Vacant, Damaged, and in Default: A Servicer’s Dilemma
Mortgage servicers envision a scenario where a borrower is happily
living in his/her house, maintaining it, and promptly paying the mortgage every month.
The borrower also pays taxes timely, and maintains the appropriate insurance coverage
on the property.
That is not the scenario we are talking about here.
This paper will discuss the opposite situation – one that begins with a delinquency and
evolves into a property inspection. An inspection that reveals a vacant, abandoned,
property that has suffered damage. All too often, the borrower in this scenario is
nowhere to be found, and cannot be contacted. A foreclosure date is set in the distant
future, but only if there are no delays/moratoriums/other issues to push it back even
Now what do we do?
Property Preservation-Pre-Sale vs. Post-Sale
Since the 2008 financial crisis, there has been an ongoing debate regarding best practices to managing vacant, damaged properties in default. There is an inherent risk complying with GSE, investor, and guarantor asset preservation requirements, in addition to all municipal, county, or state regulations. In some cases the servicers’ requirements to manage a property in default may conflict with specific codes, regulations and rules. These contradictions can leave the servicer exposed to a number of pitfalls that include regulatory, financial, and reputational risk. While we believe that most business decisions involve an evaluation of risk and reward, this particular subject does not leave much room for an error in decision.