Asset Foreclosure Services, Inc. - August 2006 - Managing REO, Making Foreclosed Property Profitable

Volume 1, Issue 11
August 23, 2006

Catching Defaults Earlier In the Process

If cases are referred early there can still be time to stop defaults and fix the problem before the borrower enters foreclosure.

By Jennifer Harmon

As the REO market opens up in places like the Midwest, servicers are rushing to stop defaults before they move into foreclosure status. And even though default ratios are climbing on a national level, there is still an opportunity for lenders to catch borrowers early and help get them on a payment plan. A variety of default solutions are available to assist in bringing the mortgage current.

Servicers have a huge amount of inventory in terms of foreclosure and loss mitigation. Companies like Asset Foreclosure Services, Inc. in Woodland Hills, Calif., create customized plans for different households if the borrower is unable to make their payments. It meets the needs of a diversified clientele including servicers, sub-servicers, banks, and private investors.

AFS is a full-service trustee company that provides a variety of default servicing solutions throughout California, Arizona, Idaho, Montana, Nevada, Oregon and Washington. It specializes in solutions that include in-house foreclosure, reconveyance, post foreclosure services and loss mitigation support.

The AFS team creates customized plans for each client using the latest tracking technology such as, Iclear, MDS, Vendorsape and Lenstar, which ensure servicers always know the status of their file. The boutique style operation enables AFS's close-knit staff to deliver individual attention. Loan servicers and investors both incur heavy losses while managing defaulted loans. It's essential to understand the timelines and importance of expediting the foreclosure process. "Unfortunately it depends on the servicer and when they decide to
accelerate the loan. There are different cases where there is still time. If the borrower is too delinquent, it can be difficult to set up a plan to meet servicing requirements," said AFS Default Manager Victor Merritt.

AFS manages assets from a servicer's perspective to ensure cost-efficient and expeditious processing. Forebearance agreements, work-outs and short sales offer more choices in loss mitigation. Some servicers might not collect interest on loan for several months. And if the servicer does not wish to suffer a severe loss, it will likely provide an opportunity for the borrower to get into some type of  forebearance plan. “We work to provide the consumer with the best possible option to save their home,” Mr. Merritt said. The bank does not want to spend money and time to market the property as unforeseen costs reduce its value."

California is unique in terms of the appreciation of home values. The state has seen average 20% price appreciation with homes in certain parts of the state rising $300,000-$400,000 in the past three years. For a lot of borrowers in California who received 2-3 year fixed mortgages or LIBORs, those loans are beginning to amortize and reprice or they are currently adjusting every month. "In Orange County, we're seeing homes that, theee years ago were valued at $350,000 that are now worth $700,000. Homes are like ATM machines with
homeowners taking home equity. As a result of dangerous financing, people can't afford the payments when the loans adjust," explains Mr. Merritt.

In addition, borrowers attempting to refinance their loan after missing several mortgage payments can be challenged, especially in a market of rising interest rates. “It’s not rare for the borrower to wait until the last minute to say something, explains Mr. Merritt. "They wait for a phone call from the servicer and they ignore the letters. Most of the time if they had communicated early on, borrowers could get help before servicers take action.”

If cases are referred early enough in the process there is still time to stop defaults before foreclosure. Companies like AFS devise unique plans to help borrowers catch the problem beforehand. The company offers nationwide referral services and has carefully selected counsel throughout the U.S. based on customer service and adherence to timeline requirements. There has been a shift
all over the country with default ratios climbing in states like Arizona and California. "Three years ago there was a shift towards creative financing. People got into homes they couldn't afford; often, they were too large. Taxes and upkeep couldn't be maintained while the homes appreciated," he says. This is a very negative picture that has become all too real.

Reacting to the current market, AFS has incorporated its web-based system that enables clients access to files from any computer with a user ID and password. The company's system provides for a near paperless environment allowing servicers to receive their status reports online at any time. Twenty-four hour processing, with little more than a completed declaration of default and copy of the original deed of trust. This allows AFS to guarantee processing of a new referral within 24 hours of receipt.

Besides in-house foreclosure services, AFS can handle complex foreclosures, deed in lieu of foreclosure, and post-sale REO and eviction services. They also deal with Bankruptcy, Chapters 7, 11 and 13 as well as Bankruptcy litigation.

Mr. Merritt also says criteria and guidelines such as FICO requirements are tightening because the risk side of the business is going up. In a big change from four or five years ago, he explains that investors are growing more and more worried. Bankruptcy filings are back up after years at a lower level. "The new law is designed to help borrowers repay their debt but many are at a point where they can't pay," he said.

In terms of the national economy, many people have qualified for loans they never should have received, he said. Borrowers rushed into loans with huge prepayment penalties. Stories are unique and every borrower has his or her own issues to deal with. "We want to know what has happened to them. What is their reason for default? It helps if we see a theme or trend," Mr. Merritt explains. Lenders want liquidity, lower risk and lower losses. Borrowers need relocation assistance. In many cases, mortgage banks contact the auction firm for property liquidation opportunities to retain homeowner’s equity. If the property has reached post foreclosure status, public auction is a popular way to go for investors, especially in California. A huge market of REO is invaluable for investors who act like a normal Realtor in many instances. They handle repairs or forego them if they already spent that much on the sale. “Borrowers have been known to rip up floors and break windows. You want to help the borrower before it gets to that point. They are disgruntled because you are taking their home away from them and will retaliate. These borrowers will leave you different gifts to remember them by,” explains Mr. Merritt.

Knowing this, it is vital for lenders to take every step to protect their assets. Property inspections should be ordered systematically on a property that has any potential of being damaged or vacant. Also, property inspections can uncover vital information about the asset that may alter the direction the servicer will take going forward. For example, an inspection could uncover a property has illegal activities going on inside just from observation. In this case the authorities will need to be notified. “Diligence and consistency can save the investor time
and money,” says Mr. Merritt. It is important to remember the asset is usually the only way the investor can recover their losses, make sure the foreclosure/REO process is always executed correctly and professionally.