BLOG VIEW: Just after the crash, investors swarmed a market that was on its way to seeing the lowest homeownership rate in 20 years. As millions of Americans left the ranks of homeowners and returned to renting, buy-to-rent investors, many of which were very large hedge funds, stepped into the market intent on making a killing by snapping up distressed real estate at bargain prices. They bought millions of homes as banks unloaded their portfolios of distressed assets.
The banks that sold real estate owned (REO) properties aggressively in the years immediately following the crash were betting that getting the properties off their books early would involve lower loss severity than holding the properties until the market improved. They were right. Shadow inventory and zombie foreclosures created blight in neighborhoods across the country, and asset management firms spent millions on field services for home preservation.
By 2012, the Wall Street Journal reported that as many as one-third of all existing-home sales were foreclosures. By the first quarter of this year, it had fallen to just under 10%. Likewise, home prices were beginning to stabilize and banks were getting higher offers for their REOs. As prices rose, big buy-to-rent investors began to step back from the market, making way for smaller investors and individuals who would pay more. The Wall Street Journal, citing the S&P/Case-Shiller index, reports that, ‘After falling nearly one-third from their peak in 2006, prices began rebounding sharply in February 2012 and, since then, have risen nearly 25% through October.’
On the surface, this seems like good news for servicers that are intent on keeping loss severity low on the REO properties they still have in portfolio. Barring unforeseen problems, higher prices will help servicers reduce loss severity. It's the unforeseen problems that are the problem.
One problem that often crops up relates to the value of the real estate. Damage to a property that was left unoccupied, negative changes to the neighborhood brought on by the downturn that impact value and general lack of repair and upkeep can all create unwelcome surprises when the investor is ready to unload the REO. Most lenders rely on a range of collateral valuation tools to help them get a handle on the real value of the asset before they move forward with listing it.
Another problem that is more difficult to spot has to do with problems with the title or unknown liens against the property. Because some of the real estate that is still making its way back into the market has been passed around, investors can't make any assumptions about the status of the property. Although title insurance will provide protection against these problems, it's an expensive proposition that is usually left until a sale is imminent. Waiting that long to find out there's a problem is not a best practice.
Many servicers find gathering this information problematic. It distracts them from other important duties, tasks them with work they are not typically skilled at and forces them to stretch already lean teams. As the rate of serious default and foreclosure cases has fallen, many servicers have already reduced their loss mitigation staff.
Specifically, lenders and servicers need to know about the property's current ownership (all owners, not just the first listed) and all encumbrances. This includes liens and judgments that have been made part of the public record. In many cases, especially in rural areas, the only way to get this report is to send an abstractor out to the county courthouse.
Many industry players today, both on the servicing and the loan origination side, are using low-cost property reports to update their property files before the REO is listed or a second lien is approved on a formerly distressed property. Such reports provide a low-cost, speedy way to assess the situation and head off the unforeseen problems that can lead to higher loss severities.
Though the improving economy and normalizing housing industry are very good signs, in general, keeping loss severities down on the properties that are still making their way back into the marketplace is an ongoing task that leading companies are taking seriously by using the best tools available to get the information they need to make decisions.
Shannon Cobb is executive vice president of Dallas-based American Tax & Property Reporting Inc. (ATPR Inc.), which offers a proprietary suite of products and solutions for real estate information services, including SmartProp, a next-generation search product delivering a range of property reports that includes current owner, two owner, property conveyance, open mortgages, judgments and liens, tax information, tax status, and legal description.