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By michael h. moreland
Ceo
Moreland Financial LLC
In Everyone’s Best Interests
maintenance agreements offer lenders a way to preserve nonperforming assets
When it comes to real estate owned (REO) properties, maintenance costs can add
up quickly. A leaky roof can result in
$10,000 of mold and drywall repairs. A
neglected lawn can lead to thousands
of dollars in landscaping costs. City-building-department fines and homeowners association (HOA) dues can
add up to thousands more in late fees
and attorney costs. Perhaps most significant, however, are the unaddressed
life-safety issues often present in
REOs — hazards that can create negligence claims the moment a property’s
title changes. When a home goes into
foreclosure, many servicers lower their
price by 15 percent simply to allow for
deferred maintenance.
Suffice it to say that REOs with neglected maintenance issues can pose
major financial risks to the financial
organizations that own them. When
homeowners stop paying their mortgages, it’s often the case that they
stop paying to maintain their homes,
as well. With that in mind, how can
mortgage bankers and lenders mitigate their maintenance-related risks
and, in turn, increase their returns on
loans funded?
to a large extent, the best way to
control pre-foreclosure deferred maintenance is fairly simple: Help your borrowers with their maintenance needs
before their properties go into REO.
Strike a deal
If your bank discovers that one of its
nonperforming properties is being ne-
glected in terms of maintenance, con-
sider offering the borrower an external
property-maintenance agreement. this
agreement could be put into place when
determining whether to do a mortgage
modification or forbearance agreement
and, among other uses, could provide
funds for the home’s roof to be fixed,
its lawn to be maintained, its exterior to
be painted or its HOA dues to be paid
in full.
The specifics
Most loan agreements include language that allows a bank to protect its
interest in the asset, but these clauses
primarily are aimed at making tax, hazard or mortgage-insurance payments
should the borrower fail to do so. It’s
likely, then, that an organization’s attorneys will recommend that the borrower
and the bank sign a separate agreement to address property maintenance.
In most instances, this agreement also
will have to be signed by the property-
preservation company assigned to do
the work. Regardless, the agreement
should:
Illustration: Dennis Wunsch
upgrade the home’s landscaping or
amenities. Maintenance should be
limited only to items identified specifically in the agreement.
3. The agreement must include a
mechanism to add new items to
the list of those being maintained.
Of course, a home’s condition and
needs can change over time —
air-conditioning units can fail, and
inclement weather can damage
fences and bring down trees. A
bank may consider granting certain
clients an established minimum automatic approval of approximately
$200 to address repairs that are not
specified in the initial external maintenance agreement.
4.An emergency-repairs budget
should be specified. Much like the
previous provision, the agreement
should contain a mechanism to add
items at any given time. If plumbing breaks, it can do thousands of
dollars’ worth of damage in a short
period of time to carpets, walls and
ceilings. In this case, you would
want to encourage the borrower to
call the property-preservation company to stop the water leak before
bringing in a team to dry out the
continued on page 34 »
michael h. moreland is CEO of Moreland
Financial LLC, a loan-servicing and property-preservation company. He has more than 25
years of experience in commercial and residential loan servicing, having worked for some
of the largest banks and servicing companies
in the U.S. Reach him at (407) 309-4993 or at
mmoreland@morelandservicing.com.
Visit morelandfinancial.com.
