REQUIRED READING: The Protecting Tenants at Foreclosure Act (PTFA) of 2009 was designed to extend protections to tenants from the persons or entities that became owners of residential property through the foreclosure process. The industry responded with a strategy that planned and prepared for the substantial volumes of properties that were expected to be managed under the new PTFA guidelines.
While there was much uncertainty surrounding the passage of this legislation, the result was an epic hurry-up-and-wait scenario. Today, there are very few properties that require servicers to actually act as landlords, and the percentage of tenant-occupied homes remains extremely low compared to the total volume of real estate owned (REO) properties.
Interestingly, what was the spiraling focal point of so much uncertainty and anticipation in 2009 has contributed to another concept that is gaining momentum as being a widely accepted solution: REO occupancy.
Last summer, the Federal Housing Finance Agency solicited opinions for options in selling single-family residential REO properties held by the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. It received more than 4,000 responses from various industry stakeholders.
Since then, there has been a resurgence in the REO occupant theory – this time, as a unified REO-bulk sales initiative. Ideally, investors will buy up REO properties with the intent to transition them into rentals. In February, the Mortgage Bankers Association reported in its National Delinquency Survey that the percentage of loans in foreclosure for the fourth quarter of 2011 decreased from the previous quarter to 4.38%. It is a start, but we are not yet out of the woods.
While the number of REOs held by the government-sponsored enterprises and the FHA represents only a portion of the addressable market, having another viable option for moving these properties is thought to carry enough weight for moving the housing landscape in the right direction toward recovery.
Ten years ago, servicers would not be able to predict the makeup of today's REO environment. A one-size-fits-all approach to managing these properties is no longer an option, as the industry has become increasingly sensitized to nontraditional REOs.
Landlord-tenant speculation and formal establishment of rent-to-own initiatives for REOs have driven a true openness to change, as well as a willingness to find a solution for managing such unprecedented foreclosure volumes while also best meeting the needs of homeowners and lessees everywhere. There has been a renewed urgency in responding to communities' desire for stabilization, preparing for change and making other parties aware of how to adapt.
The industry learned a lot from this situation. It generated new technologies and services, set higher standards for efficacy and added a human element to the process. A decade ago, servicers could not imagine having such direct contact with REO tenants, much less having the resources to manage such change. But today, it is reality.
The idea of having tenant-occupied properties – whether from taking over as a landlord or preparing a home for a rental situation – revolutionized property preservation. An added responsibility – caring for someone's well-being and safety – called for new timeliness and higher standards for routine preservation procedures.
The success of REO property care depends on quick, accurate execution. Response times for repairs shortened from days to only hours. Services such as 24-hour hotlines and around-the-clock maintenance availability have become the norm as servicers and their field providers aim to act on emergency situations right away.
In addition, REO occupancy has brought a human element to the industry – one that was probably needed. With a tenant, there is a real person who has needs and quality-of-living standards that must be upheld.
As a result, servicers should treat each property as their own. The industry has a copacetic attitude about more frequent, direct and enhanced communication with occupants. As a result, record-keeping of preservation procedures and reporting of work order fulfillment have become much more intensive and thorough.
The need to differentiate
Rather than dispute the pros and cons of tenant-occupied and rental REOs, let us acknowledge that our REO landscape is ever-changing. There are no longer just traditional foreclosures; the industry must make adjustments to maintain these newer REO scenarios effectively by holding them to much higher standards. In all, strengthened communication between parties, heightened risk awareness and additional services are required.
Nontraditional properties deserve additional attention during the preservation process. There must be a level of extra service, because there are different legal requirements.
As an example, just take into account habitability laws. The thing to remember here is that getting a property ready for a tenant is truly different than preparing it for a bank or other investor to rent. For an existing tenant, typically changing the locks, getting the property in broom-swept condition and posting the necessary signage is acceptable in addition to future necessary maintenance and/or repairs.
The goal in this situation is to take responsibility for something that is ultimately yours and ensure it is being cared for while not being intrusive to the occupant. For the latter, the goal is more so to ensure the property is put into lendable condition. This would ensure the bank could receive financing to transition the property. Home buyers in the market expect a property – new construction or pre-owned – to be a blank slate for them upon purchase and move in. When there are renters, the mind-set is not the same – for them, the home is an accommodation, not an investment.
Each REO scenario requires a different set of services. A vacant rental market scenario allows for more comprehensive monitoring and maintenance. When there are tenants, the goal is to be as unobtrusive as possible.
Banks are doing whatever is right for the occupant. They have dedicated teams to field their requests and have established direct lines of communication with appropriate legal counsel and field service companies for expediting how to address any concerns. Service providers can additionally act as on-site property managers to gather tenant information, collect documentation, assess the property's condition and respond to repairs whenever needed.
Property law varies by state, and attorneys are licensed to practice in individual states because of these jurisdictional differences. Foreclosure law also varies by state. As a review, servicers must confer with risk management their insurance coverage and other similar policies. They are liable for the same risks of any other landlord having to do with the property's condition and tenant's safety.
There are no more tenant-occupied properties today than there once were. Rather, now they are just being handled differently. Servicers have become very sensitive to the situation.
Tenant-occupied REOs, regardless of how they become that way, are both a challenge and an opportunity. While the situation warrants heightened attention, resources and timing, it also has led to ideas for reinvesting back into communities and pioneering programs for donating REO properties to veterans and other publics in need.
Chad Mosley is vice president of business development for Tampa, Fla.-based Mortgage Contracting Services LLC. He can be reached at (813) 319-1317.