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New Year’s REO Solutions

*_Results-Based Strategies for Managing the Bulk of Business That '09 Left Behind_*


As the mortgage default servicing sector launches into 2010 after an eventful and at times tumultuous 2009, leaders and decision makers are devoting time to strategic planning and related budgeting efforts. While this exercise is decidedly routine, economic conditions and real estate market dynamics are anything but, which means the industry must strategize effective means of managing projected delinquency rates and related default volumes.

One practical outcome of the government-led foreclosure prevention efforts and focus on loss mitigation alternatives has been a decrease in the rate of completed foreclosures and the related inflow of new REOs into lender/servicer and investor portfolios. This “lull” in activity levels has created various challenges for the default industry segment, including asset management vendors, title providers, property preservation companies, and real estate agents/brokers, who all exist to support and manage the timely disposition of REO assets. Even well-established entities with staffing and infrastructure in place to manage higher asset counts are facing excess capacity and, in some cases, having to reduce staff via attrition and/or layoffs, while newer groups that have entered the market during the past 12 to 18 months have found it difficult to gain traction.


There is a clear and consistent expectation among industry leaders that REO inventories will begin to rise again late in the first quarter/second quarter of this year and remain at heightened levels through 2011, primarily as a result of the following well-publicized factors:

* Volume of option-ARM loans scheduled to reset in 2010, many in markets where values have declined and borrowers are underwater
* Continued high levels of unemployment
* Limited success rate of the government-initiated foreclosure prevention efforts (i.e., HAMP), as well as “shadow inventory” of borrowers not eligible for these programs and where foreclosure appears to be inevitable
* Impact from newer short sale incentives, which is expected to be limited by ongoing process inefficiencies


So what are REO service providers doing to maintain performance levels and position themselves for the anticipated changes in the coming year? Here are a few best practices:

1. *Training* » Prioritizing training initiatives is a logical and effective use of available time and resources. Many asset management vendors are focusing on cross-training to increase depth across the organization, as well as expand career options for staff. One such provider is offering voluntary sessions each week for various functions (i.e., employees attend on their own time), and participation has been active. Industry resources like The Five Star Institute have expanded course offerings aimed at equipping real estate agents and brokers with tools and knowledge required to successfully market distressed and REO properties.

2. *Automation/Process Improvement* » Many servicers are using this period to evaluate systems and implement technology solutions designed to automate manual steps and create a common platform in response to industry consolidation. Various software applications are being leveraged for their ability to simplify vendor management processes and create effective workflows across default servicing functions. Some organizations are utilizing Six Sigma tools to analyze processes that may currently involve multiple handoffs to create more efficient approaches, introducing higher levels of discipline and better controls that will serve them well in a higher-volume environment. Finally, the never-ending migration toward paperless processes continues, with a greater emphasis on green initiatives.

3. *Over-the-Top Service* » It’s a fairly simple concept: Take advantage of lower work/caseloads per full-time equivalent (FTE) to improve performance and “over deliver” on client expectations. One common method of


vendor management is the “champion challenge” approach, where a given scope of work is divided between multiple providers. This strategy can help competitively position a vendor to capture a higher percentage of available business, both in the short and long term. Keep in mind that client expectations will need to be actively managed as volumes pick up and workloads return to more normalized levels, along with related service/performance metrics.

4. *Business Continuity* » This nascent period can allow for the most thorough and comprehensive disaster recovery testing possible, which in turn can be leveraged with existing and prospective clients, auditors, rating agencies, and other similar entities.

5. *New Strategies* » Devoting the time, resources, and effort required to evaluate and pilot a new strategy can be difficult in a high-volume environment, where other competing priorities tend to take precedence. But it is possible. One servicer, for instance, that has historically managed REO title and closing functions in-house is planning to engage with a national provider to evaluate that model and benchmark results against the current approach.

Many investors are implementing rental strategies for selected REO properties in key markets as an alternative to selling at current market prices, with some considering a “rent and hold” approach and others piloting “lease with option to buy” or “rent to own” programs.

The current and anticipated level of distressed residential single-family properties across multiple states is driving a shift in investment strategy beyond more traditional regionalized, concentrated portfolios to a broader footprint. Several service providers have emerged that can handle lease administration and property management on a national basis in response to this developing trend.

5. *Vendor Performance* » Now is also an ideal time to thoroughly review vendors, their related performance, and their future capacity. Onsite and/or field visits and joint process reviews are a few items that may be overdue and worth considering. This might also be a good opportunity to engage new vendors for functions where volume/workload is expected to spike in coming months, ensuring adequate time and resources are earmarked for their implementation and thereby increasing the likelihood of success for all parties involved.


Besides assessing their organizations and getting a firm grip on all of their moving parts, savvy service providers also should employ these practical pledges to upload servicing successâ€"and offload stressâ€"in the dawning decade.

1. Consistently treat borrowers, and each other, with professional courtesy and respect in all interactions. And while this sometimes is easier said than doneâ€"especially given the levels of stress and pressure inherent in the processâ€"it’s a goal worth striving for nonetheless.

2. Leverage available industry resources to the fullest extent possible, enabling servicers to maximize performance and contributions on behalf of borrowers, clients, and investors. This includes more traditional sources such as trade publications, conferences, and roundtables, as well as social networking sites like LinkedIn, etc. Informal networking can also be effective, such as capitalizing on situations that may arise in the normal course of business to develop industry relationships.

3. Never lose sight of the ultimate investor who owns the distressed assets that are being serviced and whose bottom line is directly impacted by any and all decisions made pertaining to those assets. And pursue optimal recovery scenarios for those investors, within the constraints of federal and state programs/regulations, as well as pooling and servicing agreements for securitized portfolios. Balance both objectives with the clear commitment to help delinquent borrowers remain in their homes, given that those borrowers demonstrate both the ability and desire to do so and are willing to take the steps required to facilitate a timely resolution (i.e., loan modification, short sale, etc.).

4. Ensure that strategic decisions consider the need for housing price stabilization and community preservation across many of the country’s real estate markets. This is an area where the industry has the opportunity to partner with government agencies and various nonprofit organizations to define and implement strategic solutions that can and will support efforts along the economy’s road to recovery.

Sure, resources will continue to be stretched thin and the industry’s collective knowledge and experience will be put to the test yet again in the New Year, but if everyone works together and follows through on their goals, resolutions will turn into results.

About Author: David Tiberio


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