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Structuring Effectively for REO Disposition

Derrick Logan
Mar 25, 2011

We are now three years into the nation's retreat from historically high homeownership rates, with millions of homes transferring out of the hands of delinquent borrowers and back into the banks that held their mortgages. In the third quarter of last year, the last period for which data is currently available, the Mortgage Bankers Association (MBA) reported that 13.78 percent of all borrowers were either in foreclosure or at least one payment behind on their mortgage. The MBA has estimated that nearly two million bank-owned properties were on the market at the end of 2010, with twice that many at least 90 days delinquent and heading down the path to foreclosure. Guhan Venkatu of the Federal Reserve Bank of Cleveland has estimated that the shadow inventory, those real estate-owned (REO) properties that banks already own but have not yet released into the market, accounts for another four million or so homes. That many homes would take well over a year to sell in the current environment. RealtyTrac reported last year that roughly one-quarter to one-third of all real estate sales in the first half of 2010 were homes in some state of foreclosure. If nothing changes, it could take years for the industry to cycle through the REO lot that we already have coming into the market, and that's if the shadow inventory doesn't set off another round of foreclosures. Fortunately, things are changing. A new approach to REO It was at the National Property Preservation Conference in November that the U.S. Department of Housing & Urban Development (HUD) reiterated its plans to split its property preservation and asset management groups into separate departments. It was a move that put the federal agency in line with the best of the industry's asset management companies and one that will likely make the agency more successful in the future. Until recently, the two departments operated as a single unit within HUD. Separating property preservation and asset management is a strong move that will allow HUD to deal more effectively with the influx of foreclosures, disposing of properties faster and more efficiently than in the past. There was a time when the older model made sense and many asset managers utilized a similar internal structure. With fewer REO properties to deal with, companies could operate with smaller teams and cross-train them for increased efficiency. But it makes much less sense in today's market. Today's asset managers are flooded with properties, many of which are either already in a state of disrepair or at risk of becoming so. Banks are taking back homes of every description in neighborhoods of every kind all over the country. There are critical tasks that must be completed for both preservation and disposition of the REO. With the work coming in so rapidly, it would be easy to overload and overwhelm a firm that tried to accomplish both functions within the same department. Over the past 18 months, most companies working in this space have found that there is sufficient work to employ full-time teams in both areas. In fact, because of the time-related expenses involved, it makes good sense to do so. Time is a critical concern in this business. The longer a non-performing asset is held in portfolio, the more money is sacrificed on a daily basis. An effective structure for success Over the past 13 years, we have been developing the systems in use my company, REO Allegiance. We believe that HUD's move to separate these two departments will make the agency more effective because we have become more effective and successful when we began to separate the various functions that go into the work we do for servicers and investors. But HUD's move is only the beginning. With today's high REO volume and the need to dispose of every property as quickly as possible, it is imperative that asset managers isolate every critical function required for both property preservation and REO disposition and scrutinize the processes that lead to successful outcomes. When this is done, it becomes clear that there is a single set of steps that leads to the optimum outcome in the shortest period of time. In fact, the goal is to visualize the workflow as a sequence of steps leading directly to accomplishing that goal. In the end, the best companies have found that separating property preservation from REO disposition is only the beginning. When we consider the work pertaining to property preservation, the goal is clearly to protect and preserve the property. To achieve this goal, the work required for each property must flow through several departments, each with its own specific list of tasks. For instance, in our firm, we utilize an order placement team, a property preservation team, a quality assurance team, a recurring service team and an eviction team. There are also auxiliary functions that must be considered, such as vacant property registration and utility management. By breaking the work down and distributing it effectively across these teams, we're able to process thousands of orders at any given time efficiently and without errors. On the other side of our business, REO disposition has its own set of complicated issues that must be carefully analyzed and then managed to achieve the goal of 100 percent REO disposition. To meet that goal, real estate brokers are assigned, marketing plans are formulated, a selling price is agreed upon for each property, contracts and closing issues are resolved, rehabilitation issues may be referred back to us for preservation and many other tasks and processes must be accomplished quickly and correctly. It doesn't make sense for all of these functions to reside within the same department in an environment like the one we're experiencing today. Of course anytime you decentralize any operation, communications and information technology become critical concerns. Without the right technology to keep information flowing freely across the enterprise, firms with any number of departments are just as sure to fail. To be successful, it's important that the company's IT specialists also have a complete understanding of REO preservation and disposition. The perfect structure for success Given this discussion, it may yet be unclear how many departments it actually takes to be effective at both maintaining properties and effectively disposing of bank-owned real estate. There can be no question that structuring a firm to deal effectively with the work it will face as it fulfills its function is an important part of being an industry leader. At REO Allegiance, we've spent a great deal of time and effort making sure that our structure is conducive to efficiency and error-free operation. The truth is that the structure of an REO asset management firm must be a reflection of how it approaches the work it does. Firms that take a specialist's approach to their business are likely to have more departments, each focused on the critical tasks that are crucial to their part of the business. It will be interesting to see what HUD does next in regard to their portfolio of real estate. It's heartening to see that the agency has taken the first step in the right direction. Derrick Logan is director of business development of Bayonne, N.J.-based REO Allegiance, a nationwide property preservation and eviction services company. He may be reached by phone at (201) 746-8734 or e-mail derrick.logan@reoallegiance.com.
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