Lenders to Manage the REO Cycle with an Eye on Costs

By Frank Ferris

New York -- The mortgage industry is bracing for trouble, as lenders and investors face the prospect of having a flood of REO (real estate owned) on their hands. A study by the Center for Responsible Lending predicts that 2.2 million American households will lose their homes, with equals as much as $164 billion in foreclosures in the subprime mortgage market alone. The study projects that almost 20% of the subprime loans issued during 2005-2006 will fail.

If that scenario unfolds as predicted, mortgage lenders will look to technology to bail them out. Investors, servicers -- and lenders with repurchase troubles -- may not be eager to talk about their REO-disposal strategies, but today a few companies have developed technology to expedite REO disposal. The advent of Web services and XML-based data exchange have eliminated tons of paperwork and accelerated the process of REO asset management.

Mortgage Technology readers looking for REO assistance may recall the April 2005 article by Tony Garritano on Williams and Williams, the Tulsa-based national real estate auction company that was building a comprehensive platform for the asset manager to dispose of REO. (Mortgage Technology is a sister publication of MSN.) For the lender with auctioning REO properties in mind, Williams's field services department and e-contracting website already projected the ability to take REO from inception to closing at full market value in 45 days. If a flood of properties comes on the market at once, that kind of promise will be hard to keep, but REO technology keeps getting slicker and more efficient.

REO management is considerably more complex than foreclosure, involving an array of participants whose functions need to be orchestrated to clear, evaluate, preserve and dispose properties. The costliness of REO disposal comes from the manual parts of this process, and so the more automation that can be brought to bear, the less the bite on the lender. Today the asset manager can view and work with all the pertinent information regarding an REO property on a custom built platform that utilizes Web services. Technology works for REO management in a number of ways: communicating with various participants (e.g., lender-broker interface); eviction process, progress ticklers; orchestrating workflow; routing offers through to approval; marketing properties to prospective buyers (e.g., buybankhomes.com); custom decisioning rules (e.g., BPO or appraisal, whether to repair or not); AVMs to back BPOs; and vendor invoice payment.

The trend toward more technology and less human intervention is now well-established for REO management, according to Duke Olrich, president and CEO, DRI Management Systems, Newport Beach, Calif. DRI offers a website to connect with the real estate broker, where the lender/investor asset manager can order a broker price opinion and the broker can fulfill the order.

"Just the elimination of paper files has made a dramatic improvement in REO management, as with all other mortgage processing work," agreed Chad Neel, president and chief operating officer, Fidelity National Asset Management Solutions, Westminster, Conn. "More expert professionals and fewer clerks. Simple things like you don't lose files, you don't have the paper cost, you don't have the FAX cost. We have probably twenty to thirty percent less staff today handling the exact same caseload." In January, 2005, FNAMS released its online BPO solution for REO properties. "This eliminated the need for printed reports, and increased the amount of data from four to over 600 data fields," Mr. Neel stated.

In October 2006 Santa Clara, Calif.-based Tavant Technologies released a default management system that includes REO. "From a technology perspective," stated Sanjay Raghavan, Tavant's director of financial services practice, "the main thing is the workflow orchestration, which is a mechanism which is aware of all the tasks that need to be performed. As certain activities get done, it triggers activities for other people, and falls into somebody's queue. So if you're looking at an REO, you may have a team that consists of an asset manager, an assistant manager, evictions coordinators and a variety of different people. The tasks are broken up and given out to the team members, and the workflow orchestration knows which tasks are prerequisites for which other tasks, so as soon as certain things get done, new tasks get flagged to other people."

The Software as a Service model has now been harnessed for REO management. In November 2006, for example, San Mateo, Calif.-based Remend, Inc. (www.remend.com/reoagent) was singled out as one of 12 SaaS innovators to present at the SIIA OnDemand conference Information Industry Association OnDemand Conference. Remend offers REO Agent as "the first complete on-demand REO application exclusively designed for agents to manage REO properties efficiently from occupancy through closing." Remend boasts that the system gives agents "the same type of powerful REO management system that is used by large servicers with no installation or system setup expense." The system integrates REO management into a single application including occupancy, cash-for-keys and lockbox, trash out and maintenance, eviction tracking, BPOs and marketing opinions, listings, offer management, and closing tracking.

Mr. Olrich said his company's Web connection between the lender and the real estate broker has become more sophisticated: "Wherever that brokers are, they can dial into the Web and actually receive a request saying, 'We want you to give us a BPO,' and some clients actually say, 'You're assigned to this property; go out and do an inspection.' Even the [assignment] can go out literally automatically."

The first step is to determine occupancy. Based on that, a number of things happen. If the property is occupied, then, via a Web service, a request will go out to an attorney to begin an eviction process for that property. The DRI website manages communications back and forth with the attorney throughout the eviction process. The process in each state, and even in counties within states, is slightly different, Mr. Olrich noted: "Within the management system there will be certain ticklers back at the server's site in our system, that would make sure that the attorney is doing their job according to predetermined milestones and standards."

If the property is vacant and the broker can get in to see it, "the broker would send back the BPO electronically, and we set up several rules," he explained. "Some of our clients say if the BPO is different, typically between 20-25%, from a previous BPO that they did in foreclosure, then they would automatically request another BPO from another real estate broker, or they may go right to a full appraisal, depending on the size of the differential. The difference depends primarily on the investor. In the MBS pools, each might have different requirements. I would say it's probably 60% BPOs and 40% appraisals. And some of our users, to validate a BPO, will actually use an AVM."

First American's eAppraiseIt has two automated products geared for the REO manager's need to inexpensively arrive at a value for a property. "One is the Value Reconciliation application, that can take the various BPOs and appraisals that have accrued on a property and arrive at a best evaluation, thus saving time for the inhouse staff," said DeAnna McCann, eAppraiseIt chief marketing officer. "Also, eAppraiseIt has developed a Default AVM, which produced the low-end valuation of a property."

Prior to the release of Default AVM, she said, the problem with using AVMs for REO appraisal was that "most AVMs do not yet have a good way to take into account subject property conditions. Often at the REO stage the property does have condition problems -- maybe less than average condition." But cost remains the paramount factor driving AVM acceptance in REO management, Ms. McCann pointed out, because "one of the challenges that REO managers face, as well as folks that are working in the other parts of the default services side, is that, unlike valuations used on the origination side, the cost of valuation is borne by the servicer. It cannot be passed on to the borrower. So these folks are looking for the most cost effective valuations they can find."

REO properties can deteriorate fast, liquidating them quickly is the name of the game. That requires integrating the systems of all parties to the sales process. Since 2003 Fiserv, for example, has integrated the REO.com Offer Management System into the MortgageServ loan servicing platform. Los Angeles-based REO.com Inc. provides workflow products, management services, and property listings, boasting over $8 billion in real estate sales since 2002.

Size matters in assembling all the resources needed to handle REO with maximum efficiency, said Mr. Neel: "Fidelity Information Services has a huge budget and investment in technology. They've spent all this effort and expertise developing these solutions, so it's obvious that lenders large and small will benefit greatly. If I'm a large volume client, I get the offset a whole lot of cost to a company that can invest in the technology and expertise. If I'm a small client that handles a few hundred REO, I don't have any economies of scale. So outsourcing to somebody like us gives them tremendous lift."

In March, 2005, FNAMS launched its Offer Mangement System, which automates the back-and-forth between brokers and lenders, automatically notifying brokers and agents when there is a response to their offer. Mr. Neel said that next year FNAMS will release an REO module to NewTrack, the default solution offered by sister company Fidelity National Default Solutions. "I'd say between 30% and 40% of foreclosures and bankruptcies in the country are managed on [the NewTrack] system today," he said.

Mr. Raghavan also stresses that larger vendors have the advantage in REO technology: "Of the 1200+ people that we have, a good chunk of them have deep expertise in providing IT services and developing systems in the mortgage industry. So there's a lot of domain understanding that we have brought into the development of applications, such as the default management and REO applications. And when we say we make these capabilities available to the marketplace, that usually means we already have some underlying technology components -- I tend to call it 'the plumbing' -- that you need to develop a default management and REO solution." Tavant is one company bringing modular design and service-oriented architecture to create the messaging architecture and workflow management to bringing REO services to bear with the speed needed to handle REO transactions quickly.