USFN Spring 2005 Regional Default Servicing Seminar
Huntington Beach, CA April 20th-22nd
Property Preservation Session (April 21st)

Panelists:  Laurie Maggiano, Tom Rose, and Shelby Rigg (HUD); Laura Hennes, Kimi Yamamoto (PEMCO); Mike Hardiman, Shelly Smith (NHMSI); LuAnn Kogler (MC&B); Caroline Reaves (First American National Default Outsourcing); Sherilee Massier (WFHM); Doug Licker (MCS); Paul Magaha (First American Field Services); Yvonne Neighbor (Countrywide Field Services); Jan Brown (Superior); Marc D. Engel (Fisher & Fisher); Robert Klein (Safeguard Properties)

Caroline Reaves spoke first, mentioning the MBA HUD Committee, which meets a couple of times a year with HUD to review issues of concern to the mortgage industry, and she applauded the success the committee has had building communication with HUD.  HUD has been responsive to all of the issues the committee has brought to them, and Caroline encouraged servicers to bring issues to her, Vicki Vidal of the MBA, and Robert Klein of Safeguard, to be added to the agenda for future meetings with HUD.

Laurie Maggiano of HUD presented a PowerPoint slideshow about the M&M contracts.  She noted that HUD has awarded 24 contracts to 13 different contractors.  The last award, for Philadelphia HOC Area 2 (the states of Michigan and Ohio), has been made to Greenleaf Construction, who is subcontracting the work to MC&B, the contractor previously servicing that area.  Santa Ana HOC Area 3 (Washington, Oregon, Idaho, Alaska) had been awarded to Harrington, Moran, Barksdale, Inc. and has been under protest since the award was originally made, but Laurie indicated that the matter seems to have been settled and they anticipate HMBI will take over this area on or around June 1, 2005.

The new M&M contracts are performance-based: the contractors are given standards and expectations and are then allowed more latitude than the previous contracts afforded to find their own ways to meet these standards and expectations.  There are incentives for performing above the minimum standards and disincentives for failing to meet the standards.  So far, she said, the M&Ms have indicated that they are very happy with the arrangement.

The new contracts also established national oversight of the M&Ms to create more uniformity in how standards are applied.  Any changes to requirements or procedures should come down from the National GTR and the National Contract Office.

HUD also established a requirement that the contractors maintain an Electronic Monitoring System (EMS) that allows HUD to view inspection reports, correspondence, overallowable and extension requests and responses, etc., to keep tabs on how things are progressing.  While the M&Ms are not contractually obligated to allow the servicers access to the EMS, some have set up a "lender center" to foster better communication.  Laurie encouraged servicers to contact the M&Ms to discuss this opportunity.

Some of the new contract provisions include reducing the amount of time the M&M has to respond to servicer requests (for bid approvals, overallowables, extensions, etc.) from ten (10) days to five (5) days, and instructing M&Ms that they must not reject properties conveyed with less than $2500 worth of damage, but may reduce the claim by the cost of the required repairs (though the servicer may elect to accept reconveyance of the property instead of the reduction).  Laurie also noted that the contract package includes the HUD inspection form that the M&Ms use for their initial inspections of conveyed properties, and the form is available for use by mortgagees if they so desire.  (Please see Attachment 1, pgs, 127-131 of the M&M Contract.) 
 
Laurie also discussed non-compliance letters, which are issued by M&Ms who find that servicers have conveyed properties without meeting all of HUD's compliance requirements.  The letters are reported to HUD and sent to senior management at the lender shops.  There is no monetary penalty associated with the letters, and the servicers are not required to respond, but Laurie indicated that responses are welcome and that inaccurate letters will be corrected or rescinded.  The M&Ms' comments in these letters will ultimately be used as part of an overall system for rating servicer performance, and HUD is considering delegating additional authority (e.g. for exceeding allowables, etc.) to servicers whose performance is consistently excellent.  The letters, she stressed, are not intended to be punitive, but if it does appear that a servicer consistently fails to comply with HUD's guidelines, that servicer will likely be turned over to the quality assurance division for a servicer audit.

Laurie said that in addition to measuring individual servicer compliance, HUD also intends to use the letters to assess the overall effectiveness of the program and to assess whether HUD should examine or revise any its procedures and requirements.

Laurie directed servicers to HUD's new M&M web page at http://www.hud.gov/offices/hsg/sfh/reo/mm/mm_info.cfm, and she asked that servicers who disagree with the M&Ms about something be sure to read the contract before making a complaint, to determine whether the M&M is simply following HUD's instructions on the disputed point.  If there is a conflict, servicers should first contact the M&M and escalate as necessary within that organization.  If the dispute cannot be resolved, the servicer should then contact the GTR who has authority to give direction to that M&M.  If the matter still cannot be resolved, the servicer may then contact the HUD REO Director.  Policy Headquarters should be contacted only about policy issues, not about case-level matters.  If the servicer does need to review policy issues, that telephone number is 202-708-1672, and the servicer may reach Marlene Robinson (Principal GTR) at ext. 2891, Laurie Maggiano (Deputy Director Office of Single Family Asset Management) at ext. 6879, or Leslie Bromer (Housing Policy Specialist) at ext. 2309.

Laurie noted that while property expenses went down in 2003 and the average sale price for a HUD home went up, HUD's net return still dropped by 1.83% that year.  The average servicer claim on a HUD property increased more than $3000, leading to HUD paying out nearly $125,000,000 more in claims in 2003 than in 2002.  The increase may have been due to increased holding times, to excessive conveyance expenses, or to other as-yet unidentified causes, but HUD is working very hard to analyze the increase and identify the reasons for it, and Laurie stressed that it's in the best interests of everyone in the industry to learn the answers to this.

The panel then turned to topics on the agenda they put together just prior to the conference.  There was an inquiry about the new property preservation mortgagee letter that HUD has said is in the works.  Tom Rose (Director REO Division Santa Ana HOC) confirmed that it is in review but couldn't say just when it is expected to be released.  He did advise, however, that there will be an interim letter and that that will include discussion of the voluntary preconveyance inspection program that a number of M&Ms and servicers have begun participating in.

Laura Hennes of PEMCO indicated that PEMCO in Southern California is very receptive to this program, and she asked that interested servicers call her or Mary Cambero.  She also indicated that as long as servicers have good photos and other documentation of due diligence, PEMCO will work with them.

Robert Klein of Safeguard commented that Safeguard has participated in a number of preconveyance inspections and that we are finding the program enormously beneficial, really helping Safeguard and its contractors understand just what the M&M inspectors are looking for and looking at.  Safeguard has found that many times the M&Ms are pointing to items that are really issues of marketable condition, not conveyance condition, but there is an overall spirit of cooperation, and most of the M&Ms have been open to discussing items that may be in dispute.

Robert also noted that Safeguard has benefited enormously from the opportunity to further educate our contractors about the M&Ms's common concerns and causes for complaint.

Marc Insul of Fidelity and Paul Magaha of First American asked for more information about the inspections, including whether the M&Ms will be using the HUD initial inspection form.  Tom reiterated that the program is strictly voluntary, so there are no set procedures or required forms, though the initial inspection for certainly could be used.  HUD's hope is that this will prove to be a good opportunity for servicers and M&Ms to discuss property issues and to give M&Ms an advance look at the properties coming in to their portfolios.  The mortgagee letter will recommend that the servicer make an appointment with the M&M about five (5) days before conveyance.

Sherilee Massier of WFHM indicated that while the idea is attractive, it's difficult to fit this into the 30-day time frame.  She noted that they rarely have a property in convey condition a full five days before conveyance, though the 5-day time frame for M&Ms to respond to servicers' request has certainly helped.

Laura Hennes suggested that servicers could schedule the appointments even before the property is in convey condition.  If the servicer reports that they still have 20 cyds of debris to remove, for example and that the work will be completed prior to conveyance, the M&M inspector can evaluate the remainder of the conveyance condition and confirm they agree that yes, that's 20 cyds of debris.

Servicers asked if the M&Ms will grant extensions in connection with these inspections.  HUD indicated extensions would not be granted simply for the purpose of completing an extension.  If an unusual circumstance were to be discovered during an inspection, the question of whether that warranted an extension would have to be evaluated on an individual basis.  As for disagreements about what constitutes conveyance condition and what strays into marketable condition, Mike Hardiman (NHMSI) remarked that as the program and the associated "mutual training" goes on, the different entities will get into synch about what the others are looking for and how the guidelines should be interpreted, and the need for these inspections will diminish.

Discussion turned to issues associated with inspections.  Doug Licker of MCS noted that inspections performed after a natural disaster but outside of the regular compliance inspection cycle generally are not reimbursable, although it is common practice for most of industry to perform such inspections.  HUD has indicated that they are reviewing the possibility of allowing servicers to claim off-cycle inspections in the case of FEMA-declared disasters.

Servicers have also inquired about properties that may be especially vulnerable to vandalism or malicious damage but that are not located in a "hot zone" areas: mortgagees would like to know if additional inspections to protect the integrity of these properties might be claimable.  Tom Rose indicated that this would be a policy issue for Laurie Maggiano's group, to review and decide how to clearly define what constitutes a "hot property."  Caroline Reaves noted that Laurie had previously agreed that servicers might bid additional inspections at properties where the servicer perceives unusual risk, as they would with any request to exceed an allowable.  Several of the M&Ms seemed to agree with that notion, but Tom demurred, saying that he thinks additional inspections constitute a variance, not an overallowable, and therefore M&Ms should not have the authority to approve them.  Laura Hennes suggested that increased risk of vandalism due to the geographic vulnerability of a property was not unlike the increased risk of water damage posed by a leaky roof: if there servicer is aware of a potential problem, they should take appropriate measures and bring their concerns to the M&Ms.  Tom indicated that the REO Directors would review the matter and develop some recommendations for how to proceed.

There was some brief discussion of non-compliance letters being issued in cases where the servicer feels they have simply gone beyond the minimum requirements for compliance, as when a property is winterized outside of winterization season or a winterization area.  If the winterization is not claimed for reimbursement, should the M&M issue a non-compliance letter, and should such a letter be considered in the evaluation of servicer performance?  It was noted that, as far as compliance letters are issued to let HUD know what the servicer is doing in the way of preservation, consideration of these letters does seem appropriate.  MC&B also remarked that they must dewinterize the property to perform a utility check, so unnecessary winterizations may cause the M&M to incur additional expense.

There was then discussion of issues associated with bids for preservation work.  The most common conflicts have to do with requests for second bids.  Second bids are an additional expense for servicers, and while the guidelines do establish that they are required for debris removal, many servicers find that the M&Ms are asking for multiple bids for a whole range of services where additional bids were not previously required. 

It was agreed that M&Ms must explain the reason for the request for an additional bid.   Servicers should try to submit sufficient documentation with their first bids to eliminate the need for supplemental bids.  Laura Hennes proposed that for extensive and costly work, servicers should perhaps secure a second bid automatically, but Caroline pointed out that contractors' fees for bids are often a percentage of the total bid amount, so second bids on high-ticket work are even more expensive for servicers.  Robert noted too that additional bid requests slow the whole process, guessing that 90% of delayed conveyances are due in some part to bidding issues at some point in the process.

Mike Hardiman of NHMSI remarked that his staff often finds that even individual items on first and second line-item bids are frequently vastly different.  The staff does try to contact the servicer to get clarification in such cases, but they often find that the most expeditious way to resolve the confusion is to request another bid.

Robert suggested that all parties could agree that thorough, comprehensive documentation of all items being bid is the best way to reduce the need for supplemental bids.

With that, we reached the end of the time allotted for the property preservation session.