STORY BY TIM DOEHNER
July 28, 2008 EXCLUSIVE TO DS News
Pricing Methods Are Outdated
In the “real” world, pricing would be guided by a free- enterprise and market-driven point of view. Supply and demand, for instance, should receive consideration before the final charge is determined. In the world of mortgage servicing, however, government agencies and investors tend to set the standard for fees.
Pricing for property preservation services is driven by guidelines from the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), Fannie Mae, and Freddie Mac. The small print in each agency’s procedural manual makes it clear that its published fee schedules for services are to be used as guideline rather than a rigid pricing structure. On paper, servicers are free to pay more or less for property preservation services than the fee schedules suggest.
However, spelled out in the various guidelines is the fact that these prices are the maximum an agency or investor will reimburse the servicer at the conclusion of the foreclosure process. Over time, these published fee schedules have become the standard by which all pricing is applied. Lenders or servicers are usually not willing to pay more than the amount they can claim for reimbursement, making their investment in preserving their properties a zero-sum game. National field service providers have accepted this method of determining pricing because it is impractical to negotiate every preservation order on a property-by-property basis. Lockset installations, lawn mowing, and debris removal are all examples of services that have become a commodity in the mortgage servicing industry.
How Fees Are Determined
Lenders and servicers negotiate agreements with national field service providers who then subcontract the preservation work to local or regional contractors who actually perform the work. Historically, pricing has followed HUD fee schedules for all loan types not governed by other agency or investor guidelines. Every five years or so, HUD will publish a new mortgagee letter that outlines the fees that lenders can claim when filing their post foreclosure claims for expenses incurred during the course of a default. Changes in pricing occur in the mortgagee letters, becoming the new standard. The VA and other government-sponsored enterprises (GSEs) publish new pricing guidelines annually.
Typical property preservation services include lock changes, winterizations, boarding, pool securing, debris removal, and grass cuts. Pricing variations for services performed can be regionalized down to the specific state level. HUD has attempted to inject more standardized region-specific pricing into its fee schedule across the country. These efforts have resulted in price increases for some contractors and price decreases for others. The theory behind these changes is that services cost more or less in different areas and fees should reflect those differences. The thinking is that disposal of debris, for example, costs more in New York City than it does in Jackson, Mississippi. The manner in which these decisions are made, however, is debatable andSetting the price for property preservation services can be a tricky undertaking. Ihe bulk of existing pricing is based on archaic federal guidelines rather than current materials costs, the cost of maintaining a property preservation company in today’s market, and the recent influx of foreclosure properties. A strong case can be made for reanalysis and adjustment of prevailing property preservation pricing structures.
Running a Company Costs More
The perception may still exist that the typical preservation contractor is a handyman traveling from property to property in his pickup truck performing basic securing services. Today, nothing could be further from the truth. Contractors rely as much on their computer networks as they do on hammers and saws. Most are small business professionals and entrepreneurs who have formalized business plans, departmentalized office staffs, and multiple field crews. The monetary investment in trucks, tools, and materials alone can run into the hundreds of thousands of dollars.
Sensitivity to pricing changes is vital to the success of these local contractors and imperative to their ability to react quickly and survive in a competitive marketplace. The contractors’ core competencies mirror those of any other business owner having to handle sales and marketing, accounting functions, human resource needs, and organizing and administrating the day-to-day operational needs to meet the clients’ expectations. Having said that, the actual performance of the work—physically getting a crew to a property, the changing of the lock, cutting of the grass—cannot be automated.
Property Preservation Expenses Have Increased
No discussion of pricing would be complete without a look at the expense side of work with no guarantee that they will be awarded the job.The property preservation contractor’s balance sheet. In an industry that requires moving people and materials from location to location, contractors are directly impacted by increases in gas costs, which squeezes more profit from an already shrinking margin. Couple the increase in operational costs with the increasing client demand for multiple unpaid or low-paid bids for nonconforming work and it’s easy to see how preservation pricing is always at the forefront of a contractor’s list of concerns.
Litigation by homeowners and mortgagees has made the need for liability and errors and omissions insurance essential. Accusations of property damage and theft are a convenient and disconcertingly common way for delinquent mortgagors to strike back when they are losing their home. Property preservation contractors are constantly at risk of having to defend themselves against such allegations. In these situations, lenders and servicers are motivated simply to make the problem go away and are so overloaded that the time to investigate these claims is not available. As a result, contractors are often forced to pay hundreds, and sometimes thousands, of dollars as a cost of doing business. The increase in claims made against liability policies has lead to increased premiums, compounding the negative impact on the contractor’s bottom line.
The advent of technology has significantly changed operations for many property preservation contractors. Record keeping and invoicing functions have been streamlined and automated to a large degree, but data entry costs have increased. Digital photography has added a new dimension to work documentation, quality control efforts, and ease of photo storage, but it has also led to the perception that there is no cost associated with the technology since the traditional film and film developing costs have been eliminated.
In reality, the cost of the camera(s), memory cards, and batteries, and the time to upload the photos to a remote server very much a part of the contractor’s cost of business. The life the average contractor’s camera is short, due to high use and extreme temperatures as well breakage, loss, and theft.
Lender/servicer service requirements have increased while prices have remained the same. Standard services typically also require a complete property condition report with no additional payment made to the contractor. Damages and adverse conditions must be identified and the cause, location, and recommended cure must be noted. Experts must brought in at times, particularly when damage and repair work beyond the scope of a contractor’s skill set, and the contractor cannot typically charge the client for the time, effort, and cost of managing these experts.
Today’s Property Preservation Challenges
Unprecedented growth in vacant properties has forced mortgagees to confront escalating property maintenance costs and colossal losses on these nonperforming assets. In some cases, mortgagees are postponing or deferring preservation costs until they are required to perform those services due to vandalism and/or city code violations. At the same time, contractor work volumes have increased to the point where contractors are having a difficult time maintaining service level expectations. Business for most contractors is booming but the difficulty of finding manpower and equipment fast enough is an obstacle.
Contractors’ overall cost of doing business continues to rise. Lender/servicer pricing adjustments, made yearly or on an every-five-year basis, is too slow to have any positive impact on the out-of-pocket expenses contractors experience today.
A Solution to the Problem
Does the answer lie in across- the-board price increases? Not completely. Contractors must be smart businesspeople. ‘Ihey must run their businesses efficiently. They must provide their clients with the best possible service and exceed expectations whenever and wherever possible. But to achieve that service level, contractors require three basic needs: (i) to be paid fair market prices for services provided; (a) to have clients willing to pay for all services provided; and () to have a method by which pricing can react quickly to rapid changes in market conditions.
An open, fair, and equitable relationship is being sought by the preservation contractor network and should be recognized as the ultimate answer to the situation today. Such a relationship will also create a solid platform for future discussions regarding service pricing. Preservation contractors are the eyes and ears for mortgagees and investors, offering invaluable assistance and advice when it comes to the best practices in protecting and preserving vacant properties. As a whole, property preservation contractors understand and appreciate the dilemma and pressures faced today by the mortgagees. The hope is that both contractors and lenders and servicers can engage in a positive dialogue that will benefit all parties. DS