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Unloading Inventory

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Editor's note: This story was originally featured in the December issue of DS News, out now.

Post-Foreclosure Sale Property Inventories

Over the past years, mortgage servicers have experienced substantial reductions in post-foreclosure sale property inventories given lower levels of nonperforming loans, higher purchase volumes, and stronger employment levels. During this period, servicers have developed and refined various property disposition strategies relative to assets held in portfolio (to be liquidated from servicer REO inventories), as well as assets that will ultimately be conveyed back to insurers or investors for property liquidation after the completion of a foreclosure sale. While the management of liquidation processes may vary from servicer to servicer the end goal is the same–effectuate liquidation strategies and expedite third-party property sales to minimize neighborhood blight and reduce the operational and holding risks associated with distressed-property management.

While servicers are charged with appropriately managing property inventories in accordance with investor/insurer requirements regardless of the party that will ultimately liquidate the properties, the liquidation of HUD-insured properties presents added layers of administrative coordination post-foreclosure sale.

Servicers with post-foreclosure sale assets that are insured by HUD are charged with conveying properties to HUD (for property liquidation), in acceptable condition or selling to third-party buyers under HUD’s Claims Without Conveyance Of Title (CWCOT) program. Ensuring that properties are in conveyable condition requires tight management of the eviction, title, and property condition remediation processes, so that these properties can be transferred to HUD for liquidation. This conveyance-path process can be costly (for servicers and for HUD) due to various operational and holding risks that can be greatly diminished under successful third-party property liquidation efforts. Given the inherent risks of the conveyance path, the HUD CWCOT third-party liquidation process provides a more cost-effective and less-risky alternative to conveyance.

Broad CWCOT Program Highlights

Optimization of the CWCOT program reduces servicers’ post-foreclosure sale property inventories, decreasing the risk of holding and ultimately conveying properties to HUD for property liquidation through successful and qualifying third-party sales. Upon completion of qualified third-party sales, related insurance claims may be filed through HUD to retrieve qualified unpaid principal balance deficit totals as well as reimbursable expenses.

Program participation not only reduces the ultimate impact of the FHA insurance fund due to expedited third-party sales, but also mitigates the following risks and costs associated with post-foreclosure sale inventory asset management—relative to qualifying properties and circumstances:

  • Future liability of holding vacant/high-risk properties
  • Ongoing maintenance and property preservation-related costs
  • Operational/staffing levels
  • Nonclaimable property-preservation costs
  • Potential debenture interest curtailments
  • Potential reconveyance volume
  • Property liquidation risk to HUD
  • The CWCOT program concerning third-party sale property liquidation efforts related to HUD-insured properties involves two options—noncompetitive sale and competitive-sale strategies:

Noncompetitive Sale Strategy: The sale of HUD-insured properties via noncompetitive sale efforts (through typical third-party foreclosure sales not previously marketed for sale through an auction company) provides servicers with a narrower liquidation strategy as these properties are not generally actively marketed to a wider potential buyer audience. Further, the minimum ‘reserve’ purchase prices as determined through pre-foreclosure sale property values are generally higher than the minimum reserve purchase prices that are established under the competitive-sale property liquidation strategy.  

Competitive-Sale Strategy: The sale of HUD-insured properties via competitive-sale efforts through partnership with an auction company significantly broadens the reach of potential buyers given that competitive-sale efforts are coordinated in partnership with auction companies that market properties for a minimum of 15 days prior to auction cycle. The wider reach of potential buyers, coupled with lower minimum sale reserve prices, make the competitive-sale property disposal technique an effective strategy. In the long run, the competitive-sale strategy tends to expand the number of potential buyer bidders, and increase the overall resultant sales prices (thereby reducing the exposure of the FHA insurance fund).

The following highlights contribute to the effectiveness of property liquidation through competitive-sale efforts:

CWCOT Competitive-Foreclosure Sale ‘FIRST-CHANCE’ Option:

  • Increased CAFMV haircut or minimum sale-price adjustment, reducing the minimum foreclosure-sale property price reserve threshold (attracting more potential third-party bidders as compared to non-competitive sale efforts)
  • Permitted reimbursement of auction company marketing services for up to 5 percent of netsales price per property sold through competitive-sale efforts
  • More limited scope of states and municipalities that allow for competitive bidding at the time of foreclosure sale
  • Corporate contributions allow servicers to accept below-reserve bids in exchange for lender contributions in an effort to achieve quicker property liquidation and avoid additional holding risks/future losses.

CWCOT Competitive Post-Foreclosure Sale ‘SECOND- CHANCE’ Option:

  • Increased CAFMV haircut or minimum sale-price adjustment, reducing the minimum post-foreclosure sale property price reserve threshold (attracting more potential third-party bidders as compared to noncompetitive sale efforts)
  • Permitted reimbursement of auction company marketing services for up to 5 percent of net sales price/property sold through competitive sale efforts
  • Wide scope of participating states and territories that allow for competitive bidding through second-chance post-foreclosure sale efforts
  • Corporate contributions allow servicers to accept below-reserve bids in exchange for lender contributions in an effort to achieve quicker property liquidation and avoid additional holding risks/future losses.

CWCOT Program Inflection Point

In late 2014, when HUD published updated guidance (effective for foreclosure sales scheduled on or after February 1, 2015)around the CWCOT program and competitive-sale benefits, servicers began broadening strategies in an effort to further optimize the program. According to HUD, CWCOT claim submissions now exceed conveyance claim submissions, demonstrating the growth of the CWCOT program across the wider servicing industry. This increase in CWCOT liquidations benefits both servicers and HUD for the various reasons mentioned above. In addition, the program will continue to provide potential buyers with options in an ever- competitive purchase market.  

Competitive REO Sales

While the REO market has contracted over the past years, given overall lower inventory levels, servicers continue to look for ways to efficiently liquidate properties from their own inventories. For many servicers, REO liquidation strategies may also include the use of competitive-sale efforts.

In the REO realm, partnering with auction companies allows servicers to more effectively reduce inventories given the reach of the online auction industry (which has grown substantially in the past ten years).

Post-Foreclosure Sale/Distressed Asset Inventories—Looking Forward

According to Freddie Mac’s September 2017 Housing Outlook, home prices are expected to increase slightly in 2018. Overall, economic conditions are expected to remain strong, further supporting lower post-foreclosure sale and REO property inventories in the near term. Of course, there are those variables that could impact distressed asset inventories.

Natural Disaster Impacts

Borrower, servicer, investor, and insurer impacts around Hurricanes Harvey, Irma, Maria, and the wildfires have been and will continue to be at the forefront in terms of homeowner assistance (both financial and physically), damage remediation efforts, and potential downstream exposure.

Freddie Mac’s September 2017 Housing Outlook further referenced the potential for increased mortgage delinquencies 3as a result of disaster-related impacts, particularly around those properties that were affected by Hurricane Irma (given lower property equity levels as compared to those properties impacted by Hurricane Harvey). At this stage, potential downstream disaster impacts, including resultant foreclosure activity, are not yet known. Those borrowers that were directly impacted by the natural disasters are still working through FEMA claim filings, surchargeable damage insurance filings, forbearance options, dislocation assistance, and/or potential employer relocation (among other direct and indirect issues resulting from disaster impacts). Therefore, it will take time for the industry to fully understand the extended level of disaster effects related to delinquencies and potential resultant distressed-property inventory levels.

Overall, the technological and marketing advances that have grown over the past several years, as well as broader optimization around property-disposition strategies have contributed to servicers’ ability to more effectively manage distressed-asset inventories and ultimately scale as these inventories shift through various market conditions.

About Author: Kelly Conley

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