As the foreclosure crisis continues to shrink in the rearview mirror, many in the mortgage industry are starting to breathe easier. Default rates have been dropping steadily and most forecasters expect that trend to continue. By all accounts, our industry is moving well into the recovery.

For some players, including the nation’s banks and capital markets investors who have invested heavily in distressed loan portfolios, this is misleading.

While it is true that zombie foreclosures, which have posed such serious problems in some jurisdictions that state legislatures have been moved to pass new laws, are on the decrease, recent reports in the trade media put the number of zombie foreclosures down 9% from the third quarter of 2015.

Unfortunately, this drop in vacant properties that have yet to be foreclosed is balanced by a rise in bank owned real estate. RealtyTrac's parent company ATTOM Data Solutions reported in September that the percentage of vacant bank-owned properties is larger now versus a year ago as banks are completing more foreclosures. To some degree, this is an “out of the frying pan and into the fire” sort of situation.

According to a HousingWire story, Attom found 7% more vacant bank-owned at the end of the third quarter. That’s up 67% from 2015, with an estimated 46,000 zombie foreclosures still lying dormant. Without residents living in the bank-owned homes, these properties pose much more serious risks to the bank because property preservation is more difficult and costly.

While REO sales have been decreasing since the crash, Servicing Management reports that at 7% of all distressed sale activity, it’s still double the pre-crisis amount of 3%. This is still a big problem for servicers.

Capital markets players that invested heavily in distressed pools have also been working through their portfolios, which has increased the REO inventory they’re holding. These investments are made in the knowledge that many of these assets will be returned to the market, hopefully at a profit. Every day that REO remains unsold costs these firms money. Choosing the wrong asset management and REO disposition partner can quickly erase the profitability in these portfolios.

Bank and capital markets executives understand the challenges inherent in properly managing this process, which led to a standing room only crowd for the REO Lab at this fall’s Five Star Conference and Expo. Speakers from all over the industry offered their best advice for dealing with what will likely be an increasing load of REO inventory in the short term.

“I think that people are realizing the market may shift again, and if you’re ahead of your game and paying attention now, if it shifts, and your knowledge is there, you’ll be able to handle that industry, I think REOs will come back—not the way they were when the market shifted in 2008, 2009, and 2010,” said Joyce Essex-Harvey, an agent with Coldwell Banker Residential Brokerage and one of the speakers in the lab, according to an article in the MReport.

Getting outsourced REO disposition right

The days of financial services companies believing they are large enough to handle every function on their own are long past. Today’s most successful companies find partners they can trust to outsource those functions that are not core to their business. As you would expect, that means that both banks and capital markets firms are seeking out third party experts to handle their asset management and REO disposition functions. We’ve already witnessed an uptick in our business in this area and we expect it to continue throughout 2017.

Failure to choose the right third-party business partners is risky. Even if the CFPB wasn’t holding the company accountable for every action taken by the third party (which it is), the risk that inexperience could lead a partner to make a costly mistake is very real.

Buyers of outsourced asset management and REO disposition services must have partners that can help them (1) cut costs, and (2) vastly improve performance. Adding efficiency to these processes actually creates value for the buyer, which explains why firms shopping for these services take such care in the selection of their partners.

While suggesting that time and money are the key metrics on which to base a new partnership may seem simplistic, choosing a partner that cannot deliver savings in both is a bad decision. But what does it take to deliver efficiency affordably? How can the buyer know that a partner is truly capable of delivering them both?

The right partner must help institutional sellers both minimize costs and maximize returns. It requires significant and specialized human and technological resources to move a firm’s foreclosure assets from sale to closing and liquidation at a high rate of speed -- and at a higher return.

Choosing such a partner can be difficult if you don’t consider all of the elements that go into delivering on the promise of better execution with lower costs. Servicers are advised to perform due diligence on any partner and find out how any prospective partner plans to offer both.