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Talking in Codes

*_Continuing Communication Is Key to Navigating REO Code Compliance with Suppliers, Communities, and Other Related Entities_*

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If ever there were a time for candid, cooperative dialogue between default servicing professionals and the partners with whom they do business, that time is now. According to housing data released by Lender Processing Services Applied Analytics in late May, banks currently hold more than 1 million REO properties. Many industry experts warn that this number will likely increase significantly during the next several years. As REO inventories rise, so do the holding costs. One such cost is the potential financial impact to servicers related to municipal code violations and nuisance abatement.

Local, state, and county governments faced with increasing blight and decreasing revenues have made this challenging issue one of their top priorities over the last several years. Demanding legislation and diligent enforcement strategies are becoming more prevalent. Property owners increasingly face the possibility of significant financial penalties, criminal sanctions, and negative publicity with potential or pending code violations.

Each municipality, county, and state has its own view of appropriate community standards and faces unique challenges related to maintaining such standards. The result is myriad unique and differing legislative and enforcement strategies. As a result, tracking and compliance are difficult tasksâ€"tasks further complicated by the lack of a local servicer in the communities in which REO properties sit.

A critical component of an effective compliance strategy is building relationships and communication between the servicers’ REO departments, their local REO suppliers that are managing the servicers’ REO properties on the ground, and the municipalities that govern the areas in which the properties are located. Therefore, beyond the standard due diligence around service capabilities, there are two key questions every servicer should ask its REO suppliersâ€"be they field service companies, bankruptcy/foreclosure attorneys, or REO asset management providers: What processes are in place to open and maintain lines of communication with municipalities, and how does the supplier work with local officials to ensure accessibility and servicer code compliance?

*OPENING THE LINES OF DIALOGUE*

If communication with municipalities is a critical element in helping keep REO properties compliant with local government codes, then how can servicers ensure that positive and professional communication takes place? It may seem to servicers that some local officials are adversarial and unwilling to work with them to ensure that codes are both effective and reasonable. Nevertheless, the best way to foster a beneficial relationship with local officials is through an intentional, sustained community outreach initiative.

Especially for servicers with properties in multiple jurisdictions, one option is to work with REO suppliers that have vast networks of their own that are vested in the local communities and often have existing, working relationships with local officials. Servicers are then able to harness the expertise and local presence of a network of professionals sensitive to the issues local governments are dealing with and collaborate with them to ensure that REO properties remain compliant with local codes.

When working with their REO suppliers, however, it is important that servicers evaluate how active their REO suppliers are when it comes to community engagement and determine whether or not relationships with local officials are already in place. It is also a good idea to know as much as possible about the nature of those relationships, including who specifically the REO suppliers work with and what role their contacts play in the jurisdictions where servicers do business. Servicers should also know the nature of the relationship; for example, field services or asset management companies should be in regular communication with the code enforcement officials.

*PROACTIVE VS. REACTIVE*

There are two main methods by which servicers and their REO suppliers can handle code enforcement issues: reactively and proactively. Of course, when a code violation is issued, the servicer and its REO supplier must react to remediate the issue, whether that means an attorney must appear in court to litigate the matter or a field service representative must respond to address maintenance issues at the property.

However, while a reactive response is necessary when a complaint has been made or a citation issued, it is far better for servicers, in concert with their REO suppliers, to approach the matter of code enforcement from a proactive standpoint. A proactive approach will bolster servicer

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efforts to avoid or minimize the risk of loss associated with code violations. When the lines of communication between municipalities, servicers, and their REO suppliers are good, code officials are more inclined to reach out to the servicers and REO suppliers before acting in order to provide them an opportunity to remediate outstanding issues.

Rather than immediately assessing fines or abating the violation for which the servicer will ultimately be responsible, local officials may reach out to the servicer’s REO broker, foreclosure attorney, or field services company and let them know there is a problemâ€"if the relationship and communication has already been established. This allows REO suppliers to be informed of the issue at hand, consult with the servicer on how best to address the issue, and work with local officials to resolve the problem in a mutually beneficial way.

*THE CASE FOR COMMUNICATION*

While code violation citations naturally generate revenues, the code enforcement efforts in most jurisdictions are driven primarily by a strong desire to maintain community standards and to address citizen complaints. Often, it is the complaint from a neighbor that a propery has fallen into disrepair or is overrun with grass and weeds that sets the whole process into motion.

For local officials, knowing that a servicer works with REO suppliers empowered to resolve issues is a tremendous advantage. These same REO suppliers are also key to fostering the open and timely communication that is essential to a workable relationship.

Over the past three years, the default servicing industry has begun to actively reach out to code enforcement officials and policymakers to discuss the compliance challenges the default servicing industry faces. In so doing, the industry as a whole has succeeded in alleviating some of the frustrations and constraints that have plagued both local governments and servicers.

By actively seeking the input of local government, the industry has also been able to help communities save the time and money required to initiate and complete the code violation process. From the initial property inspection by a code enforcement officer through the associated court proceedings, incurred costs to a city equate to approximately $3,000 to $4,000 and 10 hours of code enforcement time. At the end of the day, the city may obtain compliance and/or some fines but only by expending a great deal of time and money in a situation where both resources are at a premium.

At the same time, by simply employing a field service company, REO broker, asset management company, or attorney who has opened the lines of communication and is accessible, an immediate response becomes much more likely. When code compliance is the goal, this is a far more attractive process and outcome for everyone involved. The vast majority of code violations fall into the REO supplier’s normal scope of operations that are dealt with as a matter of course anyway, such as cutting grass, clearing yards, and securing properties.

By demonstrating to the city that these issues will be dealt with expeditiously, suppliers can also help officials make sure citizen complaints are resolved while preserving their neighborhoods and protecting them from blight. It’s remarkable how receptive officials can be when they know that one phone call to the servicer’s REO supplier can solve the problem, save money, and swiftly achieve compliance. This is much more attractive to local governments than writing tickets and pursuing litigation.

*ASKING THE RIGHT QUESTIONS*

It is extremely important that servicers employ REO suppliers that not only understand the importance of relationships with municipalities but also have proven methodologies for doing so. Servicers should make this an important part of their due diligence process with any REO supplier they work with or are considering. The issue is very important to the communities where they do business and may impact the reputation and profitability of the servicer as well.

Specifically, servicers should ask for case study examples of how an REO supplier works with communities, especially where servicers have the most properties at risk. Servicers should request a list of the cities where an REO supplier maintains the strongest relationships and then ask to be put in contact with a key official in that city. It will become very clear to the servicer whether the REO supplier’s stated relationships match reality on the ground. If they do not, it may be time to look elsewhere.

Equally important is evaluating the REO supplier’s overall strategy for addressing code violations and ensuring that the supplier has dedicated the necessary people, processes, and technology to the strategy in order to ensure successful execution of the servicer’s stated goals.

Unfortunately, current conditions in the real estate market appear likely to persist for some time, and the volume of REO is significant in some areas and staggering in others. Servicers must work with REO suppliers that can provide excellent service and support servicer efforts to protect asset value and condition. But servicers must also understand the vital importance of working closely with local communities to make sure problems are resolved and that officials are up-to-date on what servicers and their REO suppliers can and cannot do as foreclosures work their way through the legal system. Ultimately, communication is the key.

About Author: Rob Hicks

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