taking a creative approach.
Q: In terms of costs and hold times, can the servicing community expect more challenges in the property preservation space, given the sluggish real estate market and less-than rosy delinquency projections?
Lang: Dan Immergluck of the Georgia Institute of Technology completed a study showing that for each percentage point the foreclosure rate increases, crime in that area rises 2.33%. Drug dealers, vandals and squatters can easily identify a foreclosed property. In Florida, California and Arizona, the dead lawn is a giveaway.
In Malcolm Gladwell's ‘The Tipping Point,’ he states that small things can ‘tip’ and have huge repercussions. He calls these repercussions ‘quality of life’ crimes. Broken Window Syndrome, for example, is when one unrepaired broken window tells unsavory individuals that a property is uncared for, and theft and vandalism ensue. A piece of trash thrown on an empty lot can suddenly become a dumping ground. The same holds true for a vacant property.
It's hard to tell what the mortgage industry's tipping point will be, but one thing is clear: code enforcement officials will be depending on servicers to be responsible and to be good neighbors.
