The recent thaw in state foreclosure actions has added to the millions of vacant, foreclosed properties already on the market. Since September 2008, mortgage companies and banks have foreclosed on 3.3 million homes and in just the last year, more than 860,000 have been lost to foreclosure–fully half in five states: California, Florida, Arizona, Michigan and Texas.
This is a costly proposition. Besides what the private entities are spending, the government-sponsored enterprises, Fannie Mae and Freddie Mac, paid out nearly $1 billion for maintenance costs in 2010, while local governments are spending millions more to take care of properties that are not properly maintained.
This is critical because vacant properties increase public safety costs and lower the value of nearby homes, reducing property tax revenues. Not surprisingly, cities and states have become much more aggressive and proactive in protecting neighborhoods and property values. More and more authorities are enacting ordinances that require mortgage servicers to register homes in foreclosure, pay fees and post bond for repairs.
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This trend could burden credit unions and other servicers and investors with millions and possibly even billions of dollars in extra costs. We're seeing credit unions active in the mortgage business working more closely and staying in touch with local authorities and code-enforcement officials. They are staying informed on these ever-changing–and ever-growing–requirements, knowing that they may be forced to pay fines if they don't comply.
Keeping track of all these new ordinances and rules and their constant amendments is a major job in itself. Nearly 1,000 new laws mandating registration of vacant or foreclosed property have been enacted over the past six months, with California and Florida each approving more than 100 such ordinances.
Credit unions know they have unique challenges, as well as both advantages and disadvantages, compared to their larger competitors when it comes to servicing mortgages and complying with these new regulations and ordinances.
It's certainly true that credit unions don't have the resources of the giant mortgage servicers. But they also don't have the same huge number of properties to look after.
History shows us that homes serviced by credit unions tend to be in better condition than those serviced by the big servicers. Credit unions, it must be said, did a better job of due diligence during the underwriting process, which has paid off in fewer defaults and foreclosures. Credit unions, unlike their large competitors, also keep in closer communication with their distressed member-borrowers, which has generally meant that their properties are in better condition.
At the same time, however, a loss on one home hits a credit union a lot harder than it would a large national bank. As a result, credit unions must be prepared to move more quickly on distressed properties to make sure disrepair and vandalism don't get out of hand and to preserve every dollar of the value of the property. That requires continuous monitoring of new ordinances, which pays off in quick response times and less chance of code violations.
Using technology is essential to keep up with local ordinance and code changes, order appraisals and inspections, and uncover any liens on REO properties.
Credit unions are also more likely to give unique treatment to individual properties, as the need requires, rather than try to treat all properties equally. Small, locally-based servicers want to give a better impression than their larger, more distant competitors since they live there. While most servicers, large and small alike, care about their properties, high-touch servicers take it more personally–they're just built that way.
Still, most credit unions don't always have the capacity to invest thousands of dollars in improvements to boost the sales or auction price of the home. So, the goal should be to maintain the property to the same level as the rest of the neighborhood. Servicers need to inspect a property at least once a month to ensure the property is still up to par, especially for those that remain longer on the market.
Servicers should also provide contact information to local authorities if problems occur. It's also a good idea to give contact information to neighbors and post this information on signs outside homes, replacing them if they are removed.
Not least, it's very important to build a friendly, personal rapport with local housing inspectors and code-violation officers. The inspection process goes a lot smoother if you have an amiable relationship, rather than an adversarial one, with these officials. They're more likely to let borderline infractions slide rather than nitpick every problem.
Working with local inspectors will pay off in fewer infractions and allow for less subjectivity. That's where an experienced high touch field service company providing personalized boots on the ground services pays major dividends for credit unions.
Many economists believe it will be 2014 before the housing market starts to turn around. But rest assured these property preservation ordinances will remain in place long after the foreclosure crisis has passed. These ordinances are revenue generators for cities and not likely to be repealed even after the market recovers. Credit unions and other servicers need to be able to comply with them now.
Suzanne Ball is president of America's InfoMart Inc.
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