After years of historic default and foreclosure activity, servicers are finally able to see past the wreckage that devastated their portfolios during the housing crash. With one in 10 mortgages entering default between 2007 and 2010, these firms had no choice but to call on outside help to manage a tidal wave of REO properties and the field services work required to keep those assets from deteriorating before they could be sold back into the market. It was a challenging time to be in the real estate business.
It proved just as challenging for those firms in the asset management, field services and property preservation businesses.
With REO typically accounting for only a small percentage of the loans in the servicer’s portfolio at any given time, the bulk of the field services work in the U.S. was handled pre-crash by a handful of large field services companies.
These firms typically managed sub-contractors across the country to provide field services for properties until they were resold. In most cases, it wasn’t long before a distressed property was back on the market.
But then came the crash. While many have pointed back to the subprime lending crisis as the catalyst that started the downturn, it wasn’t just a mortgage issue that homeowners across the country were dealing with. Yes, millions of Americans took out adjustable rate loans that ticked up to higher interest rates, taking their payments with them, and often just out of their reach. But there were other problems the economy was dealing with at the same time. Perhaps chief among these was the general loss of confidence on the part of the American consumer.
Rising delinquencies led to fewer buyers and lower confidence led to less consumer spending, which slowed down hiring and increased unemployment. Then, when consumers saw billions in tax dollars go to banks to cover investments in toxic assets, many of them mortgage-backed, the bottom fell out of the market.
This isn’t intended to be a history lesson. For that, HousingWire has previously published an excellent timeline of the crash.
My point is that the property preservation industry rose to the challenge. With angry borrowers wreaking havoc on their homes before abandoning them, field services as a line of business matured in a hurry.
New companies sprang up and the existing leaders got bigger, scooping up contacts from asset managers who couldn’t even talk about the properties under their protection because they were part of the massive pool of shadow inventory the banks were holding in an effort to keep the market from falling even further.
By the time of the crash, I’d been working in this industry for nearly 20 years, and I’ve never seen anything like it. The men and women working in that part of the business rose to the challenge. And while they will likely remain the unsung heroes of the foreclosure crisis, they saved billions of dollars’ worth of real estate, maintaining it until it could be sold back into the market.
Today the market is changing, with foreclosure completions down 27% in May from a year earlier, according to CoreLogic, and foreclosure starts down again in June for the 33rd straight month, according to RealtyTrac. Over the past few months, we’ve seen foreclosure completions tick up a bit as the judicial foreclosure states continue to work the existing foreclosures through their systems.
In general, we seem to be emerging from the worst of the crisis. This has prompted some servicers to begin questioning their external support structures, especially banks regulated by the Consumer Financial Protection Bureau, the regulator that loves to talk about how banks are ultimately responsible for everything their third-party vendor networks say and do. For some, it makes sense to begin taking back some of the work that was previously outsourced to asset managers and property preservation companies. But servicers should proceed with caution as they exercise this option.
Consider that bank repossessions increased in May from the previous month in 33 states, according to RealtyTrac. Foreclosure starts ticked up from the previous month in 26 states during the same period. Today, the company reports that over 12% of the properties in the U.S. are still sitting vacant.
After operating pretty much the same way for decades, the mortgage servicing industry learned the hard way how to change to meet a new environment’s requirements during the crash. Soon, the industry will have to change again. When servicers re-engineer their companies for the future mortgage business, they’ll likely take one of three paths.
They’ll decide that they have a flexible outsourcing model in place that allows them to send files outside to special servicers, default servicing companies, foreclosure attorneys and asset managers as the need arises and leave things the way they are. Very few actually have a setup like this, though many may assume that they do.
They’ll continue to decentralize their operations, outsourcing everything that cannot benefit from the traditional economies of scale enjoyed by servicers in the past. This will require them to become expert at managing third-party vendors, a skill some servicers developed quite well during the crash.
Or they’ll bring work back into the enterprise, setting up new departments for default and foreclosure, REO asset management and property preservation. This will save some companies money and increase their control, which will benefit compliance efforts. However, tight margins will make managing these enterprises difficult, magnifying mistakes and increasing risk.
There are certainly opportunities here, as there are in any market. But with regulatory oversight high, the risk of anti-foreclosure opposition still prevalent and margins low, servicers must move with great care.
Servicers would be best served by undertaking three key maneuvers:
One, carefully auditing their existing third-party relationships, the real value these relationships deliver to the company and their vendors’ ability to further scale in the event of future need. Relationships that are not providing tangible value now should be culled while there are still plenty of players in the market. As the market tightens, the options servicers have will likewise be reduced.
Two, perform a thorough audit of the company’s internal operations and capabilities. As the work of servicing the mortgage portfolio begins to return to some form of normalcy, servicers should ruthlessly seek out underutilized assets within their own enterprises. Where can these assets best be utilized? Can they take on some of the work that the firm has been outsourcing, or should they be used to deepen relationships with borrowers in the portfolio, something the regulator seems to value above all else?
And three, performing a thorough audit of the company’s existing compliance and quality assurance processes. Going forward, no task list will be deemed complete if the final step is not to recheck every change for its impact on overall compliance. The costs associated with an error are now too high.
Perhaps we should be grateful that when we finally retire, we’ll have stories to tell about the historic real estate crash that started in the early years of this century. It reminds me of that old Chinese blessing: May you live in interesting times.
These are surely interesting times, and we can all count on continuing change as the market adjusts. Servicers have learned how to change, though the lesson was painful to many.
Now, they’ll have the opportunity to change again. If they do it correctly, they stand to come out of the downturn in much better shape than when they entered it. If not, the overall losses they experienced during the crash will become something more amplified.
