One of the biggest challenges for banks trying to unload distressed real estate is to do so without pushing prices even lower. Foreclosed homes already sell at steep discounts-sometimes trailing market values by as much as 30 percent.
Faced with 2.2 million properties in foreclosure nationwide, bankers at a recent mortgage servicing conference in Orlando, Fla., eagerly traded tips for maximizing returns, or at least minimizing the pain, on "real estate owned."
Finding the best price is "an art, not a science," Matt Sylvia, a Bank of America senior vice president, told attendees during a panel discussion at the annual Mortgage Bankers Association event.
BofA is considering whether to sell properties to investors or rent them out, one of several strategies that could lead to a more orderly absorption of existing inventory.
"We want to look at investors to help us move assets and turn them to rentals," Sylvia said. Though his company has not used this tactic much so far, "you'll see more of that this year from us," he said.
Poor communication within a bank, between the departments handling REO and defaults, can be a hindrance to shoring up prices. Often a property will be listed for less than the price the bank could have received on a short sale. "We need to do a better job, and we're pushing hard to close that gap," Sylvia said.
With about two-thirds of its REO, BofA typically receives bids within 60 days of listing a property, he said. "It's the other one-third that don't get offers that are the problem."
Mark Paniccia, group vice president of REO at SunTrust Mortgage, said his company has several tricks for making sure it gets the best prices possible. One is a policy of listing properties for a minimum of 10 days, which often is enough time to attract multiple offers.
"We're upfront with everyone" about not accepting offers right away, he said on the panel.
To ensure it is pricing a property correctly, SunTrust typically gets an appraisal along with two price opinions from different brokers. It averages the three figures to set an asking price.
The company also does "flip checks," which involve monitoring properties for six months after their sale to see if any are resold at a higher price. Besides being a sign of undervaluation, a quick turnaround with a wide disparity in the pricing can be a red flag for fraud.
Perhaps reflecting the surreal nature of the upheaval in the mortgage industry, and how executives are struggling to keep up with all the changes, the theme for the conference was: "Servicers wear many hats." Banners throughout the Orlando World Center Marriott showed a man wearing a stack of multicolored hats, calling to mind the witty, thought-provoking paintings of Rene Magritte, the surrealist famous for his images of faceless businessmen in bowler hats.
Overall, conference attendees projected an upbeat, let's-roll-up-our-sleeves attitude, even though the mortgage industry, having been pilloried for fraudulent practices that led to the robo-signing scandal, is now getting inundated with new regulations. Talk in the hallways and at the crowded hotel bars often focused on the challenge of coping with all the requirements.
Among other things, servicers are scrambling to comply with hundreds of new city ordinances that require them to register properties early in the foreclosure process. The intent of city officials is to avoid neighborhood blight by holding servicers accountable for a property's upkeep, even if they haven't legally assumed ownership yet.
Vicky Beever, a performance monitoring manager at JPMorgan Chase, said that to avoid violations, her company has a group of field officers who work directly with local municipalities.
"All a city wants is for us to secure the properties," Beever said. And having a contact at the bank makes city officials feel more comfortable.
Sherilee Massier, a vice president at Wells Fargo Home Mortgage, pointed out that it's often hard to determine whether a property in the process of foreclosure is actually vacant.
"The utilities may be turned off, but the owner may be in a sleeping bag in the back bedroom," she said.
The conference was teeming with regulators who talked a good game about reducing uncertainty for servicers. But some acknowledged that their policies had perhaps done just the opposite.
"We do understand that one of things mentioned about tighter credit availability is putback risk," said Mario Ugoletti, a special advisor to Ed DeMarco, the acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
Regulators are demanding audits and reviews of loan files to ensure that servicers thoroughly detail their loss-mitigation and foreclosure efforts. Consultants reminded conference attendees more than once that a paperwork trail is crucial for avoiding compliance trouble.
"Transparency is definitely the theme," said Diane Pendley, a Fitch Ratings managing director. She joined a few other conference speakers in talking up the value of investing in compliance.
Nigel D. Brazier, a managing director at Newbold Advisors, said servicers need to identify each regulatory change, create processes to ensure compliance with it, then hold employees accountable and measure their progress.
"It all comes down to making sure every step of the process is tracked and documented," Brazier said. "Servicing should be like a utility with a consistent set of practices."
Some servicers are resisting such extensive quality control, instead continuing to blame lenders' formerly lax underwriting standards-and borrowers themselves-for much of the mortgage mess. Pendley sympathized with those who expressed such frustration.
"I have to get over being physically ill when I look at a loan because many of the borrowers were just not qualified," she said. "The servicer didn't put the borrower in that situation."
Kate Berry is a consumer finance reporter for e American Banker.