As the mortgage-lending crisis spreads, business is booming firms specializing in "property preservation."
Three weeks ago, 50-year-old Mimi Norris strapped on black steel-toe boots, packed a face mask and a digital camera in her bag, and headed to work. Her assignment: inspecting a foreclosed home in a blue-collar neighborhood of Akron, Ohio.
From outside, the small white house appeared to be in good condition, but as Ms. Norris unlocked the door, she braced for what might lie inside. At worst, squatters or drug dealers she'd have to sweet-talk her way around, or mold so thick her throat would close up. At best, she'd probably find debris and tattered possessions, a snapshot of despair faced by the vacating homeowners. Her job would be to capture it all on camera and make repair recommendations to the lender now in possession of the property. Then the lender might hire her firm to arrange the fixes.
"You don't know what you'll find until you step foot inside," says Ms. Norris whose firm JR Services LLC in Norton, Ohio, services foreclosed houses across Ohio.
As the mortgage-lending crisis spreads, business is booming among small mortgage field-servicing firms such as JR Services, which specialize among other things in "property preservation." Driving the trend: the national homeowner-vacancy rate, which measures how many vacant homes are for sale. That rate rose to 2.8% in the fourth quarter of 2007, matching a record set in the first quarter of last year; by some accounts, it hasn't been this high since the Great Depression. Meantime, U.S. foreclosure filings, a prelude to vacancies, surged 75% last year to 2.2 million, according to RealtyTrac. In December alone, there were 215,749 foreclosure filings, almost double from December 2006.
Across the country, a web of handymen, contractors and inspectors like Ms. Norris are on the front lines of a battle to keep the vacated homes free from burst pipes, vandals, rot and animals until they can be resold -- and to preserve the integrity and living conditions of neighborhoods. In some cases, these mortgage field servicers work for the lenders who are foreclosing on the house. In others, they act as vendors to big national middlemen who handle large volumes of foreclosures and then farm out the fix-up work to these smaller regional shops. While a large proportion of the companies, big and small, are private, some trade groups estimate mortgage servicing to be a $1 billion business with 8,000 to 10,000 active companies in operation.
While business has been building for these small companies over a couple of years, the recent surge is producing a share of angst. Lenders faced with growing housing inventories they need to sell are pushing servicers to handle more houses, faster, piling on the pressure. "Even the quality control of a good contractor who has been able to handle the volume in the past, he begins to slip and then it snowballs from there," says Tim Doehner, executive director of National Association Mortgage Field Services Inc., an industry trade group that includes 400 members.
For her part, Ms. Norris says business has tripled in the last year in terms of foreclosed homes handled. Her firm is private, but she says revenue was between $300,000 and $500,000; Ohio ranked No. 6 in foreclosures in 2007. Likewise, Ginni Benderman of Eagle Inspections in Muskegon, Mich., a state that was No. 3 in foreclosures with 136,205 filings last year, says business has doubled for her 10-year-old firm over the last few years. "Michigan, for lack of better words, has gone to hell in a handbasket," Ms. Benderman says.
Much of Ms. Benderman's new business filters down from the bigger national middlemen, which are struggling to keep up with requests. Revenue has doubled in the last year for Mortgage Contracting Services LLC in Tampa and is expected to double again this year, says CEO Allan Martin. Meantime, revenue tripled last year to $9 million for Houston-based Mercantile Group Ltd., doing business as Integrated Mortgage Solutions. The company now services 50 clients -- up from 15 eight months ago -- including lenders and their real-estate agents as well as investors and auction companies dealing in foreclosed homes. "It's such a whirlwind," says IMS President Cheryl Lang. "Hopefully it will calm down soon."
The surge of foreclosures is also tempting droves of newbies -- some qualified, some not -- into the mortgage field services industry. "You have to be very, very leery," Mr. Doehner says. "It's not just a matter of owning a pickup truck and going out and doing the work." To that end, in December, Mr. Martin of Mortgage Contracting Services created an internal quality assurance department to try to ensure consistency and regulatory compliance among its some 600 vendors around the nation. At IMS, before-and-after pictures are now required for all work performed and scrutinized by the company to make sure a job was really completed and that photos of cleanup work aren't fakes taken of other homes and submitted for claims. "We know that in the middle of Michigan, for instance, there should be no leaves on the trees in the middle of winter," Ms. Lang says.
It's a strange and sometimes harsh line of business. Work often begins when a homeowner is 45 days delinquent on mortgage payment and the lender requests an occupancy inspection. A simple drive-by can yield clues: no toys in the yard, no car in the driveway, an overgrown lawn, no lights on at night. If the owner continues not to pay, field-service reps might be asked to contact homeowners and try to resolve the default situation -- known as loss mitigation. Finally, if a home moves into foreclosure, field-service vendors do everything from help pack up homes for evicted tenants to remove family pets, dead and alive, left behind when owners vacate. Then the nitty-gritty preservation work to maintain the vacant property begins.
Among the smaller vendors that perform property preservation services, working faster in the middle of winter can be particularly tricky. Doug Feinholz runs Property Preservation Services Inc. in Denver, where the terrain often impedes the job. "We have to navigate remote canyons and unpaved roads," he says. "Even going up a mountain and hauling landscape equipment requires bigger trucks with more powerful motors, and the lack of oxygen can reduce the equipment's horsepower."
Navigating the finances of this industry isn't always simple either. The U.S. Department of Housing and Urban Development publishes guidelines of reimbursement rates that it will pay lenders for preservation services performed on homes whose mortgages HUD's Federal Housing Administration unit insures. Those guidelines are used as an industrywide benchmark. For instance: $40 to secure a door with a new lock and $20 to inspect the exterior of a home for occupancy. For some tasks, rates vary by state: $180 to remove a vehicle in Alabama vs. $240 in Michigan.
Often, field-service providers say, they must negotiate with lenders for more money. "If you're paying $40 for a guy in a van to drive 20 miles at $3 a gallon for gas and then you give the middleman anywhere from 5% to 50% of that for giving you the job, now you basically have a guy changing a lock for nothing," says Ms. Norris of JR Services.
Then there's cash flow. For instance, Ms. Norris typically pays workers right away to change a lock or shovel snow but sometimes her firm isn't reimbursed for 60 to 90 days. That has meant securing lines of credit to cover the gap. "Five years ago, we did the majority of the work ourselves," she says of herself and her business partner. "Now we've got 30 contractors working for us."
The Akron house Ms. Norris inspected three weeks ago, which seemed in decent shape from the outside, turned out to have a hole in the roof, mold, and mushrooms growing out of the carpet where water had seeped in from the ceiling. Piles of debris and a filthy recliner were left behind. It took three men in Hazmat suits to complete the cleanup last week, to the tune of $4,000; Ms. Norris says her firm will see about $300 of that. She's waiting on approval to complete other repairs, including the roof.
"We are glad to be doing well, but this is sickening," Ms. Norris says. "We don't like to see people lose their homes and there's just far too much in places like Ohio and Michigan. It's deplorable."
[Via - StartupJournal.Com]