Carrying the weight of the largest consumer industry, tied down and stretched thin by so many stakeholders and painted black by the dashed American Dreams of troubled homeowners, there’s little wonder that the foreclosure system has moved along at glacial speed.
Given the many “dangers, toils, and snares,” it’s a sure bet that countless citizens of crumbling residential communities across the country have believed that amazing grace alone could counter such calamity.
There does seem to be a light at the end of the tunnel; however, the trend of judicial states implementing fast-track foreclosure statutes for vacant properties brings hope to a dense, difficult, and often depressing system. On the heels of its in-depth focus last summer on both the state of and challenges within the foreclosure market, DS News brings you the third and final installment in the series: foreclosure solutions.
Only two fast-track foreclosure laws are on the books nationwide—in Ohio and Maryland—but, according to Community Blight Solutions, Illinois, Pennsylvania, and New York could be the next to implement much-needed remedies.
“It’s all about keeping people in their homes as long as possible, but, once abandoned, a house becomes a liability,” said Robert Klein, Community Blight Solutions’ and Safeguard Properties Founder and Chairman. “Fast-tracking enables the mortgage servicer to get possession of the property before it deteriorates. This directly leads to on-time conveyance and faster rehab and sale.”
The new foreclosure law in Ohio, which took effect on September 28, 2016, expands the rights of mortgagees in advance of and during a foreclosure. The statute authorizes an expedited foreclosure action against vacant and abandoned single-family residential properties, allows the bank or servicer to enter and secure such properties, and criminalizes the damaging or diminishing of property in any way by a homeowner from the time they are notified of an impending foreclosure action. The law also “extinguishes an owner’s right to redemption of a mortgage on residential property found to be vacant and abandoned upon the confirmation of the property’s sale.”
Klein added, “No one will be forced out of their home by these new laws. There are clear protections to ensure that a property is, indeed, vacant and abandoned.”
The new law stipulates judicial and sale procedures for foreclosed residential property deemed vacant and abandoned, including the authorization of foreclosure sales by a “private selling officer” rather than the traditional public auctions conducted by a court officer or licensed auctioneer. It also requires the establishment of an “official public sheriff sale web site and an integrated auction management system.”
“The creation of fast-track foreclosure laws are the last tool that all states really need to adopt,” said Steve Salimbas, CEO of Agios World Wide, Inc. “When a property enters the foreclosure process it defies common sense for that property to be tied up legally for years. With this final step, properties will be occupied much sooner, which means they will be maintained and cared for. Blight will be mitigated, home values stabilized, and the health and safety of the neighborhood will be maintained at as high a level as possible.”
With a national crisis, especially one involving the country’s biggest consumer market, the best solutions come after examining how initial remedies came up short. In 2013, the Federal Reserve Bank of Philadelphia and Amherst Securities Group, LP, examined 3 million REO liquidations and 1.3 million defaulted loans to estimate foreclosure timelines and the cost of delay. By comparing the time-related costs to date with those before the start of the economic downturn, the cost of delay came to eight percentage points on average. Statutory foreclosure states encountered expenses four percentage points higher, while judicial foreclosure states were hit with a 13 percentage-point bump.
“Combined with evidence that foreclosure delays do not improve outcomes for borrowers and that increased delays can have large negative externalities in neighborhoods, the weight of the evidence is that current foreclosure practices merit the urgent attention of policymakers,” the study concluded.
Michael Woods, AVP and Managing Attorney at Potestivo & Associates P.C. in Rochester, Michigan, maintained the primary reason for a lack of significant foreclosure delays in the Great Lakes State was that it is a nonjudicial one. (Fannie Mae found that judicial foreclosure states take 280 days longer, on average, during the foreclosure process.) One example is that a postsale redemption period for the distressed mortgagor can be shortened for the foreclosing institution when a property has been abandoned.
“The abandonment process has been used to reduce the number of unsecure and unmanaged vacant and abandoned foreclosed homes in Michigan,” Woods added.
The longer homes remain abandoned and uncared for, the more communities are saddled with blight and other problems. Some things just aren’t worth the wait.
“The potential for a vacant property to only be exposed to one or two seasonal extremes will lower risks and can help restore communities,” said Jerry Rowell, Managing Director of Assurant Field Services, about the benefits of fast-tracking foreclosures. “Vacant properties require higher levels of preventative maintenance and tend to have increased exposure to risks.”
The extended foreclosure process found in judicial foreclosure states means so much is left in the lurch—the property, servicers, neighborhoods, municipalities, and the real estate market in general. Increased time means more exposure, which means homes and thus neighborhoods are subject to greater deterioration, damage, community blight, and depreciation of overall home values.
“Court dockets exploded with foreclosure cases and in many circumstances states where a normal foreclosure could complete in six to 12 months, the process was instead taking up to several years,” said Rowell.
Fast-track foreclosure legislation allows a bank or servicer to petition the court to expedite summary foreclosure judgment and therefore move a property to resale much faster, according to Rowell. The financial institution usually must meet and document at least three criteria confirming that a home is abandoned or otherwise vacant before it can file the petition.
Scott Keller of Dyck-O’Neal, Inc., a Dallas-based loan purchaser, asset manager, and servicer, emphasized the importance of confirming that a property is, in fact, empty. Otherwise, a fast-track foreclosure solution may get bogged down, further delaying asset preservation and neighborhood revitalization. Kimberly Goodell, Assistant Vice President and Managing Attorney at Potestivo & Associates P.C., called the Illinois statute allowing for a shortened postsale mortgage redemption period based on property abandonment “very strict.”
“As a word of caution, it is important to get a more granular inspection to verify vacancy through neighbors, utility meters, perimeter openings, and other visual confirmation and photo documentation,” said Keller, Dyck-O’Neal’s Director of Sales and Marketing, who has 13 years of experience with loan defaults and 11 years in REO disposition. “These close and thorough inspection results will make a difference with the foreclosure attorney and subsequent court proceedings in an accelerated foreclosure process.”
The process facilitates acquisition by an investor, insurer, or bank so that entity can get it to market and all parties, including the community, can return to the benefits of occupied homeowner status.
Rowell said that two key positives to come out of the downturn were the fast-track foreclosure initiatives and investor and insurer focus on at-risk borrowers. On the latter, he shined the spotlight on the GSE-published guidance on Quality Right Party Contact (QRPC), which directed banks and servicers to ensure that a single point of contact was available to at-risk borrowers so that all the essential information, including account status and relief options, was available at all times.
The Fine Print
We all know the saying that an ounce of prevention is worth a pound of cure. In the mortgage maelstrom that was the foreclosure crisis especially and in today’s complex, high-speed housing industry in general, failing to stay on top of loan details at the start of a process means sending them down the line where they only get bigger and more costly.
“One of the most common problems the industry encountered in the wake of the foreclosure crisis occurred when companies attempted to foreclose on loans with incomplete or incorrect information in the collateral files,” said John Hillman, CEO of Palm Harbor, Florida-based Nationwide Title Clearing (NTC). “We saw this problem crop up again when large portfolios of nonperforming loans began to trade hands. Sometimes improving the foreclosure process is really about preventing problems from occurring that wrecked the process in the past.”
In 2016, NTC reported on a portfolio case in which over 60 percent of the more than 160,000 loans contained “serious errors that would have killed a sale or led to drastically increased legal fees during default or foreclosure.” Business has enough variables; file accuracy and integrity, especially during a major crisis, should not be one of them.
“The client was not even aware of the problems lurking within its own portfolio,” Hillman said. “The moral of this story is if you’re not auditing the files you have to the outer edge your budget will allow, you’ll break your budget later with costs to remediate after the fact.”
Foreclosure challenges will vary by case and definitely by state with their different compliance rules, legal structures, and schedules. In-house standards of efficiency are an important way to navigate different market currents and regulations.
“It can come down to how efficient the default attorneys and bank/servicer are at their internal foreclosure procedures,” said Scott Stoddard, CEO of Quandis, Inc., a default management technology firm based in Orange County, California. “Our experience is that clients that leverage technology to automate foreclosure workflows, tasks, time frames, and compliance are able to much more efficiently manage the entire process. One of the benefits realized is quicker and less costly foreclosure proceedings.”
Purchasing Occupied Assets
A house in foreclosure limbo means a loss for multiple parties as the resident is not likely to perform maintenance if eviction looks imminent. The bank and servicer are not in the property management business, and an investor is there to make money, not to sink funds into a degrading asset. Finally and most noticeably, the communities are negatively affected by lower property values and when homes are abandoned, the higher probability of crime.
“The sooner the foreclosure process is complete, the better it is for everyone involved,” says Javid Jaberi, EVP of Single Family Residential Operations at Auction.com. “Until the real estate in question is sold, it continues to burden an investor’s balance sheet and hinders the stability of the neighborhood.” Jaberi cited the study commissioned by Community Blight Solutions and performed by Aaron Klein, former Treasury Deputy Assistant Secretary for Economic Policy, that found a property triggers losses of approximately $150,000 in the first year of vacancy: $133,000 from reduced property value for neighbors, $14,000 in increased crime, and $1,500 in police and fire department expenses. Jaberi maintained that the best way to reverse course out of this value black hole is the purchase of occupied assets. Just like a leased commercial building is worth more than an empty one, investors are attracted to cash flow, which leads to a more attractive situation for all.
“By purchasing an occupied asset, investors can help sellers rid the real estate from their balance sheets sooner, provide the foreclosed family stability in their home, generate a new source of income, and prevent the property from entering the REO process,” Jaberi said. “To rebuild communities that have been negatively impacted by foreclosure and to benefit investors is to ensure that every home is quickly purchased by an investor or homeowner who values the real estate and the neighborhood in which it is situated.”
Affected communities will certainly trade the drifters, grifters, and bystanders for committed investors, both financial and emotional. The buy-and-rent strategy offers a stable of stability: the owners-turned-tenants avoid the uncertainty of having to find new housing and schools, the real estate remains a contributor to the local tax base, and the neighborhood bypasses the debilitating effects of blight and crime.
To accomplish this, sellers should first establish a reserve price instead of a list price. According to Jaberi, who has servicing experience at Fannie Mae, the reserve price reflects the seller’s estimated net proceeds from a standard REO outcome.
“If a reserve price is correctly calculated, 80 percent of the time a buyer can be found at a foreclosure sale or in an online auction the day after the foreclosure sale,” he added. “Once sold, a buyer that allows the foreclosed family to remain in the home gains an opportunity to earn additional income from rent the family is now able to afford. When buyers purchase occupied assets and allow the foreclosed borrower to remain in the property, the buyer, the seller, the foreclosed borrower, and the neighborhood win.”
Get In The Game
The foreclosure crisis had a profound and protracted impact across the country. Michael Harris, President and CEO of Glencoe, Illinois-based Exceleras, noted that Detroit, Baltimore, Chicago, Las Vegas, Memphis, Milwaukee, Tampa, Toledo, and Virginia Beach are still struggling with blighted areas filled with abandoned or REO homes.
“Part of making the foreclosure process better is making its impact on communities less catastrophic,” he said.
A complex problem such as the foreclosure crisis can lead to complicated solutions, which create more confusion and delays. The joint venture of Exceleras and M2 Asset Services, LLC, has chosen instead to empower communities through their nonprofit partners. Built on Exceleras’ DispoSolutions platform and leveraging M2’s experience, the result brings together the process knowledge and partners, including those in construction and home finance, for the community organizations.
“In the past, these organizations have been forced to stand on the sidelines, coaching residents and sometimes administering funds, but never being real parties to the transactions,” said Harris. “For the first time, community-based organizations will have the power and the connections required to heal neighborhoods. This puts them in the game, giving them even more incentive to ensure wins for everyone.”
Foreclosure ills go beyond markets or metros to, as NeighborWorks America’s Nicole Harmon said, “micropockets” that can be hard to properly target and assess. Struggling homeowners are too consumed by their own mortgage miseries, and major financial institutions aren’t inclined or designed to put boots on the ground. Nonprofit community organizations are the ones to effect positive change, which is why Exceleras and M2 Asset Services have provided them a complete default and asset management tech solution to acquire, rehabilitate, manage, and sell real estate.
“This is a great opportunity for individual real estate investors to participate in the rebuilding of our communities, and earn a good return while doing it,” said M2 Managing Partner Donald Maxwell, who once served as Fannie Mae’s Director of National Property Disposition Center. “It allows nonprofits to make more money with their services by having scale and access to the funding required to acquire these properties from sellers, like so many cities that currently own them. Secondly, it puts more people who deserve to be homeowners into homes of their own.”
Are We There Yet?
The National Institutes of Health found that foreclosures adversely affect health and mental health on both the individual and community levels. Although its conclusion certainly is not surprising— stating “programs designed to encourage early return of foreclosed properties back into productive use may have similar health and mental health benefits,” – the study does underscore how pervasive the housing problem was and is. All types of solutions are required, from the legislative to the innovative, as are hearts and minds.
Jonathan Dever, the Ohio state representative who captained the fast-track legislation in the state, told a story of a city in his district plagued by foreclosures. A councilmember recently called to say that since the new law was put into effect, all the zombie title homes targeted by the city had been fast-tracked and sold.