PERSON OF THE WEEK: The housing finance industry has undergone a complete transformation since the financial crisis struck in 2008 and how REO properties are handled is certainly no exception.
Back in the pre-crisis years, real estate agents often did not know that the properties they were selling were secured with mortgages with loan-to-value ratios of 100% or more.
So, of course, when homeowners defaulted on these loans in droves, it launched the mortgage servicing industry into a state of utter distress. As REOs flooded the market, servicers and lenders faced a new challenge: How to market and liquidate a mountain of depreciating assets in a horrendously bad housing market.
Since then, new regulations have come into play that are designed to prevent borrowers from getting into loans they cannot repay and to prevent servicers from fast-tracking foreclosures when borrowers get into financial trouble.
This also includes a significant change in the way REO properties are handled.
To learn more about how the process of marketing and liquidating REO properties has changed since 2008, MortgageOrb recently interviewed Tiffany Malm, director of REO and Ancillary Services for US Real Estate Services Inc. (USRES).
Q: How has REO changed since the recession of 2008?
Malm: In the past decade, the housing market has dramatically shifted. Since the housing bubble burst in 2008, and the effects trickled down, not only has the general population’s ability to own a home shifted, but the desire to do so also changed.
As homeowner occupied housing has decreased, the rental market has seen a significant increase with both private and institutional investors co-existing in the retail market and REO space.
Prior to the market crash, the default servicing industry did not have as many regulations and compliance processes in place surrounding the liquidation of REO properties. And those that existed were rarely as clearly defined as they are now. The goal was simply to market and close properties as quickly as possible.
Today, new regulations define how REOs are managed; from what kind of notice to serve and how long a tenant/occupant must be given to vacate to property preservation standards and standardized notifications provided to purchasers before buying a property.
For better or worse, there are frequent updates to these regulations and guidelines – thus, internal processes are continually evolving. One must be adaptable in today’s REO market in order to keep pace with these changes.
Q: How have processes changed with regard to how REO is handled?
Malm: With more regulations and standardized practices in place, there have been significant process changes within the industry, as well. With laws and regulations that define when and what must be done during various stages of REO, one must remain current and relative.
It is also important to note that these new regulations are on the local, county, state or federal level – making full compliance no small feat.
There are also requirements in certain areas of the country regarding vacant properties, requiring that they be properly identified and registered within a specified timeline, as well as guidelines on property condition, and, in some cases, how the property is secured. Failing to properly register a property or maintain it can lead to significant fines or action against a bank.
As these regulations have come into play, the industry has had to adjust to new expectations. At times, the new regulations have not always been clear, making it difficult to ensure that they are being adhered to.
Another significant change is that businesses today are more apt to segment the REO process with specialists for each stage of REO. For example, there are now specialists who handle the intake of new REO files – and then the file will move to another specialist who will take care of the eviction process or the pre-marketing – and, so on, to the asset manager and closer. This allows for these specialists to become subject matter experts in their roles with increased oversight to ensure compliance.
Before the recession, the intended outcome with REO properties was to liquidate quickly for the highest return possible. Today, however, there is also a heavy focus on ensuring that these properties are being properly maintained and are in compliance with neighborhood standards, not to mention local/state/federal guidelines.
Fast does not necessarily equate to the best recovery of losses any more.
Q: Has there been a change in the types of properties in REO?
Malm: Historically, REO portfolios were comprised of lower-value single-family properties. Due to the effects of the market crash a variety of conditions resulted in a much more diverse population of REO’s including land, manufactured homes, single and multi-family residences, and even small commercial properties. Today’s portfolios often carry a wide range of values with many more mid- and high-value properties having been affected by the economy.
Q: What changes have been made with regard to how REO properties are marketed?
Malm: Many REO properties are still marketed and sold the traditional way – with a local real estate agent. However, another popular method is the dual path option, in which a property is listed with a local agent while concurrently running in an auction.
This creates double exposure to expand the buyer pool and allows the property to be viewed by a larger audience, rather than only those with access to local listings.
Additionally, with a larger audience, it provides the opportunity for multiple bids on the same property to occur, which may create an even greater return for the seller.
Q: Why can’t the future of REO be speculated?
Malm: The market crash and recession of 2008 reminded and instilled in everyone that anything can happen at any time. Unfortunately, preparation only goes so far when a crisis takes over a whole industry.
The best way to go about business involving REO is to stay objective on what is happening in the present and to be flexible enough to adapt to changes quickly. While remaining aware and being prepared doesn’t hurt, the best way to succeed is to do one’s best work at the moment, and expect change at any time.