Increasing Portfolio Value and Reducing Risk

The Need to Perfect Loan Collateral and Document Custody by Debbie Lastoria and Meaghan Hanley Every loan has a value at origination. The loan officer makes their commission, and based on the secondary market, the investor pays for a loan in accordance with the underwriting basis for which it was closed. This value should survive the life of the loan—but we all know it may not. The value may be impacted by a refinance for a better interest rate or default by the borrower, and this is considered based on statistics. However, there is an exposure that exists with the condition of the collateral file, which is not often taken into consideration upfront. Having a solid process of tracking and maintaining (at a minimum) the mortgage note, recorded mortgage, and title policy at origination is key. In a perfect world, you would originate all your loans and have that process put in place. Now enter the complex world of mortgage banking, where your portfolio was not self-originated, but rather acquired or purchased. Then add into the equation that your purchases include re-performing or non-performing assets. If the collateral file is the underlying basis of your loan value, how do you manage to a complete and perfected file regardless of the origination source? The growing need for a more complete custody process Before the financial crash, investors focused their loan origination requirements on a solid loan underwriting process. The assumption was that a good process would reduce the risk of loss should the borrower run into a financial setback and default. We all know that this was not the case, and then suddenly in 2008, the collateral file became the most important factor to sell a loan, foreclose, or even successfully release the lien. The problem was, while everyone was focused on the underwriting factors, the collateral file management was a secondary afterthought at best. Fast forward, it has been reported that homeowners in some form of default are back to 11% when pandemic related forbearance is considered. This, compounded with increased origination and payoff volume, along with the work from home challenges will again put stress on any collateral handling practices including the well-managed ones. With the challenges of 2020, the needed controls on managing a perfected collateral file have become more of a priority at origination. However, we are still seeing literally hundreds of thousands of collateral files with important documents missing, sometimes even the promissory note or endorsement to the proper interested party/entity. Regardless of whether you know the condition of the file, a perfected collateral file will be required for ALL life of loan events—which may be much more costly to manage when required than a proper review and remediation upfront.  For example, this caused serious problems during the foreclosure crisis because servicers were not able to provide the courts with proper documentation indicating their right to foreclose. In judicial foreclosure states, this problem proved to be very costly. In some states, the inability to produce the signed note meant the servicer’s entire case was lost. As a result, servicers are now required to validate their standing prior to first legal proceedings. This process includes not only a review of the collateral file but also a comparison to current land records to ensure all assignments of record are considered in the determination of the lender of record. While the number of loans in default had returned to pre-crash levels with proven successful loss mitigation efforts, this costly review process is still impacting the cost of servicing overall and will only get worse again as we prepare for the impact of pandemic related forbearance fallout. The market for whole loan sales is re-opening and all indicators point to a healthy expansion in 2021 especially when factoring in the non-QM origination and EBO (Early Buyout Program).  Purchasing and/or selling these assets typically requires loan review factors such as the underwriting and the mortgage position, as well as the condition of the actual collateral file validated with the land records. Typically, in today’s environment, this process could include: 1)  a due diligence firm, 2)  a title company, 3)  a custodian, 4)  a collateral remediation expert, 5)  attorneys, and then the custodian again. Not only does each contributor charge at a minimum a per order intake fee to begin the work, but the compilation of results from all parties in this fast-moving market is also taking too long. To further complicate matters, the results are inconsistent, causing further delays. The result is that some buyers are finding it difficult or impossible to combine analytics from all these parties relating to the loan in time to know the real value of the portfolio so they can make a quick resale back intothe market. If a firm that has just purchased a portfolio with the intention of turning it right away cannot quickly, and accurately, assess the value of the loans, they are likely to undersell. We have personal experience with a firm that, after successfully completing a project of the type outlined in this story, increased their purchase price by $50 million from the data compiled vs. the data confirmed. This suggests that the downside risk of failing here will be measured in tens of millions of dollars lost. Clear signs that the industry needs a better solution In our work of helping portfolio sellers prepare their pools for sale, we have found that the existing exception reports are often inaccurate even when reviewed by multiple firms. The non-note collateral is often improperly married to the note collateral and improperly handled trailing documents fill backlogged queues. Worse, where each of the parties investigating the files returns a different result, it must be re-reviewed to resolve the discrepancies. Some new origination or seasoned portfolio issues that should be considered for best execution downstream are: Ensuring you have proper controls for Agent and/or Corres-pondent follow-up Building a tracking and reporting vehicle that incorporates third party data sets Pre-sale review and remediation to proactively

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Hindsight is 2020

Looking Back on Last Year’s Top REI Insurance Claims by Shawn Woedl With 2020 in the rearview mirror, we can look back on the year and see what we learned. Last year proved that you cannot prepare for everything, but some of the most common insurance losses that happen across the real estate investment industry, year after year, can be mitigated or avoided completely with some planning and commitment. Let’s look at the most common claims submitted last year and some practices an investment property owner can follow to protect their valuable assets. Cause of Loss #1: Wind/Hail With a record-setting 30 named storms (more than two and a half times the annual average), it is no surprise that Wind claims increased 21% compared to 2019. Last year broke 2005’s record of 28 named storms, blowing through the assigned alphabetical names and moving into the Greek alphabet. While these storms certainly caused significant damage (especially those late in the season), they luckily didn’t reach the damage estimates of 2017’s Maria, Irma, and Harvey (more than $90 billion combined). Prepare Your Properties for the Storm If you own properties in the Southeast or along the Eastern Seaboard, you can take steps to prepare for impending storms and limit the damage your property may endure. Well before a storm hits, ensure you have fans, water pumps, cleaning supplies, and a portable generator on hand. You may consider installing permanent storm shutters, but a second option is to use 5/8″ marine plywood cut ahead of time to fit over windows. Tape does not prevent windows from breaking. A well-maintained property can help mitigate damage. Be sure gutters and downspouts are secure and clear of debris. Keep trees and shrubs well-trimmed so they are more wind resistant. Be sure the battery backup for your sump pump is working to prevent drain backups. When it’s safe to visit the property, you may find broken windows, holes in the roof, or standing water. Use tarps to cover openings in case of additional rain, or secure with plywood to discourage thieves from accessing the property. Water can cause mold to form quickly. Act swiftly to dry out wet items. Put furniture on blocks, remove area rugs, and bring in a water pump and fans. Now is a great time to be sure your insurance policy covers Named Storms (a storm or weather condition identified by name by the National Weather Service). Some standard property policies exclude this cause of loss and require that it be purchased separately. Don’t be caught flat footed after the fact—review your policies now, before hurricane season. Cause of Loss #2: Fire Fire is one of the most avoidable causes of loss for investors but remains one of the most common. Preventable Fire Losses The COVID-19 pandemic meant more people were staying at home, which increased opportunities for negligent fire losses. Cooking is the leading cause of home fires, starting from either a grease fire that gets out of control or from unattended cooking. It is critical (and often required by your insurer) that your properties, whether tenant-occupied or vacant, have working and well-maintained smoke detectors. They should be inside every bedroom, outside each sleeping area, and on every level of the home, including the basement. Have a plan to inspect them monthly and change the batteries twice per year. Place fire extinguishers at readily accessible locations in the kitchen and other main areas. Fire extinguishers can help put out small fires before they become uncontrollable. Research the various types available and educate your tenants on their use, as well. During colder months, heat sources can also lead to fire losses. Have all fireplaces and chimneys professionally inspected, and fixed if needed, before the cold season hits. Space heaters should not be used as the primary heating source. If allowed, they should be equipped with safety features such as auto-shut-off, be plugged directly into an outlet, and never be left unattended or allowed to run overnight. Cold weather and increased homelessness can also mean that vacant and renovation properties are more susceptible to squatters who need shelter. It is not uncommon to see a property burn because someone taking refuge there lit a fire to stay warm. Be sure the home is properly secured to keep them out. Wildfire Losses 2020 was also a record-setting year for wildfires with more than 52,000 recorded fires from California to Colorado. Last year nearly 9 million acres went up in flames, almost double from 2019 and 2.3 million more than the 10-year average. If you invest on the West Coast or within a mountain zone, there are regular maintenance practices that can create a “defensible space” around your properties. Keep the area around the home clear of dead vegetation, dried leaves, pine needles, ground debris, and anything that will burn. Remove tree limbs that overhang the roof, and keep the roof and gutters clear of branches and debris. Do not store combustible materials in or near the house and make sure vents are covered with 1/8″ mesh screen. Be sure the property has garden hoses long enough to reach any area of the home. Cause of Loss #3: Theft and Vandalism Vacant and renovation homes are always more at risk for theft, but the pandemic has heightened this risk. Many theft losses can be avoided by taking simple security measures. Make thieves and vandals believe the house is being lived in. Set exterior lights on a timer or install motion-activated lights. A well-lit exterior may discourage thieves from approaching your property at night. Keep the yard cut and clean, and trim back trees and shrubs that may block views of the house and provide places for thieves to hide. Make sure the property is properly secured—lock doors and windows and reinforce them with sturdy hardware. Use an alarm system with monitoring. If someone does break in, they may leave just as quickly if the alarm goes off. Lastly, monitor the property frequently, check the mailbox,

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