Richard Powers is the senior vice president of real estate sales for Altisource Portfolio Solutions
, a leading provider of real estate, mortgage, asset recovery and customer relationship management services. For this episode of In This Corner
, Richard explains why the shadow inventory of homes could double from the S&P estimate, and what the industry plans to do about it.
Defaults are up, but foreclosure sales are down. How big is the pig-in-the-python going to get?
One thing is clear: the pig -- at about half a trillion dollars -- is already pretty darn big. But predicting just how much bigger it’s going to get is tough because doing so would be an attempt at economic forecasting, a dicey proposition at best. So let’s talk about likely ranges. S&P estimates that the number of foreclosed homes and seriously delinquent homes that have yet to reach the market represent 33 months of supply
, including re-defaults. This assumes current levels of absorption in the $160 billion per year range. The elimination of the federal home buyer incentives, a deterioration in the job market, and rising interest rates all could have a dampening effect on absorption and a corresponding increase in the number of properties that will ultimately have to be liquidated. Therefore, in a worst case scenario, the total amount of shadow inventory could be much higher, perhaps as much as twice the number that S&P recently forecast.
So, asset managers are under some pretty serious pressure to not only manage the sale of the assets but the rate at which they go out the door. What works and what doesn't work for AM's looking for that perfect blend?
This is something we have to confront every day, and the bias is different for each of our servicer and investor clients. In a perfect world, each property would be sold in a day at the highest possible price. However, we have yet to stumble upon this nirvanic state. What we have done is run a variety of test and control scenarios that allow us to optimize the relationship between proceeds and sale time. This analytic approach has helped to determine the “right” listing price, rather than simply defaulting to a broker price opinion (BPO) or internal reserve price to establish the initial market exposure price. We have also steadily improved process and throughput to reduce cycle times. For example, we have automated a client’s rules into our system and in so doing have obtained delegated authority for many decisions that would otherwise involve hand-offs required for securing marketing or repair approvals.
Are there enough buyers waiting for those homes?
It would seem that, based on the current economic environment, the answer would be no. Of course, a further decline in home prices would help in one regard: demand. But on a macro level, it would only make matters worse as declining home prices would put even more pressure on defaults. Conversely, a sustained drop in unemployment and improvement in the economy would not only stabilize home prices but increase demand as well. While we can all hope for the latter scenario, we should also prepare should the outcome prove thornier over the next few years.
For those wise enough to prepare for the worst, what new innovations or strategies are some asset management firms using to liquidate this huge overhang of REO inventory?
Asset management firms are using short sales and deeds-in-lieu, as liquidation alternatives, as they often deliver a much higher net present value than the traditional REO sales process. As you might imagine, we are utilizing these approaches much more extensively, as is much of the industry. It goes without saying that finding a balanced solution that allows a borrower to remain in his or her home is the first and best option, where appropriate. In cases where workouts and modifications are not the answer, the next best option is to get the property into stronger hands in the least costly and most time-efficient manner. This is why there is so much focus on these tools, beginning with the creation of Home Affordable Foreclosure Alternatives (HAFA) program to the various private industry implementations outside of the federal government’s involvement.
In February, Altisource acquired Lenders One. What does the acquisition mean for Altisource, and is there going to be more condensing - companies acquiring smaller companies - in the future for asset management firms?
Let me answer this in reverse order. Consolidation across all industry segments is a trend that is firmly underway and underscores the fact that only the most efficient operators will survive. I see no evidence that this trend is reversing. But having said that, the transaction with Lenders One and MPA has nothing to do with efficiency but everything to do with synergy. The combined production of Lender’s One members was over $70 billion last year and places them among the top 5 in retail originations nationally. Altisource brings capital and complimentary products and services that will allow the participants within Lenders One to originate more loans and be more profitable. Lenders One/MPA has an impressive roster of member firms with a terrific management team. Although this partnership is in the early stages, we are excited indeed about the prospects ahead.