By JAMES G. PANERO, Esq.
11/5/2001

In these recessionary economic times, mortgage companies are paying much closer attention to issues of loss severity and loss mitigation on their non-performing assets. Clearly, after the non-performing asset has progressed through the foreclosure process, the final opportunity to mitigate loss is through disposition of the underlying real estate. Although it may appear that once the asset reaches the REO Department, there is no longer any further potential exposure or loss potential, this could not be further from the truth. This, together with the increasing trend of outsourcing the disposition function raises numerous risk management and exposure issues of which servicers should be aware.

This article will briefly examine some of the many potential areas of exposure that may be encountered when outsourcing the REO disposition function. Although discussed in the outsourcing context, many of the areas of exposure addressed below can also be applied to the in-house REO Department as well.

Obviously, the first opportunity to prevent unnecessary losses down the road is in the selection of the REO Outsourcer. A true REO Outsourcer should act as an extension of the client's REO Department providing all of the functions for which the typical REO Department would be responsible. As such, lying at the core of the outsourcer's responsibility should always be a concerted focus and attention on loss severity, loss mitigation and risk management. This would include the close and careful monitoring of all relevant third party vendors such as agents, appraisers, title companies and eviction counsel so as to effectively and expeditiously move the asset through the disposition process; the clearing of title; identifying and mitigating exposure relating to defective foreclosures; monitoring and supervising the eviction process; and having at least a general understanding of the various processes and legal proceedings encountered in the default arena such as foreclosure, eviction, redemption and bankruptcy.

As REO portfolios continue to grow, many companies have recently emerged across the country who market themselves as "REO Outsourcers" or "REO Asset Management Companies". However, in many instances, these companies do not have the knowledge or expertise to effectively dispose of assets while protecting the client from unnecessary loss exposure. In fact, many of these firms often turn out not to be true outsourcers but rather mere "referral networks" whereby real estate agents refer REO listings to other agents around the country or in a particular region. Such providers typically do not engage in any activity beyond the traditional services provided by a real estate agent and therefore require the client to closely micro-manage every step of the process as they would with any broker-direct channel. Although this may be perfectly acceptable for some clients, very often the true nature of the services provided are not disclosed up front. It is only after investing considerable time with such a provider that clients realize their mistake. Oftentimes, this realization occurs after routine outsourcer responsibilities such as the clearing of title suddenly becomes the client's problem at closing; or when the property is not selling due to the outsourcer's failure to properly establish true market value.

There are many other specific areas of the disposition process that represent fertile ground for potential exposure problems. For example, closing delays frequently result from the inability to transfer clear title at closing thereby forcing the client to incur additional unnecessary carrying costs. If the outsourcer is simply referring title issues back to the client for resolution, a necessary and critical function of the outsourcer's job is not being fulfilled. It should be the outsourcer's responsibility to see that everything possible has been done to establish clear title prior to closing. Due to the many transfers that a loan may have gone through since origination, especially in the subprime market, it is inevitable that there will be cases where liens were not properly removed from record; were not extinguished at the time of foreclosure; or were simply never addressed. If these issues are addressed early in the process, many of the closing delays and resulting carrying costs may be avoided.

Another frequent source of potential liability is taking action on a property that is subject to a post-foreclosure redemption period. The extent of activity in which a foreclosing mortgagee may engage with respect to a property in redemption is governed by state law. In some states, the foreclosing mortgagee will not only be prohibited from taking possession but will also be prohibited from taking any action on the property whatsoever such as gaining access for an interior BPO or appraisal; or for taking remedial steps to preserve the property. Since violation of these laws could result in serious legal exposure, competent outsourcers should be consulting with local counsel so as to protect the client from this avoidable exposure. There is nothing a former debtor would enjoy more than bringing suit against the mortgage lender who just foreclosed on her home.

Similarly, in many states foreclosure sales are subject to confirmation proceedings. It is often illegal for the foreclosing mortgagee to take any action (such as securing, re-keying, etc.) on a post-foreclosure sale property until confirmation or ratification of the sale. In some states, it may take up to 45 days for confirmation of the sale to be completed. Even though many clients may be chomping at the bit to start moving the asset through pre-marketing, to do so during this time may result in serious exposure.

There are many other potential problem areas that could result in losses above and beyond the normal costs associated with carrying REO assets in portfolio. An effective, knowledgeable and competent outsourcer should be able to identify many, if not all, of these potential problem areas as they arise. Doing so will enable the client to take immediate preventative measures to avoid incurring further losses and to effectively move the property through closing.

Article © MortgageDaily.com All Rights Reserved