Reminder: Rehab REOs to increase profits

Don't sell property "as is"

I read with a great deal of interest an article appearing in Mortgage Servicing News on Aug. 31st, penned by Glenn Brooks, senior vice president of Fay Servicing, titled, “Why REO Rehab Is Making a Comeback.” In his piece, Mr. Brooks proffered the opinion that, “Real estate owned property managers can differentiate themselves and earn more business by bringing focus back to distressed property rehabilitation.”

Mr. Brooks’ article makes the case for why REO asset management companies should again make property improvements on their clients’ REOs to enhance curb appeal and potentially increase net asset recovery, since the Tsunami of foreclosures has subsided. While this change would potentially benefit these REO groups, emphasis should also be placed on the benefits to the lender, servicer, and investor clients: Decreased holding time and increased net asset recovery. After all, mortgage loan servicing is a margin-driven discipline.

While in most “normal” housing markets foreclosures amount to between 1 and 2% of all mortgages, delinquencies during the recent housing bubble topped 10%. This overwhelming and rapid growth caused immense pressure on REO groups, which, as Mr. Brooks pointed out, caused internal and external third-party REO asset managers to turn away from rehabilitating the vast majority of REOs in order to dispose of these distressed properties in a timely manner, despite the deep discounts associated with selling REO properties in their as-is condition.

As the default capacity and inventories of REO properties stabilize, at least in the short term, the servicing and asset management organizations involved in the mortgage default arena need to look once again at each REO property on an individual case-by-case basis to determine if rehabilitation and/or property improvements are the best marketing strategy for each property.

As a former vice-president-REO manager for three of the nation’s largest mortgage lenders, we found that strategic rehabilitation of properties in markets that made sense to do so dramatically decreased days on market, while increasing net asset recovery. And with respect to rehabilitation, in some cases this meant only paint and carpet. But in other, more upscale markets it could, and did, include remodeling an outdated kitchen or master bathroom, structural enhancements, a new roof, upgraded cabinetry and countertops, enhanced landscaping, and other improvements that brought these properties up to, and sometimes above, neighborhood standards.

As Mr. Brooks also pointed out in his article, in many neighborhoods, bringing properties up to Federal Housing Adminstration lending standards can also expand the buyer pool. This is particularly important as FHA loans have proliferated over the past several years. In addition, as reported in HousingWire and other media, Freddie Mac and Fannie Mae are soon going to be competing with each other to make lower down payment loans, which typically require houses to be sold up to FHA standards. While one can question the soundness of the direction Freddie and Fannie are headed in that regard, it is going to happen

In Trey Garrison’s recent article in HousingWire, “Are REOs ready for a comeback?”, the noted housing industry analyst and reporter quoted a new report from Clear Capital that suggests that REOs and even short sales may be on the rise again.

The information contained in Mr. Garrison’s article is important because, as I have been pointing out over the past several months, there are growing signs of another economic calamity and related housing bubble on the horizon. This next bubble is not “expected” to be as large as the one we experienced in 2007-2008, but it will be significant.

The volatility of world markets, most notably in China, but also in other parts of Asia, Europe and here in the U.S., as demonstrated by the roller coaster activity on Wall Street in recent weeks, seems to support my above-stated observation.

And the best news of all for REO groups today is that the latest and greatest, robust real estate-related technology platforms make management of the rehabilitation process easier than ever. When coupled with streamlined processes, policies and procedures, and other management tools in place, seasoned REO groups deploying a state-of-the-art task tracking and work flow system can now develop and maintain rehabilitation and property improvement strategies that can keep up with cascading increases of foreclosures. This will ensure decreased holding time and increased net recovery on REOs that are sure to make a comeback – soon.


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