The New Year Through the Eyes of Our Industry Partners
As we close out the year, we turned to some of our partners throughout the industry for their thoughts on what is to come for the market in 2017. Our partners told us what they expect for the REO market regarding inventory, disposition, investor activity, and more.
Broker Brain
We expect expects increased activity in the REO space by late 2017. We feel now is the time for REO Brokers to establish their system of record, so each broker is prepared.
Equator
Michael Schreck, President
The REO universe has evolved dramatically over the past few years, and those most adept at responding to meet new market demands will thrive in 2017 and beyond. The general macro environment for REO will remain largely the same: decreasing foreclosure rates, stabilizing REO inventory levels, increasing compliance requirements and holding costs. However, while overall REO volumes continue to decline, foreclosures in the first half of 2016 remained 48 percent above pre-recession levels. Nineteen states posted increases in foreclosure activity during the same time-period, including New York, Virginia, Massachusetts, and Connecticut, among 15 others. Not only does REO remain elevated and growing in certain markets, but also the nature and strategies of investors are undergoing significant change. In particular, the increased presence of private equity and alternative investors utilizing a longer-term renovate and rent strategy will require significant adjustment, particularly by real estate agents and REO vendors.
Private Equity Alters REO Market
In 2016, we saw an accelerating trend of many financial institutions reducing their exposure to REO assets and in many cases, removing them from their balance sheets altogether and exiting the category. Meanwhile, leading private equity/ alternative investment firms continue to expand their REO portfolios and position them as long-term holds. This longer-term approach is having a significant impact on how vendors and technology will need to adapt to the REO market.
Advanced Analytics Implications
A key impact we are seeing is the increasing use of analytics and machine learning to match assets to the right strategy by the local market. These advanced analytics help optimize the best real estate agents and REO vendors to execute these strategies. Top servicers are focused more than ever on one of two very different strategies: either efficiently marketing assets to quickly sell, or upgrading the asset and marketing it as a long-term rental. Agents and vendors that can demonstrate the local market intelligence to support both of these strategies will be the big winners in this environment.
As an example, Equator helped its servicer clients successfully sell $20 billion of REO assets in 2015 utilizing its national agent and vendor network. Increasingly, our servicers are availing themselves of advanced analytics (Equator’s and their own inhouse) to optimize these selections. Our data suggests that servicers have a $200 million opportunity by improving their agent selection alone. Correspondingly, the best-performing agents and vendors are grabbing a larger share of a servicer’s business. This represents a strong opportunity for agents and vendors who perform better than their peers consistently, particularly with private equity and alternative investors who rely on analytics to make their selections.
Adaptation and Consolidation
This significant shift in how investors buy, renovate, and rent REO assets is a mega trend that shows no sign of abating. Hence, there are new requirements and expectations of agents and vendors. An example is an increasing demand for field services such as property preservation and repair to support this longerterm hold approach. Another is the consolidation of vendors and agents by many of these servicers/investors to focus increasingly on the top performers that offer a larger footprint. The bottom line: agents and vendors will need to adapt to these changes and the most successful participants in the next evolution of REO will tap into the advanced data early and often to know how to adjust their business and performance accordingly. Virtually every major industry will be materially affected by this, and distressed real estate will be no different.
Truly Noble Services
Randy Cecil, President
Our outlook for the upcoming year of 2017 is optimistic as the year 2016 winds down. Of course, our viewpoint stems from a workflow base dependent on renovation projects, repairs, and separate property preservation services. Political distractions and political attractions are somewhat settling to a more normal news topic.
We have recently had the benefit of hosting specific training sessions with national service customers, and during such meetings and events, many opinions and facts are often shared. The takeaway has been, thank goodness elections are past, and now we will see actions evolve that will surely effect REO. Interest rates are a premier signal being watched. Higher rates might slow long-term planning while increasing volume in the immediate deal/purchase transactions. With Christmas quickly approaching, chances of change before year-end seem unlikely although media coverage could create reactionary movements.
We remain prepared for the next opportunity. As an employer and service contractor, we are working through our usual process of budgetary considerations derived from current year reality and contingencies for the New Year.
Hard fiscal decisions in our shop will come as usual as our due diligence warrants. History tells us there is always an assumption of risk as we forge ahead toward the reward, and we are optimistic.
US REO Partners
Phil Chernitzer, CFO/Founding Member
The default servicing industry will continue to be guided by political, legislative and regulatory actions as it has during the past 30 years that I have been a part of it. The industry fails, becomes restrictive, and opens up again. We are all servicers to either the client, customer, investor or trustee, and we have already seen a refocus on getting back on track for what our jobs should be but with regulation and “compliance” being the hot button. Anyone who has been in the default business for more than 15 years understands where we are based on prior cycles and what the requirements are to provide better service and survive. It’s a matter of setting a standard and trying to exceed it.
Unfortunately, during the height of previous inventory levels, we lost many of the fundamental policies to efficiently and effectively manage the industry, and many profit centers arose which don’t necessarily provide the best return for those we service.
Knowing your return is always key for business, yet many have no true data to interpret for evaluating results. In essence, the industry created its self-fulfilling prophecy and must create more changes to correct these to become efficient. Whether it’s relaxing regulation, creating vendor scorecards that measure skill and performance, better data to monitor processes, or focusing on substance instead of form, we see a few companies shift to help open the path to efficiency and better returns. At U.S. REO Partners, we brought together the top professionals who have the commitment, experience, and reputation of many of the people leading the industry and who have been around for 20+ years. We know how to differentiate data that is statistical noise from what is relevant to the industry and what it takes to maximize return (which we always did), not just dispose of quantity (which happens in the industry cycles). REO/default is still higher than the norm but is still being compared to the height of the bust with “inventory down,” yet only some know what is out there to plan for the coming year. US REO Partners’ recent webinar focused on what data is out there, how to use information, and how to better develop yourself and your business to meet the future. No matter what external influences govern the industry, it’s still a matter of how each individual involved is qualified to handle what is coming.
Hudson & Marshall
Shawn Miller, Director of Business Development
Note: This excerpt written by Shawn Miller is an outtake from “Breaking Down Housing: The 2017 Industry Outlook.”Read the full article in the December issue of DS News.
The residential mortgage default space has evolved and diversified in 2016. These changes have been driven by many variables, but the two core fundamentals have been basic supply and demand economics. The U.S. and International market demand continues to remain strong for U.S. residential property and continues to absorb much of the residential foreclosure supply at strong returns. The ownership demographic of residential loans and REO has shifted with the increased demand from sellers and buyers of non-performing and re-performing loan pools. This ownership shift, coupled with strong market demand, has driven different strategies to optimize returns for the portfolio.
The growth and value-add of utilizing third-party auction companies for foreclosure auctions have allowed servicers to increase third-party sale conversions while yielding strong returns. By engaging established and experienced real estate auction companies, foreclosure sales benefit from a significantly larger and more robust buyer pool versus the traditional foreclosure sale process. This increased demand, bundled with the efficiencies and auction experience supplied by a third-party auction provider, drives strong results. It has proven to be an effective disposition strategy. The updates to the Federal Housing Administration’s Claims without the Conveyance of Title program and similar program adoptions by several other government guaranteed loan programs, have validated the value of engaging third-party auction companies. As REO supply stabilizes, auction companies are educating the investor demographic about foreclosure auction opportunities and the value-add of expanding their acquisition strategy.
As it relates to REO dispositions, there has been a tremendous shift in methodology and strategy to maximize recovery for each property. Historically, REO dispositions were divided between conventional and alternative strategies. Conventional would be the most traditional approach of engaging the most qualified listing broker to market and sell the asset through the traditional channels including—but not limited to—the multiple listing service, signage, broker networking and various marketing mediums. The alternative would include donations, bulk/pool, and auction. With more stabilized REO supply levels and healthy market demand, many REO sellers are leveraging both conventional and auction strategies simultaneously. By taking a multi-channel approach, sellers benefit from the value-add of both strategies and two very large, expansive buyer pools. This approach has yielded an increase in overall execution, cycle-times, and offer activity—especially within markets benefiting from strong price appreciation. By immediately engaging a multi-channel disposition approach at REO intake, sellers will receive a direct pulse on market demand, pricing generated through a transparent offer submission process and benefit from a date-certain for sale. At the conclusion of the multi-channel marketing program, the ownership will have all the information to make an educated business decision to sell the asset in its current condition, continue the eviction process if applicable or choose to create additional value through a repair strategy. If a repair strategy is elected, the multi-channel disposition approach is then engaged at completion to ensure the property is exposed to all buyer demographics and yields the most return.
There is a different approach for every seller to optimize the return of their foreclosure and REO portfolios based on numerous factors and goals. With the evolution of the conventional brokerage and auction strategies, coupled with overall market conditions, sellers have several powerful options to leverage multiple disposition channels or the option to leverage all disposition strategies simultaneously.