Not long ago, default rates required that mortgage servicers partner with field service providers capable of managing large volumes of distressed properties, many of which languished in foreclosure for years.
With the number of properties in default declining and overall volumes shrinking, the future of default servicing will require a more programmatic approach. Moving forward, the strategy will focus on cost control and operational efficiencies. This new approach is especially important when managing portfolios of vacant, damaged properties in the default cycle that are insured by the Federal Housing Administration.
One company, Superior Home Services, offers the experience and solutions to manage remediation of damaged properties with a focus on reducing the amount of corporate funds needed for repairs. Superior has pioneered the only programmatic solution for managing damaged FHA properties in default and that solution has stood the test of time for more than 30 years.
“It is a completely unique approach to a long-standing problem, and combines the expertise of managing the hazard claim recovery in synergy with the property repair process,” said Dave Cook, president and CEO at Superior.
“To fully understand the rationale for applying this type of programmatic approach, you need only examine how the typical hazard insurance contract operates, specifically how the recoverable depreciation and overhead and profit benefits can be utilized to mitigate servicer costs,” Cook added.
Under a dwelling policy, every hazard claim settlement is subject to depreciation. The insurance company settling the loss depreciates the value of the claim because the items that need to be remediated or replaced have a decrease in value based on age, decay or wear and tear. Unless the repairs are completed, the insurer will withhold money from the settlement funds. That withheld money is called recoverable depreciation. Accordingly, the money a servicer obtains from a hazard claim settlement is the cost to repair or replace the damaged property, minus depreciation, which is referred to as the actual cash value (ACV).
When mortgage servicers repair the property to the adjuster’s scope of work, the servicer can then claim the recoverable depreciation as long as they remediate within the time period allotted by the insurance policy. This approach yields two benefits: It limits, if not offsets, the corporate contribution that many servicers incur in property remediation; and by securing the recoverable depreciation, the servicer has verified that it has completed repairs pursuant to the adjuster’s scope of work.
Release of the recoverable depreciation not only offsets corporate costs; it confirms that the servicer completed all the work according to the adjuster’s scope, aligning perfectly with the FHA’s latest requirement to convey properties to the U.S. Department of Housing and Urban Development.
If the servicer does not repair the property according to the adjuster’s scope of work, the servicer has accepted a fraction of the money available to it under the insurance policy to remediate the property. Additionally, the property must still be repaired and the costs to do so in the future will likely require corporate contribution.
Superior, which was founded in 1984 by David and Bobbie Cook, has pioneered the process of managing hazard insurance claims to ensure that the servicer is made whole after a vacant property suffered a loss. This includes not only recovering the ACV, but also a process to recover the recoverable depreciation (RCV) along with the overhead and profit component. The overhead and profit piece is how Superior is compensated for the work that they do on behalf of the servicer. Ideally, the servicer’s only cost to remediate the property is the deductible amount of the insurance contract.
“Superior understands the time and expense associated with remediation of these properties,” Cook said. “Accordingly, no other vendor can better represent the mortgagee’s interests in the hazard claim process and remediation process than Superior.”
Superior’s field services network is designed with the ability to identify the difference between insurable damages and damages that must be dealt with to satisfy HUD conveyance requirements.
Traditional field networks are built to execute high-volume, high-frequency tasks such as lawn maintenance, securing the property, or doing inspections, and are paid according to work orders that specify exactly which tasks need to get done.
In contrast, Superior’s national network of vendors is equipped to work on bigger, high-dollar jobs where contractors work on draws. Instead of mowing lawns or changing locks, Superior’s vendors may work on one house for a month and perform more significant repairs.
“When you hire Superior to manage insurable repairs, or put a property in conveyance condition, or to do both, we know what needs to be done and how to address those specific, unique issues. Our field network understands the process, understands the expectations of an insurer and those of HUD, can work off a draw system, and has the experience dealing with complex municipal regulatory requirements. Our program is structured to complete substantive repairs,” Cook said.
Many of the providers in Superior’s field network are general contractors, or have been independent single-family homebuilders. This kind of prior knowledge and experience means Superior field vendors know how to work with municipal regulators as they cure code violations and satisfy code upgrades.
“When considering the number of parties involved, the need to adhere to the required timelines in managing the insurance claim, and bringing a vacant property back to a conveyable condition, it only makes sense to leverage a technology-driven platform. To leverage a process that provides transparency, communication, and a managed workflow. That is exactly the value proposition we offer at Superior,” said Cook.
In a recent example of this kind of high-level service, Superior’s office received a call from a client addressing a re-conveyance in New Jersey. During the default process, the property suffered damage and had received several code violations from the local township. Superior’s office was able to file a hazard claim on the new damages and address the code issues with the township enforcement representatives, as well as the building department. The company was able to remediate the property to meet regulation and code requirements in just one estimate.
“We were able to, with one estimate, remediate the property to the satisfaction of the local regulatory bodies, offset corporate expense by addressing some of the damage with hazard claim proceeds, and place the property in conveyance condition per HUD standards,” Cook said. “As a result, the mortgagee was able to convey the property according to HUD guidelines.”
Superior’s expertise in FHA defaults ensures that its clients are well prepared to receive the full benefit of the hazard claim, which is crucial in an environment where servicers are looking for increased efficiencies and ways to reduce the overall cost of servicing default loans.
“Our clients are ecstatic about our repair contingency program,” Cook said. “Many default managers in a conveyance department, or sometimes in a REO department, must account for any corporate expenditure in property remediation. Our unique program provides a mitigation and conveyance solution without the need to justify corporate contribution and third-party fees.”