PERSON OF THE WEEK: Although it is true that the inventory of real estate owned (REO) properties has dropped nearly to pre-recession levels – and that mortgage delinquencies and defaults have fallen to pre-crisis lows – by no means is the REO management industry “dead” – nor will it ever be.
That’s because borrowers’ circumstances are changing all the time. Not to be negative, but for most Americans, a mortgage default and/or possible foreclosure is often just one layoff, one divorce or one major health problem away. As such, the REO industry is perpetually alive: As long as homes continue to be financed, there will always be a certain number of distressed assets that end up back in the hands of the lenders post-foreclosure.
But now that the U.S. economy is improving, the REO industry is starting to see some changes: Due mainly to the fact that large institutional investors are no longer the primary purchasers of these properties, but also due to the improving economy and the use of new technologies, the way REO properties are maintained, marketed and sold has shifted considerably in the past two years.
To learn more about the recent trends that have impacted the REO space and which trends will likely affect it moving forward, MortgageOrb recently interviewed Rida Sharaf, senior vice president of operations for USRES, a provider of REO management services, as well as valuation and other services.
Q: Describe the current environment of the REO management industry.
Sharaf: Although the majority of media coverage is focused on retail within the real estate market, REO has quietly contracted, but not to the level that most would think. Distressed loan portfolios will always exist. Furthermore, the success rate of entities selling portfolios containing distressed loans and the subsequent success rate of loan modifications of those distressed loans have muddied the waters. The results gained by these requirements have been variable, with success figures falling in the range of 20% to 30%, depending on the source of the information.
Although we are not seeing the same levels of default inventory growth seen in 2007-2008, it is challenging to ascertain an accurate number of the nonperforming loans (NPLs) that exist. As a result of this contraction and unclear outlook, REO management firms have been experiencing severe consolidation, termination of business operations and, in the best-case scenario, radical downsizing.
This is not all bad news for the owners and servicers of NPLs that are seeking stable, comprehensive and quality REO asset management services. The surviving REO management firms that have weathered the radical changes within this segment are better equipped today to manage REO assets than in years past. These firms adapted to the changing climates by diversifying product offerings, maintained strong vendor and client relationships, acquired or have kept talented REO professionals, and applied strategic fiscal management to emerge unscathed.
As consolidation continues, long-term growth within the segment will, in large part, be dependent on mergers and acquisitions activity and mortgage servicing rights (MSR) portfolio off-loading. Recent large loan pool sales and equally as large MSR sales to specialty servicing operations serve as evidence of the previously mentioned outlook. The mantra continues to be “change is the new norm” for the mortgage servicing industry, and this, perhaps, is the most accurate way to describe the current REO environment. I much prefer the more internal motto of “get comfortable with being uncomfortable.”
Still, a number of unknowns and underlying factors, such as shifting guidelines, ever-changing regulatory requirements and industry scrutiny, continue to add to the complexities of the REO management segment.
Interestingly, we have seen home buying cool down somewhat with the new administration, new rules and rising interest rates. Specifically, interest rates will not only have a critical correlation to home valuations, but also impact MSR portfolio valuation. This could contribute to an uptick in mortgage defaults, especially based on the surge of home lending seen in 2015-2016. The industry is paying close attention to factors that may lead to increasing foreclosure rates and should prepare accordingly to handle LPR portfolio growth.
We have seen home prices make their way back up to 2007 levels, although stabilization of appreciating values has been observed in the fourth quarter of 2016 and first quarter of 2017. To that end, some markets, such as San Diego and Boston, are anticipating a decline in home values within the immediate future. Of course, if we see prices drop more than 10%- 12%, this could indicate a shift in the most recent home value trending and a potential issue, which is all too familiar to the mortgage community.
Q: Are all REO asset management companies created equal?
Sharaf: All REO asset management providers and platforms are most definitely not created equal. There are distinct advantages with companies that specialize in or offer “boutique” REO asset management as opposed to servicer- or bank-owned departments that evolve (or develop) into an REO management organization based on need or desire to potentially generate revenues. Managing the disposition of REO assets and the corresponding processes can be a cumbersome and a daunting burden if the organization and its staff are not intimately familiar with the various nuances, ever-changing requirements and best practices required to effectively and efficiently manage and liquidate REO portfolios.
Industry experience and innovative technology are two of the key assets an REO management company provides clients, helping them succeed in any real estate climate. Nothing trumps experience and having the expertise to handle situations that may hold potentially adverse consequences for the client and its respective investor.
Serious and costly errors occur when individuals not familiar with the REO landscape make decisions based on a limited perspective fueled by a lack of experience, as well as when individuals lack the resources and expertise to manage complex situations and are not positioned to handle the inherent scalability needed when managing REO assets.
Conversely, specialized REO management organizations are able to aggregate, share and apply their robust knowledge and experience, gained by working with a number of clients, each having slightly different guidelines, requirements and goals, to provide the most comprehensive and accurate disposition management solutions.
Q: What are the most challenging aspects of providing REO management services?
Sharaf: Remaining compliant and adhering to client/investor guidelines and requirements that change frequently will rank high on the list of potential challenges related to REO management services. Standardization, built-in procedures, situational awareness and fast-adapting technology solutions are critical to overcoming these challenges. To be successful, organizations must be proactive, seeking to clarify processes, create transparency and operate in an efficient manner to stay ahead of the curve.
Complicated compliance requirements and incrementally increasing REO volumes often require multiple dedicated resources, which can be time-consuming and cost-prohibitive for most servicer- or bank-owned REO departments. Proven specialized REO asset management organizations can provide dedicated resources to each phase of the asset disposition cycle, which, in turn, gives the most comprehensive management of critical areas such as eviction proceedings, title curation, offer negotiation, etc.
Key performance indicators (KPIs) should also be diligently monitored to ensure adherence to client and industry standards. Too often, organizations that do not specialize in REO management manually and ineffectively process incoming information from multiple vendors, resulting in disconnected, departmentalized data sources and delayed turnaround times to complete tasks, reports and finalization of the liquidation process.
Q: What are the most underutilized aspects of typical REO management services?
Sharaf: Despite having the capability, most REO management services are not provided with property-specific baseline carrying costs and routine expenditures related to normal property maintenance. Often, these figures are not made readily available to the client’s own loan-level asset manager. The underlying issue is a lack of case management system continuity. Simply stated, when an asset is moving through the pre-foreclosure phase to an REO status, details related to expenditure are left behind because a new system of record is being utilized. This isn’t a new issue, but there is technology on the horizon that can bridge the changing status gaps to empower clients with detailed knowledge of property and expense information.
Additionally, data interpretation is often underutilized, and as a result, many opportunities are missed. Simply following procedure, succumbing to mental tunnel vision, in essence, doesn’t produce results. In contrast, REO management organizations that encourage creative thinking and broader analysis of data can identify future trends, make sound decisions and leverage valuable insight, such as geo trending, to provide additional insight into specific markets. When used strategically, the additional data and analysis can be used to protect investors from making hasty liquidation decisions when other options may be available.
As an example of this lack of analysis, many REO management services do not closely examine potential asset marketing plans to gain a holistic view of markets in which an asset is located. By simply operating under a business-as-usual attitude, many investors may not fully understand what is taking place in a city or neighborhood and what factors may or may not be influencing the value of an asset and the subsequent sale. Ignoring influencing factors such as rapidly developing neighborhoods or the opening of new retailers, stores or restaurants may result in costly mistakes or missed opportunities.
Another common misconception by many servicing operations is that by maintaining or creating internal REO departments, they will be able to accomplish the same levels of efficiency, effectiveness and high standards as a specialized REO asset management firm. Additionally, a growing number of servicing operations view this segment as a potential revenue generator. However, when actual costs are tallied – which include facilities expenditure, technological infrastructure, accounting operations, specialized staffing and much more – these departments quickly become loss leaders. In reality, partnering with an REO asset management firm enables the servicer to streamline resources and, in turn, focus those resources on their core operations, generating efficiencies and boosting revenue without adding unneeded and often costly burdens on their existing operations.
Q: What are the attributes that make an REO management company a valued asset to a client?
Sharaf: Experience. Having the ability to quickly identify situations and swiftly adjusting practices and procedures to accommodate changing guidelines that can impact other aspects of the business can save a client expenditure and even more importantly, legal exposure. Experience alone, however, is not enough to be successful. Experience must be supported by nimble technology that can be manipulated and enhanced quickly to accommodate changing markets and meet the needs of the client while business continuity is unhindered.
REO asset management providers leverage tools and technology to ensure all vendor data is generalized and channeled directly into one system. Centrally aggregated data means more efficient processing, easier reporting and more accurate oversight. Specialized providers are experts in reducing holding times, mitigating risks and ensuring regulatory requirements are met. REO asset management should provide end-to-end solutions that address the challenges associated with successful management and liquidation of assets for clients and their respective investors. Technology tools should not only adapt to operations, but also simplify and amplify them.
Q: What is the next evolution of REO management services?
Sharaf: As the industry as a whole continues to evolve, REO asset management services will become increasingly more customizable, leveraging technology to automate even more of the process to generate quicker processing while continuing to maintain appropriate risk thresholds. In the current environment, where access to data is becoming fairly simple and relatively affordable, leveraging public information, past trends and complex modeling will add a new level of analysis, which when utilized appropriately, will improve almost all aspects of the management of REO assets.
Clients looking for REO asset management services should include much of the attributes listed here to their list of “must-haves” when evaluating potential vendors. In the end, the client and its investors will reap the benefits of completing thorough due diligence and choosing a partner that will meet and exceed its respective goals and expectations.
Rida Sharaf is senior vice president of operations for USRES, a provider of appraisal, broker price opinion and REO management services.