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» VISIT US ONLINE @ DSNEWS.COM SPECIAL ADVERTORIAL SECTION SPECIAL SERIES: LOOKING BEYOND THE LAYERS OF DEFAULT SERVICING REO ASSET MANAGEMENT INDEX Maneuvering the REO Market's Ups and Downs A s foreclosure rates began to climb, lenders and institutional mortgage investors became property owners at a rapid click, adding asset after asset to their swelling portfolios. Enter: the asset manager. During times of high-volume inventory, the accrual of daily carrying costs combined with the impact vacant homes in masse have on local communities make the REO asset manager the most central component of a servicer's disposition strategy. Reports from the field, though, indicate REO volumes are shrinking. DS News talked to the industry's leading REO asset management companies, and they say the inventory is there, and it's coming … eventually. Matt Martin, CEO of Matt Martin Real Estate Management (MMREM), says REO inventories appear on the surface to be contracting because servicers continue to struggle with foreclosure timelines, particularly in markets like Manhattan where the average time to foreclose is over five years. Within the pipeline, though, "there's a massive amount of supply" in terms of nonperforming loans, Martin warns, and that's evident in the sheer number of delinquencies. Cheryl Travis-Crawford, EVP at Vendor Resource Management (VRM), agrees. "The conversation is not about where is the inventory, but what are we going to do about it?" she says. "We know where it's at; it's sitting there in delinquency." Paul Sveen, CEO of Integrated Asset Services (IAS), anticipates "the flow of REO to pick back up throughout 2013 as servicers and banks develop their strategies to operate within the terms set forth in the settlement" struck earlier this year between the federal government, 49 state attorneys general, and the nation's five largest mortgage servicers. Rick Sharga is EVP of Carrington Mortgage Holdings, the parent company of Carrington Property Services, which provides REO marketing and management services to institutional property owners. On REO supply, he says Carrington is "not seeing a shortage but scarcity, certainly, especially in markets where we see a lot of activity from investors." Sharga believes the impact of shadow inventory has been overblown and there's virtually no likelihood the industry is going to see a flood of inventory hit the market and sink home prices. But, he warns, "The other number in this mix is the number of homeowners who are upsidedown on their homes." Estimates of negative equity borrowers range from about 20-25 percent of all homeowners with a mortgage. Travis-Crawford says this "saturation of underwater properties" is one of the biggest issues in housing right now that needs to be addressed. "What are the market solutions around the housing situation that exists today?" TravisCrawford poses. "We should be offering community solutions that help sustain or ultimately lead to homeownership, so what are some workable solutions to address the [negative equity] issue so these homeowners aren't harmed by our actions?" She submits that although REO rental initiatives have garnered quite a bit of media attention, "any rental solution has to be a shortterm solution that leads to homeownership." Sveen says he's seeing "tremendous growth" in rental support services. "For investors in single-family residential, this is an important service offering as they look to earn cash flows off of an asset until they achieve a home price appreciation at which they are comfortable to sell," Sveen explains. Even with—perhaps more accurately put— because of the REO market's ups and downs, asset managers are a critical component of the default servicing process. Over the next few pages, DS News spotlights the asset management companies in the REO space that stand out as a cut above, with the experience and track records to optimally market and manage bank-owned properties to maximize each asset's return. 75

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