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How is the Industry Coping with the Rapidly Declining REO Inventory?

reoNationwide REO inventory is approximately one-third of what it was at its peak in early 2009 at the depth of the housing crisis. What will it mean for banks when the steadily declining REO inventory falls down to its "normal" pre-crisis level in less than two years, as is expected?

What type of shifts or diversification is the mortgage industry experiencing right now as REO inventory continues to spiral downward?

At the REO Lab at the 2015 Five Star Conference and Expo on Friday in Dallas, industry experts discussed how to get ahead and stay informed and equipped to take on the new REO marketplace.

The first panel of the lab, "True State of REO: Market Analysis and Shadow Inventory," included Roger Beane, President and CEO of LRES Corporation; Sharon Bartlett, Director of Vendor Services at Freddie Mac; and Clay Lehman, Principal, Resolute Asset Management. Beane said the future of REO, and of housing in general, could be determined largely by who wins the next presidential election."

"Every four years you have that presidential election and you wonder how policy may change," Beane said. "But certainly housing is an extremely important policy decision for any administration that comes through. How important housing is to them is going to be a reflection of how the industry from a regulation standpoint or a deregulation standpoint. All of these different policies will take effect. It's a natural progression with any administration change, and we'll know the effect within 2 to 3 years. It really depends on the policy and what these banks and owners of loans continue to do with their properties."

Joyce Essex, an agent with Coldwell Banker Real Estate, said one key to surviving when the REO volume is dwindling is focusing on an area or two of specialty. Essex was a panelist in the REO lab for the "Diversification and Adjusting for the Inventory" discussion.

"Protecting yourself by diversifying the approaching to the marketplace with different types of products is vastly important. It's the reason for survival."

"Whether it's REO or traditional sales, performing, probates, bankruptcies, investors, whatever it is, know that market, so when the market shifts, you have the knowledge, you know who your clients are, you know who the competition is, you know the laws, the rules, and you know the marketing and the technology," she said. "Make sure that you specialize and really know what you're working on at the time and hopefully have a couple of different spaces where you can add value to the client."

In the case of Auction.com, EVP Rick Sharga, a panelist in the lab for the "Understanding Auctions" discussion, said his company has already begun the shift from distressed properties to non-distressed.

"When I joined Auction.com two years ago, I didn't join the company to be there to watch the last foreclosure property fall off the auction manufacturing line. I knew then, because I've been following foreclosures for 13 years now, that we were looking at what was going to be diminishing pool of properties," Sharga said. "So the notion was always to provide an online marketplace that provided a more efficient, more transparent, more flexible, faster way for people to buy and sell properties. We started on the distressed side because we were dealing with institutional sellers who were more sophisticated and less emotionally attached to a property. That's given us the opportunity to build out the process and build our technology to where we're ready to enter the consumer market. But the plan all along has been to be able to shift, as the distressed market gets smaller, into the broader, non-distressed residential retail market."

Diversifying to adjust for the declining inventory includes expanding product offerings, according to Beane.

"In addition to selling REO properties as an asset manager, we have a valuations division, we have an HOA division, we have our own technology for valuations, and we do multiple products in multiple arenas," Beane said. "We do origination evaluations and we do default evaluations. We're protecting ourselves in a cyclical/countercyclical economy, and based on the trends, we're able to cross-train our associates and grow our business through diversified product offerings in this industry. Protecting yourself by diversifying the approaching to the marketplace with different types of products is vastly important. It's the reason for survival."

Editor's Note: The Five Star Institute is the Parent Company of DS News and DSNews.com.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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