Although it feels like the housing crisis is in our rear view mirror, lender foreclosure exposure remains high. Based on market data from leading property information and analytics providers, foreclosure rates are down from peak levels in January 2011; however, are still high when compared to historical trends. The primary reason for the higher than expected levels is the duration, especially in judicial states, to complete the foreclosure process.
What at one time consisted of four or five properties that took 60 to 90 days to sell, has turned into sometimes hundreds of properties that can take six to nine months, or more, to move. If your financial institution has been thrown into unfamiliar territory and you aren’t sure what to do or how to manage your large REO portfolio, we have a few ideas that we would like to share.
Weigh your options when selecting coverage for your REO portfolio
Some institutions opt to cover their portfolio through a corporate insurance policy while others will cover via a lender placed or real estate owned product. Whichever method you choose, it’s critical you appreciate that an insurance policy is essentially a contract between you and the insurer, and fully understanding what is included and excluded from your insurance policy is paramount. Another consideration when crafting an insurance program is that the rate/cost will vary dramatically based on the limits, deductibles, and coverage you select as well as your prior loss experience and geographic spread (e.g., coastal, CAT-prone areas). Depending on your risk appetite, you may opt to reduce insurance premium costs by selecting a higher deductible, lowering your per occurrence and aggregate limits, and/or removing key coverages. This decision will absolutely reduce your upfront costs, but could increase your back-end costs if there is a catastrophic event and you need to rehabilitate several properties that may have experienced a loss. The key is aligning your risk profile with your insurance program.
Make sure your REO properties have adequate security
If vandalism or theft takes place on one or more of your properties, it will cost you. So, financial institutions must be proactive and take every precaution to protect their property from squatters, vandals, and looters. Lock and/or board-up all windows and doors; make sure you change all locks; and, consider disconnecting air conditioning units and pool equipment. The disconnected equipment can be secured in the garage or any other available safe place.
Also, keep the yard cut so that it isn’t easily identifiable as vacant, and secure the pool. You may even consider utilizing a drive-by security program to reduce your exposure. While these may appear to be extreme measures, theft is often the reason for higher premium as a result of REO loss. In the past, REO properties were typically less expensive and didn’t require as much security, but with the recent economic conditions and the rise in unemployment, it's not unusual to foreclose on a $350,000+ property.
Make an investment in marketing
In today’s market, consumers are wary of purchasing homes, and those who are ready and willing to buy may not know you have homes they can purchase. This could be why it takes so long to move your REO properties. Putting in the time and effort to effectively market your properties has become key.
Make sure the part of your website that lists your REO properties is very easily accessible, user-friendly, and includes a wealth of information on each property. Visitors to your website should not have a difficult time finding, accessing, or viewing information on your properties. If they do, you are only making it more difficult for your financial institution to make a sale because visitors will go elsewhere. There are a number of resources out there for homebuyers, such as “homes for sale” or real estate search engines and numerous realtor websites. So, consider thinking of it as being in competition with those resources.
Also, make your employees aware of available properties, and give them an incentive to sell. Incentives are one of the best ways to motivate staff, and the incentive doesn’t have to be something big and expensive – just some type of reward not considered commission when a property sells. Getting your employees on board to promote your properties is an essential part of marketing because they are the ones who interact most with your borrowers.
Another thing to consider is forming a relationship with a realtor. Not only will this help you when you’re determining what value to insure on the property, but it will also make your properties more visible in the marketplace. Getting a realtor to show your property and/or promote it on their website will raise awareness among homebuyers, who would otherwise not look at your financial institution as a place to purchase a house.