REQUIRED READING: From December 2011 to January 2012, there was an approximately 3% increase in foreclosure filings, according to data from RealtyTrac Inc. With ever-tightening budgets and sustained volumes of vacant properties in their portfolios, mortgage servicers and investors are shifting their focus to pre-sale as a way to protect real estate owned (REO) value.
Historically, servicers maintained a well-defined separation between properties in pre-sale versus post-sale. As volumes have grown and properties remained vacant for longer periods, servicers have begun to realize that what happens to the property in pre-sale can significantly impact the value and condition of the property in post-sale.
Clients and investors wanting higher-quality REO properties are weighing decisions pre-sale more than ever, so they need to get REO properties in better condition. As a result, field-service companies are being increasingly tasked to ensure property quality.
Prior to this shift in focus, servicers had separate pre-sale and post-sale groups looking at their contributions independently, because the needs are specific and the procedures are different for properties in those stages of the default process. Now, servicers recognize that by looking at the process as a whole and wisely investing time and money on properties in pre-sale, they can protect the condition and value of REO properties.
An example of this is an abandoned or vacant property that has been found to have frozen water damage during the field-service company's initial inspection of the property. Some servicers or investors may choose to leave the property frozen until it reaches REO status. But because the foreclosure process may take a long time – sometimes up to two years – the house will sustain costly water damage when it thaws, and that could create a severe mold problem. At that point, the property would most likely be a total loss.
If the field-service company carefully thaws the frozen property when it is first discovered and properly winterizes the property in pre-sale, the property will retain its value in REO, and the servicer will avoid significant repair costs.
Another example of pre-sale maintenance to protect REO value is the installation of dehumidifiers in older homes. Older homes often have a lot of moisture, and this becomes a problem after the property is abandoned and is sitting vacant for a significant period of time – if the house is closed up, proper airflow and ventilation is prevented. In pre-sale, servicers can direct their field-service companies to install dehumidifiers in order to prevent mold growth.
To further demonstrate this shift in focus, the U.S. Department of Housing and Urban Development (HUD) has made a key change in handling debris in pre-sale. HUD now has its field-service companies remove debris in vacant or abandoned properties pre-sale, because broom-swept condition properties are easier to inspect than those that are filled with debris. With the property cleared, damages are more apparent on subsequent inspections, and potential losses in REO can be mitigated.
Because most of the exterior work that field-service companies perform is done to prevent code violations, it is much easier to identify damages to a property through interior inspections. Most of the damages identified in abandoned and vacant properties are inside the home. Addressing these issues in pre-sale can preserve the value of the property in REO.
Mortgage servicers and investors are also working with their field-service companies to create a more formal process to ensure higher-quality REO properties. Formal auditing helps servicers and field-service companies guarantee that preservation work complies with industry guidelines.
Servicers and their field-service companies are having more detailed conversations about processes and procedures in both pre-sale and REO. The specific processes they evaluate include quality control, business risk assessment and vendor management.
Furthermore, servicers and field-service companies are evaluating quality-control procedures more closely in the auditing process. Because errors can be costly for mortgage servicers and investors, a thorough quality-control program that allows a field-service company to monitor errors and issues, analyze data, identify patterns, and take corrective and preventive actions to minimize errors in the future is the most effective way to keep REO properties in the best condition possible.
In addition to quality control, servicers and investors are focusing their audits with field service companies on assessing business risks. Servicers and field-service companies are analyzing processes for information security and disaster recovery, among other risks. Minimizing these risks and guaranteeing that business is not disrupted in both pre-sale and REO allows the focus to remain on producing high-quality REO properties.
Vendor onboarding and management are other procedures discussed during the auditing process. Servicers and field-service companies want to ensure the integrity of new vendors because the vendors are entrusted to preserve and protect homes. An evaluation of vendor background checks and verification of proper insurance coverage are important best practices for recruiting new vendors.
Shifting the focus to what can be done to vacant properties in pre-sale is a great start to ensuring higher-quality REO properties. However, what servicers and investors might want to consider breaking it down even further at the property level.
Right now, servicers are taking a more global approach, rather than examining the abandoned or vacant properties on a case-by-case basis. Utilizing the information gathered by field-service companies in pre-sale can help servicers determine what is best for each property, ultimately saving them time and money in REO.
Servicers and investors are interested in the history of the vacant properties in their portfolios during pre-sale because it helps them forecast and understand the condition of the properties when they reach REO. Taking that one step further by relying on the relationship with their field-service companies and examining the properties more closely in pre-sale ensures the highest quality of REO properties.
Kathy Cogan is associate vice president of account management for Safeguard Properties, based in Valley View, Ohio. She can be reached at (800) 852-8306.