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The Domino Effect

As 2022 approaches, property preservation companies are navigating through challenges presented by low foreclosure/REO volumes, navigating regulatory challenges posed by maintaining properties and preparing for an upswing in those volumes as moratoria and homeowners exit forbearance.

As with every other sector of the industry, the long shadow of COVID continues to stretch over both daily tasks and long-term planning, demanding that prop preservation companies attend to immediate needs while also anticipating where things will be headed in the new year.

Amid this daunting landscape, DS News spoke with industry experts from companies including Carrington, MCS, MSI, and Safeguard to learn how to maintain focus, balance, and productivity.

A Matter of Numbers
The issues facing the property preservation sector are familiar to anyone who has been watching the housing and mortgage markets over the past two years. Insufficient housing inventories were straining the system even before COVID-19. The arrival of the pandemic has tightened the screws on multiple fronts, ranging from the decrease in foreclosure volumes (and thus REO inventories) to ongoing labor shortages and supply-chain issues with such needed supplies as lumber and other crucial materials.

These issues have become stressors that have forced many vendors to rethink how they do business and strategize how best to weather the storm until relief appears. Unfortunately, for some, that wait has proven too long. Baker Breedlove, President and CEO of Mortgage Specialists, International (MSI), said, “It’s driven a lot of vendors out of the property preservation business and into new construction, renovations, or other more lucrative areas.”

“The moratoriums on evictions and the forbearance plans were all put in place to help homeowners who were negatively affected by COVID,” said Chad Mosley, President of Mortgage Contracting Services (MCS). However, he added, “That has a downstream impact on the field services industry and the property preservation business.”

According to Breedlove and several other experts, the lack of qualified property preservation vendors is felt most pronouncedly in rural areas.

“By definition, if there are fewer people, there are fewer people to get to the different properties.” Among other issues, this means it takes the existing companies longer to get through the available workload. “It takes more ‘windshield’ time,” Breedlove noted.

Nor are the property preservation sector’s challenges limited to the impacts of the COVID-mitigating policies such as foreclosure moratoria or forbearance. It’s not just about volumes, as Breedlove explained. Like countless other industries both nationally and globally, property preservation is suffering from labor shortages combined with an ongoing increase in the cost of materials.

Although the price has moderated in the last few months, for example, Chicago lumber futures traded at $707 per thousand board feet in late October. That’s less than half of a record high of $1,711.2 hit in May, but still well above pre-pandemic levels of around $400. A tight labor market and wildfires in western Canada have only worsened things, especially when combined with supply-chain issues. The cost of other building materials has also increased significantly since 2019, although without the dramatic price swings of lumber.

For instance, one of the large chlorine plants in Lake Charles, Louisiana, was damaged during Hurricane Laura, resulting in a shortage of chlorine, which then impacted property preservation companies that handle pool maintenance. For property preservation companies, 2021 has presented a mosaic of broad economic impacts alongside more localized issues that may spider-web out into more widespread consequences.

“Typically, when there’s an increased cost and goods, whether that be through materials or labor, that’s passed on to the end-user, whoever that is,” Breedlove said. “We see that in new construction, remodels, etc. However, on the property preservation side, most costs are fixed.”

Although there is a process in place that allows vendors to submit allowable increases to the Federal Housing Authority, Breedlove noted that “when inflation is hovering around 5%, it’s unrealistic to request that on all services, even though [costs of] inflation, materials, and labor impact all services.”

Since the low-volume environment results from issues beyond any property preservation company’s control, Mosley told DS News that MCS has used this slower period to ensure it is ready for when volumes do return to more normal levels.

Further complicating matters is a trend toward consolidation that has been at play throughout the property preservation sector. Mosley pointed out that decreased volumes, after all, are not solely the offspring of COVID-19. Those volumes have been well below the heights seen after the 2008 financial crisis for years. When combined with a robust economy in 2018 and 2019, the property preservation sector was already experiencing a consolidation trend well before the word “pandemic” became a staple of the evening news last year.

That consolidation meant fewer companies to choose from—a challenge for servicers, according to Candace Russell, VP of Post-Sale, Carrington Mortgage Services.

“There’s good and bad in having the industry consolidate,” Russell noted. “New companies can bring new ideas to the table, and they have different ways of sourcing their boots on the ground.”

When confronting these numerous challenges and figuring out how to do more with less, property preservation has turned to the same resource as countless other industries over the past 18 months. When in doubt, turn to tech.

Leveraging Technology While Maintaining the Human Element
Breedlove told DS News, “We focus on the end-user experiences as much as possible to try to find efficiencies to help our vendor network out.” For example, Breedlove noted that because vendors’ team members might need to spend more time getting from property to property,” properly leveraged technology can hopefully help release some of the pressure by allowing those workers to spent “less time with some of the administrative tasks.”

Ensuring that communications are swift and efficient can help streamline processes, perhaps requiring only one trip to a property rather than several, thus saving the contractor or other vendor valuable time.

“We want to make sure we have those strong relationships with our vendors as well,” Breedlove said. “It’s not a ‘rep code,’ it’s a person named Phil or Fred or Susan. It’s not a number; it’s a property. It is imperative that you do not get too disconnected to the end-user experience in our situation—from the vendors.”

MCS’ Mosley echoed that sentiment.

“We see our vendors as our lifeblood and treat them as business partners,” Mosley said. “We have a lot of tenured vendors in our network that have worked with MCS for a number of years. So those vendor relationships are deep and strong.”

Mosley said MCS’ average employee tenure is strong as well, at six years, with the management team in place for nearly a decade. “It’s very much about people, whether we’re talking about our team members, our clients, or our partners in the field. Making sure our vendors are successful is one clear key to success.”

A 30-year staple of the property preservation sector, Safeguard Properties offers a mobile app for inspections, enabling inspectors to check boxes for specific items and take and upload photos when prompted, rather than returning to an office before doing that work.

Safeguard’s Safeview Inspect Mobile is a real-time, mobile inspection application designed to provide full-service field support. Smart scripting enables customizable survey forms for different work types, which combines with industry-first multimedia capturing technology and built-in risk mitigation features such as location-based services.

“We want to decrease the barrier to entry to use our apps as much as possible,” said Elizabeth Squires, Director of Client Account Management for Safeguard.

Also on the tech front, MCS utilizes a proprietary technology system and integrations with various third-party systems of investors, insurers, and other business partners across the country. The proprietary MCS technology is a workflow management system featuring three modules. Employees and associates use the internal system—MCS 360—to issue and review work orders, helping drive quality performance. Second, the Vendor 360 module allows vendors to see what work has been assigned to them, deadlines, and other relevant info. Finally, Client 360 enables clients to place and review work orders, view results, look at photos, or run reports.

“The vendors rely on our system,” Mosley said. “We pride ourselves on our technology; we want it to be very, very user friendly. Most things come back to process, people, and technology, which are the three core focuses for us. You have to have the right vendors, good relationships with those vendors, and the technology in place to be able to transact and work with those vendors on a day-to-day basis and wrap that around sound processes.”

According to Mosley, the adaptability and flexibility provided by these tools give MCS a significant advantage in maintaining those relationships and tackling the headwinds facing property preservation.

“We want to make the vendor experience as flexible and nimble as possible,” Mosley said.

According to Breedlove, MSI also uses proprietary and third-party technologies that work together to provide users with the information they need in a concise, informative, and intuitive matter, regardless of the technology used at the front end.

Following the Rules
Even as national foreclosure moratoria reach their end, the property preservation sector must still navigate networks of state and municipal laws governing properties in default, each with its own expiration dates and other critical nuances. Ensuring adherence to these regulatory signposts can be challenging for servicers and the property preservation companies that partner with them.

“We don’t need an economist to tell us about economic data. We need somebody to explain what a public official may do next because that is more impactful than the actual economic data,” Breedlove said. “When the forbearance rate was at 8%, volumes were at all-time lows. If you had said [before the moratoria] that a certain percentage of people would be 60 or 90 days behind on their mortgages and asked us to project volumes, I think anybody in our industry would have been very wrong in their answer.”

Regardless of these hurdles, Breedlove says communication is integral, as is trying to get the process off on the right foot at the beginning.

“An ounce of prevention is worth more than a pound of cure,” he explained. “It starts with securing the work order and doing a thorough inspection of the property. We put a huge emphasis on that point in time. Everything else is important, but if you get it wrong at the beginning, it’s going to be much harder to get it right at the end.”

“The biggest hurdle I tend to find is individual state requirements,” Russell said.

For example, Washington doesn’t want an owner to secure a property that is not yet in foreclosure, even if the property is abandoned. That delays the start of any needed repairs. Some other states are developing similar rules. As such, Russell told DS News that Carrington tries to work with local code enforcement officers or municipal regulators to get a property secured by them, but this can be a cumbersome process. Carrington also works to keep investors informed about any expected delays or potential pitfalls.

Safeguard’s Squires noted that it was much easier when there was a blanket rule for the entire country. “One of the biggest challenges is that the rules and guidelines are always changing,” she explained. “If someone is in forbearance, is the investor allowed to initiate contact? How should that contact be made? How do you stay engaged for loss mitigation efforts?”

Squires added that it could get even more complicated when considering what type of loan you’re dealing with.

“It’s understanding how to service a Fannie Mae loan versus servicing a VA loan, what those requirements are, and making sure you’re fully aligned to all the rules and regulations that might be specific to that investor,” Squires continued. “Along with different investors, every state potentially has different guidelines on how to service properties.”

Mosley noted that FHA, Fannie Mae, Freddie Mac, VA, and USDA each have their unique requirements.

“They’re complex, and ensuring compliance with those is challenging,” Mosley said. “We’ve built a team that has the knowledge and the experience to execute on those investor insurer requirements, to ensure that our clients and their portfolios are compliant with those with those requirements.”

There are also still different rules for real estate owned (REO) properties, Russell said. REO poses unique challenges from the investor front: some want the property sold quickly, while others would prefer to wait to maximize the potential revenue. The investor’s interest will determine how extensive any repairs will be.

Regulatory compliance has become significantly more complex since the previous financial crisis, Mosley said. Still, he reiterated that focusing on people, processes, and technology would enable companies to best walk that tightrope.

As with other hurdles, technology also has a vital role to play when it comes to maintaining compliance, Squires suggested.

“Our system is programmed with all of those rules and regulations—allowables, the type of work the investor expects us to do upon first visit, how much money we can spend, and where they expect us to submit a bid or allowable request. So, our system is programmed with all those things, so when we send a vendor out into the field, the system looks to see what type of loan it is.” Squires said that Safeguard’s system also considers the time of the year: whether the vendor is being sent out during winterization season, in grass-cut season, etc.

The system includes all the details and investors’ expectations, including everything the vendor needs in the work order.

“That’s where technology’s helpful because the system does keep track of all those different rules,” Squires said.

Looking Ahead
Supply chain challenges, regulatory hurdles, and other bottlenecks should ease in 2022, according to Breedlove. “The labor and material shortages should subside, but they won’t go away entirely. Today’s rate of home price appreciation is likely unsustainable.”

Higher interest rates, which most economists foresee for 2022, will result in other challenges, Breedlove added.

The state and municipal regulatory nuances will remain an uphill battle, Russell suggested. She noted that this is why Carrington works closely with the Five Star Institute and other industry groups to spur conversations with all stakeholders, in the hopes of knocking down hurdles and inspiring positive change.

Another area of risk and concern is insurance rates, Breedlove added. The National Flood Insurance Program is going to a model that’s more reflective of actual risks, so the premiums will likely increase substantially—especially in places like parts of Florida. The revised flood zone maps should also be more inclusive.

Proper preparation during low-volume times such as these can make the difference between success and failure when those volumes rebound, Mosley said.

“One of the things that we have been very focused on is having a healthy vendor network, in terms of the number of contractors and inspectors—making sure that we’re right-sized with the right people in the right areas to do the work that that that we’re contracted with our clients to do. We want to make sure we’re ready for the uptick in volume next year.”

He then added, “But just as importantly— maybe more importantly—we need to ensure that our vendors are strong and ready for that change as well.”

About Author: Phil Britt

Phil Britt started covering mortgages and other financial services matters for a suburban Chicago newspaper in the mid-1980s before joining Savings Institutions magazine in 1992. When the publication moved its offices to Washington, D.C., in 1993, he started his own editorial services room and continued to cover mortgages, other financial services subjects, and technology for a variety of websites and publications.

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