Borrower defaults have become a proverbial ‘pig in the python’, and for Reynolds, who leads the default and REO service provider’s strategic planning efforts, understanding where the market is headed is critical. Jon Prior takes some time with the LAMCO’s director, putting a number on the amount of hidden REO inventory out there, and just where in the pipeline it may be. You recently launched a new REO liquidation system. Are these free-market solutions more effective in dealing with foreclosed properties than government-incentive programs that slow down foreclosures? Our unique REO Liquidation Management Process is designed to enhance the ability to manage the REO disposition process with the targeted results aimed at reduction of holding costs, legal and media risk mitigation and the increased speed of liquidation for our clients. We assist our clients in streamlining their default and REO processes to avoid the slow down you speak to. Fortunate or unfortunate, the design of “slowing things down” is aimed at allowing the institutions that hold foreclosures the ability to get their arms around the mounting problem.  LAMCO’s solution is in place to facilitate the liquidation process as timely and safely as possible once the REO asset has passed through the “incentive bottleneck.” You have a good perspective on the size of the foreclosure inventory. How big is it, and is there enough market demand for discounted homes to burn through the inventory? Our resources shed light on a shadow inventory of 7m homes nationally, and the10.9m homes that carry an average negative equity of $68,000. All of these numbers are poised to increase as the negative equity (primary driver), high unemployment, as well as foreclosure holding times increase from 18 months headed towards 24 months. Government incentives and other measures that slow the process down just delay the inevitable. The demand or appetite of acquiring distressed assets today is currently coming from small or independent investors, an opinion that’s validated by the types of liquidation processes that are prominent today, traditional sales and auctions. About how much of the pie do the independent investors make up? One auction company told us that 90 percent of all of its sales are from independent speculative investors acquiring one or two homes at a time, as we experience the same type of buyer from a traditional sales perspective. This type of liquidation alone will not make a dent in the looming inventory. This raises the assumption of additional outlets for liquidation, such as a  “bulk acquisition” model that can move inventory at a much more rapid pace. However, bulk acquisition only moves the problem from the banking institutions plate over to the “investment house” plate with the problem still needing to be addressed. It’s a problem that could then worsen as “dumping” properties quickly would lead to further property value depreciation and will drive increased negative equity, which leads to even greater foreclosures. We truly have a problem here. REO supply is going up, but housing prices seem to be recovering and gaining ground. How is this possible? The coloration of REO supply and housing price increases must be looked at very carefully. The supply of REO, as noted in opinions of a shadow inventory of 7 million homes that have not hit the market, should be a significantly weighted factor as to what is to come and the effect it will have on home prices when that occurs. There are many factors that need to be considered, such as the impact of realized balance sheet losses, compensation structures, legal risk, moral hazard and others that skew the reality of a housing price increase. A word to the wise would be to do your homework thoroughly if you are planning to acquire REO property as an investment. Where is it toughest to sell REOs due to regulations or a lack of supply? All states have their problems when it comes to REO. Increasing compliance regulations in all states create hurdles for the REO holding entity, fines, registration; lawsuits have everyone “on their toes” at this point. Example, selling REO properties at a significant discount could lead to a municipality creating a lawsuit based around an REO discount sale that devalues a neighborhood or county, with the finger pointed at “bad lending practices.” All entities liquidating REO property should consider these risks and approach methods of liquidation with caution. All states are equal from this perspective. How will an REO service company like LAMCO adapt to a market that will eventually burn through this enormous stockpile of bank-owned property? LAMCO has been in business for 20 years and has endured many real estate cycles. This one is no different, just much larger. Being there to help our clients and positively impact the economic recovery by expediting the REO process has always created a long term and loyal customer base.  REO is not something that just goes away; it will always be here and so will LAMCO. Best practices in operational management, business diversification and quality maturity systems keep a company alive, not just a good product and being in the “right place at time.” Entities holding REO should evaluate their outsourced business partners by more than just what services are offered, but by the fundamental and proven business practices that are in place to keep the REO holding entity out of harm’s way and limit financial risk. Write to Jon Prior.