Editor’s note: This feature originally appeared in the November issue of DS News, now available online
Inspections are a complex and solid backbone to the property preservation process. The many intricacies and unknown factors can often make the process challenging. Lenders face obstacles daily to keep properties up to code, and inspections are the first step toward achieving that goal.
One of the most understated factors in inspections is how small of a view the vendors have when considering a home. They are simply taking a snapshot of a moment in time, with no knowledge of the life of the loan before that point. When considering an occupancy inspection, one would assume that it’s fairly cut and dried. Just send a vendor to confirm vacancy or occupancy, right? Not exactly. The work of an inspector is not for the faint of heart.
More Than Meets the Eye
Vendors often find themselves face-to-face with danger in an attempt to get a clear idea of the status of a property. Anything from squatters to distressed borrowers could stand on the other side of the door, keeping them on their toes at all times. Of course, there are reliable indicators of occupancy: lights on in the home, animals barking inside, toys in the yard, seasonally appropriate decorations on the home, and the most trustworthy—visual observation of individuals in the home. If only all inspections were always so easy.
Many factors are misleading when occupancy inspections are performed. Does the home have a well-maintained lawn? On first thought, this would be a good indicator that the home is occupied and cared for. However, many servicers and vendors are finding this clue to be less reliable when considering the prevalence of HOAs and neighbors invested in keeping their blocks well maintained. Trash cans are out, so this must mean that a homeowner resides inside. Not always—maybe the neighbor did a round of spring cleaning and needed a few extra trash cans to save a trip to the dump, so they borrowed from the unoccupied home next door. Even the trusty meter-reading method can prove challenging if meters are located in a secure backyard. This doesn’t even begin to touch on the obstacles that condos, gated communities, and rural homes present.
A vendor’s inability to lay eyes on a property impedes their ability to report any information of substance. So many indicators that would initially point to an occupied property could lead to challenges in registering the property as vacant within designated timelines. Recent regulations have changed in terms of investor requirements for when inspections are required. Previously, lenders were expected to perform an initial inspection starting on the 45th day of delinquency, but some investors now start inspections on day 60. These fluctuating timelines have not only caused a decline in inspections ordered, but could also pose a risk to mortgage companies if properties in designated areas are not viewed in a timely manner.
So, when should out-of-cycle inspections be ordered? We all know that insurance companies have a strict set of guidelines for how claims are processed and paid, making the need for an accurate idea of occupancy even more important. High-risk or high-crime areas are a hot topic in the inspections field. The Department of Housing and Urban Development no longer requires blanket inspections in previously designated areas. The responsibility of identifying high-risk areas and adjusting inspection timelines now falls on individual lenders, and each servicer is different.
Additionally, many mortgage companies suppress inspections for factors such as bankruptcy or loss mitigation, which often leads to additional time without knowledge of the state of the property. In counties such as Los Angeles, Oakland, and Vallejo, California, as well as in Neptune, New Jersey, the municipalities require monthly inspections while the property is registered, therefore making inspection of the home compulsory even in the face of lender-imposed holds in certain areas. These requirements, while useful in the fight to maintain homes in high-risk ZIP codes, can lead to fines down the road if servicers or vendors fail to follow the guidelines set forth by the individual counties.
Dealing With Disasters
Disaster inspections are in a class of their own. There is virtually no way of preparing for or gauging the severity of natural disasters, but being proactive in filing claims is key, particularly when homes are vacant or evacuated. Whether the damage is caused by a storm surge, as with Hurricane Katrina, or flooding as with Hurricane Harvey, every natural disaster poses a new obstacle for lenders and vendors alike. Each storm is unique and wipes the slate clean of expectations.
When Hurricane Katrina devastated New Orleans and the surrounding areas in 2005, thousands of homes were abandoned due to mandatory evacuations, leaving properties closed for months and sustaining immense mold and water damage. In contrast, residents in the path of Harvey in 2017 were allowed access to homes in a much more timely manner, granting residents, neighbors, and volunteers from around the country to access homes and remove drywall to prevent mold and further damage. Additionally, in the face of challenging times for delinquent borrowers, lenders have a unique opportunity to step in and assist with inspections to assist with filing claims proactively for mortgagees current on their loans. This added level of customer service furthers the likelihood of achieving the best possible outcome after a disaster.
Despite all of the challenges that the inspections process present, the benefits far outweigh the negatives. The quicker and more accurate the inspection, the less risk that property holds. When lenders, service providers, and inspection vendors all work together, an ultimate goal is achieved; ensuring communities are preserved by lessening neighborhood blight.