The Cost of Doing Business

This piece originally appeared in the November 2023 edition of MortgagePoint magazine, online now.

Editor's note: As we went to press with the November 2023 issue of MortgagePoint, the Federal Housing Administration (FHA) announced in Mortgagee Letter 2023-20 that it has increased the allowable property inspection fee limits for property inspections of single-family homes associated with defaulted FHA-insured mortgages. With these latest updates, the FHA has increased fees for certain allowable inspection categories, making its fee limitations consistent with those in use by other industry participants. Click here more information on that story.

The past few years have been something of a roller coaster ride for both the housing market and the overall economy. With the onset of COVID, the American government and mortgage servicers implemented numerous changes designed to allow a nation reeling beneath an unprecedented health crisis to ride out the storm and keep people in their homes.

As we emerged from the pandemic and the associated spike in forbearance, the industry has since been navigating less dire challenges, such as soaring housing prices, insufficient inventory, and both inflation and the impacts of the Fed’s attempts to slow it.

As we approach the fourth anniversary of the first time most of us ever heard the word “coronavirus,” COVID’s legacy can still be felt in the nation’s housing migration patterns, in the ripples of pandemic-driven career swapping, and in the ongoing push-and-pull between remote work and traditional in-office models.

At the nexus of all of the above trends, we find the modern property preservation and field services sector. Like every industry, it was forced to evolve rapidly to deal with these tides of history, and even now, it continues to navigate the breakers, striving to remain on its feet while being buffeted by forces beyond its control. Over these past few tumultuous years, many companies within this field have gone under or moved to the relative safety of alternative business lines.

Those who remain are battle-tested and committed to the critical work that property preservation provides, helping maintain and restore properties so they can be cycled back into the housing inventory, and provide someone with their slice of the American Dream. However, the waves remain, and it can often be difficult to stay on your feet.

One critical aspect of modern property preservation work is allowable fees: the amounts set by the government agencies/investors, per service or property, that give vendors the authority to proceed on a given task or project without bidding if the cost does not exceed the prescribed fee.

“For example, Freddie Mac has a fence repair allowable set at $500 to repair/replace damaged sections of fence,” recounts Tony Maher, EVP of Business Development, Cyprexx Services (founded in 1989). “If we can complete the work for $500 or less, we are free to proceed with the service without needing to stop and bid to the investor. This allows us to expedite and complete services faster with fewer trips to the property. Investors set and reset the allowable fees using available industry data and cost estimators that consider both labor and material costs for each service.”

However, the consensus from the vendors we spoke to is that those fees have not always kept pace with the realities and economics facing the business of property preservation.

“The bird’s eye issue is that a lot has changed in the industry, given that we are at a 40-year low in terms of defaults,” said Nickalene Badalamenti-Kalas, President of Five Brothers Asset Management Solutions, a field services vendor with nearly 50 years’ worth of experience. “All these things are contributing to the fact that gas is expensive, materials are expensive, people are driving farther, they’re driving in more rural areas, and all of this cuts into the expectation of what we’re able to do, for how much we’re able to do it, and how much time is required to do it.”

For this issue of MortgagePoint, we spoke with experts from across the property preservation industry, ranging from representatives of the Federal Housing Administration (FHA) and Fannie Mae to numerous field services vendors, including members of Five Star’s Property Preservation Executive Forum. While there are many headwinds facing this industry, the primary focus of this story is, as the name suggests, “The Cost of Doing Business.”

Join us for a deep dive into the challenges facing this sector, the areas where important progress has been made, and the areas where critical work remains to be done to ensure that this unsung hero of housing market stability continues to stand—no matter how rough the waves become.

An Uphill Climb
When asked to name some of the primary pain points facing property preservation in 2023, Maher immediately lists “tight margins, weakening vendor networks, and extended timelines.” The former can, to some degree, be tied to the same inflationary factors that have led to headaches and belt-tightening for companies throughout the nation. Simply put, things are more expensive, from the screws and bolts needed to secure a window covering, to the gas needed to get the contractor to the property. And while many of those we spoke to spotlighted areas of progress in recent months—see below for more on these wins—across the board, the vendors we spoke to all emphasized that allowable fees still need work and rethinking to help offset the larger economic factors that property preservation vendors are facing.

Another critical pain point ties back to the career shifts mentioned above: even with the so-called “Great Resignation” of the COVID era having largely died down, the field services sector is still dealing with the bleeding effect spurred by the pandemic and exacerbated by inflation and other economic factors. Some companies have shuttered or shifted to other business lines.

Longtime contractors have left this field of business in search of greener pastures. And those that remain are often stretched thin and have to balance their desire to continue doing property preservation work against the siren song of quicker, easier, or better money to be made elsewhere.

“Labor costs and competition for independent contractors have significantly increased,” said Michael Greenbaum, Chair of Five Star’s Property Preservation Executive Forum and COO of Safeguard Properties, a field services provider that has been in the industry for more than 30 years. “Whether that is entry-level positions in retail or restaurants paying significantly more, or the more complex roles of general contracting significant home repairs, the competition is fierce.” Greenbaum emphasizes that the fixed-price system of allowable fees must remain competitive with the larger market to attract and retain the labor needed to support it. When it falls behind, the work will be there, but no one will be there to do the work.

“The Gig Economy is our major competitor,” added Greenbaum. “That will only increase the tug on the finite and dwindling pool of independent contractors.”

“Our industry requires a specific skill set, which requires construction knowledge and the capability to supply a wide variety of services,” noted Bill Garrecht, President of Innovative Field Services, a field services provider for almost two decades. “The gamut goes from requiring the ability to install a roof, winterize a property properly, landscaping, electrical, plumbing, install windows, doors, etc. Those with these skillsets are in short supply, and where they do exist, they naturally prefer to perform retail work where they can dictate pricing. The current standard and allowable pricing leave us short of having the ability to hire personnel who have these skills. In addition, insurance cost and workmen’s compensation costs have skyrocketed in New York state, making it nearly impossible for new vendors to enter the industry.”

“Some groups estimated the turnover in vendor networks as high as 70% during this time,” said Maher. “While we are starting to see some new vendors enter the industry, some lack experience and there is a lot more touch and follow-up required to get the same services completed as in years past. This has, in turn, led to higher timelines and more return trips for QC corrections.”

Garrecht noted, “Another issue is that most properties are rural, far apart, and

have been in our inventory for 4-10 years. Besides landscaping, there is not much work left to be done on the properties. Windshield time has risen probably five-fold for our crews.”

Even if the industry can attract the workers needed, that overall lack of inventory will remain a challenge. A recent ATTOM report examining “zombie homes”—or vacant homes in pre-foreclosure—stands at only 8,903 units nationwide. Non-owner-occupied investment properties were found to total 23,638,105, of which 842,497 were vacant. ATTOM found that the national number of bank-owned properties totaled 14,989 of which 15.85% were vacant (or 2,376 units).

The report also reveals that 320,765 residential properties in the U.S. are in the process of foreclosure in Q4 of this year, up 1.7% from Q3 2023, and up 12.8% from Q4 2022.

While the trend lines are moving upwards, it’s a far cry from the inventory levels seen in the past, and many of the vendors we spoke to were insistent that, absent increased inventory levels, the headwinds discussed above will continue to hamper the prop pres industry unless issues such as allowable fees are further addressed.

Chad Mosley, President of the Mortgage Services division for MCS (founded in 1986), says his company has taken a unique approach to property preservation servicing with the rollout of a national self-performing network that also assists with recruiting and supporting local vendors “Over the last 18 months, MCS has built out an extensive network of self-performing capabilities in 25 markets across the country, employing a ‘hybrid’ model that combines our own experienced employees with an expansive network of thousands of local service partners. Within these markets, our own team members are able to assist with recruiting, vetting, supporting and partnering with the local service provider network, and ensuring work is completed as specified. Combined with our use of cutting-edge next-gen technologies, the initial results of this new approach to servicing show maximized efficiencies and substantial enhancements in transparency, quality control and code compliance, while also building relationships and helping to support our service partners who know the local market and perform the majority of our property preservation work.”

Mosely also noted, “MCS also applauds Fannie Mae and Freddie Mac for their continued leadership and proactive approach to addressing property preservation issues head-on. We look forward to learning of HUD’s proposed changes as well, which will benefit the sustainability of our entire industry and is instrumental in ensuring our clients’ properties are maintained and preserved to the highest standards.”

In addition to overall low volumes, Denia Ray, VP of Property of Preservation for ZVN Properties Inc., founded in 2004, also points to HUD’s Claims Without Conveyance of Title (CWCOT) program and Second Chance sales, which she says “avoids the conveyance process in its entirety, if there is a winning bid. The properties that do not sell are typically in poor condition and are in scattered and often rural areas, with no concentration in any one market. The investors have not adjusted their SLA [service level agreement] timeline expectations to account for these additional challenges.”

Maher echoed Ray’s concerns. “This is a significant challenge from a preservation standpoint due to the short timelines combined with the stagnant allowable fees.

The bid/appeal process with FHA can also be very cumbersome and time-consuming. The combination of these factors can lead to timelines surpassing the claims due date, which leads to additional liability on the servicers and field service companies.”

FHA, for its part, says it recognizes the need to recalibrate its fees and other processes to account for the realities of today’s market, while also balancing the need to maintain alternatives to traditional conveyance processes, such as its Claims Without Conveyance of Title program and “first look” REO sale options for owner-occupants. Sarah Edelman, Deputy Assistant Secretary for FHA’s Office of Single-Family Housing, said, “We’ve spent a lot of time over the last two years re-tooling our property disposition options to make them fairer for those owner-occupant buyers and non-profits.

But we are equally focused on making sure that these properties are well-maintained. That involves revisiting the allowable fees and processes for professional property preservation and protection.”

Working to Different Standards
One of the challenges outlined by those we interviewed was the simple reality that different participants—such as FHA and the GSEs—have different standards, processes, and allowable fee levels. This can mean that even when one of those agencies advances positive change on this front, vendor companies may still be facing the same issues with other properties as the expectations are set at different levels.

“Something as basic as removing a cubic yard of debris can vary from $40 (Freddie Mac) to $50 (FHA and Fannie Mae) to $60 (VA), depending on the investor,” explained Maher. “Reoccurring lawn maintenance also varies significantly based on lawn size and investor. Freddie Mac only uses two different fees based on lawns larger or smaller than 10,000-square-feet, while FHA has 12 different prices for these same lawn sizes, depending on the state. Recently, we’ve seen both of the GSEs re-evaluate pricing for a number of fees, including both inspections and some common property preservation items. These have been incredibly helpful, but because FHA has a larger proportion of the delinquency volume, movement from HUD and the other government investors would be incredibly impactful in aligning the industry.”

Greenbaum added, “All investors and insurers want to preserve and protect the vacant properties as they go through the foreclosure process. Overall, there are more similarities than differences, and the fundamentals are present in all guides.”

“Getting consistency in the preservation space would go a long way in solidifying the currently fragile business model to ensure the long-term survivability of our critical industry, which does more to stabilize communities than any of the other default providers combined,” said Ray.

Another thing many of the vendors and related industry trade groups are advocating for is a more consistent and regular review process to re-evaluate these fees and ensure they keep pace with the economic realities on the ground.

So, what are the evaluation and update processes already in place, where are there wins to be celebrated, and where does work remain to be done?

The Lay of the Land
Maher told MortgagePoint that updates to allowable fees have seen some improvement since COVID, if only due to the necessities of the momentous changes that the global health crisis required.

John Thibaudeau, VP, Single-Family Real Estate Asset Management, Fannie Mae, told MortgagePoint, “Operational and material costs, especially those that are influenced by inflation or supply challenges, are important for Fannie Mae to acknowledge with our vendors when pricing discussions arise. It’s important that our pricing is reflective of current market conditions as well as sustainable for our vendors.”

Edelman acknowledged the pressures facing property preservation vendors, telling MortgagePoint, “We know right now there are enormous economic pressures and that we need to adjust our current allowable fees. I can assure you that this work is in progress.”

Edelman also noted that, in between those updates, HUD will reimburse for actual vendor fees “where it’s reasonable.” She continued, “We have our contractors use a cost estimator service. If their servicers can submit the receipts for what they actually paid, the vendor uses the cost estimator, which is updated regularly, to make sure the fees are reasonable, and then we will reimburse [for these over-allowable fees].”

Edelman explained that HUD is currently using a contractor, ISN Corporation, which is FHA’s Mortgagee Compliance Manager, that checks fees against Blue[1]book to determine if they are in line and reasonable. The cost estimator tool HUD uses is updated quarterly and is calculated by ZIP code.

“Our communication with our Mortgagee Compliance Manager and daily communication with the servicers are important in making sure we are paying the correct cost for a repair or preservation,” added Edelman.

In the meantime, however, the vendors we spoke to were able to pinpoint several specific pain points where they feel correction or adjustment is needed.

“FHA is still using the same line-item allowable fees that were published in Mortgagee Letter 2016-02,” said Maher. “While FHA has made some adjustments to what services are included in the $5,000

cost limit per property, the line-item allowable fees remain unchanged.”

Ray focused in on similar problems, saying, “In the case of FHA … pricing is less than it was in the 1990s on some allowable line items. In 2008, HUD paid $50-$60 per CYD (cubic yard) in 25 states.

HUD currently pays 16.67% less than they paid in Indiana in 2008, despite the cost of living going up 42.96% over the past 15 years, which would level up debris to $85.77 per CYD today, using an average annual inflation rate of 2.41%.”

She continued: “HUD’s Occupancy Inspection (Exterior) was $20 in 2008 and has remained constant for decades,” Ray continued. “In 2008, HUD reimbursed $35 for the Initial Vacant Property Interior Inspection and $30 for Vacant Property Inspections (Ongoing). In Mortgagee Letter 2008-31, they paid $20. Any COLA (cost-of-living adjustment) wouldn’t take into effect the more rural nature of today’s portfolio, as well as record low volumes, which should also be considered.”

“If the allowable fees are not consistent with market standards, then the vendors will submit bids,” said Badalamenti-Kalas. “That means that the vendor has to do the paperwork in-office, they have to submit it to us, we have to process it, we have to upload it, we have to pull it. It’s more resources on our part.”

Edelman’s response to these pain points is encouraging. “We have heard from many in the industry about their challenges, and it is feedback that we have taken very seriously.” She added, “Looking at our P&P fee structure has been high on the list of priorities, and we’re hoping to make changes very soon that will get us to the point of reasonable operational alignment with others in the industry.”

Several of the vendors we spoke to were quick to spotlight recent changes implemented by Fannie Mae and Freddie Mac. “Fannie Mae was the first to increase inspection pricing based on their internal analysis showed that not only are their fewer properties in default, but also that the con[1]centration of these properties is drastically different than they were in years past. With properties four times as far apart as they once were, the drive times and subsequent gas and vehicle maintenance costs required to complete services have increased as well. It is critical that these fees are evaluated and updated regularly to reduce the number of bids required, eliminate unnecessary and additional property visits that drive up costs, and ultimately expedite the completion of necessary services.”

Ray also praised Fannie Mae’s recent changes. “They have raised initial and recurring grass cuts up to current market rates in most markets, which the industry greatly appreciates. They have also gotten closer to market rates on inspections and increased debris fees from $40 per CYD to $50 per CYD, which is unfortunately still below market rates. Freddie Mac has also adjusted some pricing on a temporary basis as they continue their analysis.” Ray also noted that the VA has raised their rate to $60 per CYD, “which is much closer to where our research shows it should be.”

Ray added that one of the reasons much of the vendor feedback inevitably circles back to FHA/HUD is simply because so many of the properties that field services vendors are working on fall under their purview.

Ray doesn’t hesitate to emphasize how critical this issue has become for some companies, saying she believes the industry is nearing a tipping point. “It is more fragile than I have witnessed in over three decades in the industry.”

Both Ray and others cited data accumulated by the National Association of Mortgage Field Services (NAMFS), which found that more than 80% of the property preservation vendors have exited the industry since 2018.

“Additionally,” noted Ray, “many national preservation companies have pivoted to the single-family rental space, which has less risk, higher margins, and a strong vendor base.”

Maher explained that Cyprexx and other field services companies have recently been working with the GSEs to explore the possibility of batching inspections into only one or two orders per month.

“This would significantly help in the rural areas where inspection companies often wait for an economical number of open inspection orders to come in before sending an inspector on a route that will require a lot of windshield time.” Unfortunately, this process leads to a higher percentage of overdue inspections. He continues, explaining, “With more rural and less concentrated properties, this population is starting to impact overall timelines and SLAs. If orders were concentrated into one or two bulk drops a month, the inspectors would no longer need to route and could perform more inspections on time.”

“Bidding work at a property requires a significant amount of field time and office staff time, none of which is compensated,” notes Garrecht. “Before the pandemic, you could absorb these costs due to the high percentage of approvals. That percentage has plummeted dramatically along with the loss of inventory. We pay our vendors to perform bids as we believe it is the only fair way to operate, but mostly because our local companies can no longer afford to provide these services for free.”

Badalamenti-Kalas also suggests that a system of prioritizing the work could be of assistance. “If everything is urgent, then nothing is urgent. So, prioritize the work orders. Prioritize what the expectations are. Certainly, it makes sense for high-risk work order types to be handled with expedience, but not everything has to be that way.”

Investor Response, Next Steps, and Wins to Celebrate
With several vendors spotlighting Fannie Mae’s recent positive changes, it’s no surprise that the GSE was eager to spotlight its processes and channels of communication. Fannie Mae’s Thibaudeau told MortgagePoint that Fannie “continuously [engages] with our field service vendors by meeting with them regularly, both individually and collectively, to ensure we keep an open dialogue with our partners in the field. These engagements allow our vendors opportunities to openly discuss roadblocks and make suggestions to address specific challenges they may be having.”

As for how Fannie Mae monitors and adjusts for evolving market and economic conditions, Thibaudeau said, “Fannie Mae is helping ensure that vendors are empowered to proactively address certain conditions while they are onsite at the property completing other services. We do this by utilizing expense allowables to address common maintenance needs, necessary repair services, and safety hazards. Expense allowables help our vendors address issues at the property in real-time while avoiding potential delays in bid submission and incurring additional cost due to the need to return to the property.”

In 2018, Fannie Mae launched its Pre-Foreclosure Preservation Program, which offers servicers the opportunity to allow Fannie Mae to handle the management of inspection and preservation activities on delinquent loans secured by vacant properties.

Thibaudeau explained, “Our program utilizes a national network of vendors that help standardize the preservation of these properties in our portfolio. This initiative reduces complexity for servicers, creates savings for borrowers and servicers, and standardizes end-to-end property management. It also allows us and our vendors to benefit from lower costs through economies of scale.”

Edelman noted several recent policy changes FHA/HUD have rolled out: “We recently put out a new policy on ADUs to allow borrowers to be able to count prospective rental income. We’re going to be hopefully rolling out some proposed changes to our rehab loan here soon. We’ve also been working very hard on loss mitigation/HECM, and you’ll begin to see a lot hitting on those things. It’s a constant balance of priorities, and we are looking at the allowable fees. In the meantime, we’re trying to make sure that we have a functioning workaround so that folks are getting reimbursed for reasonable fees, continuing to make sure that works while we get to updating the fees.”

Editor’s note: MortgagePoint reached out to Freddie Mac for comment on this piece, but they did not reply as of press time.

What’s Next?
Maher said that the recent adjustments to Fannie and Freddie’s pricing structures have helped jumpstart this conversation across the industry and are helping to stabilize and rebuild vendor networks.

“It was a great start towards a sustain[1]able industry for preservation field service companies, and we’re hoping to see FHA join in,” Maher said. “It takes all of us working together to preserve and protect default properties, and we appreciate the opportunity to discuss current challenges and work together on solutions.”

Ray is hopeful that the needed changes may be on the horizon but also quick to lay out the stakes involved.

“We are cautiously optimistic there will be a paradigm shift soon, before it is too late,” she said. “Our industry plays a crucial role in stabilizing communities. Without us, the banks and servicers cannot preserve and protect their portfolios, like the investors require. If this were to occur, the consequences would be dire and would detrimentally affect all stakeholders, with the most significant impact to the communities, causing neighborhood blight.”