Servicing the rent-to-own borrower.

I firmly believe a specialty servicer's role is to assist borrowers and asset owners by continuing to innovate and create new solutions that help distressed homeowners. If there are eight existing solutions to help a homeowner, our job is to create the ninth, 10th and so on.

The rent-to-own concept appears to be a great new solution, but slow adoption has resulted in it having only minor impact in helping cure the housing crisis so far. Distressed-housing market trends indicate that rent-to-own is a significant opportunity, but the complexity in managing the borrower and asset may have stalled progress.

Servicers have not traditionally acted as property managers, arid asset managers have typically been paid to sell properties, not fill rentals.

Historically, if a servicer could not offer the borrower a workout or a loss-mitigation solution, the loan was moved into default and foreclosure proceedings were initiated. Servicers are now required to act as originator, property manager, maintenance man and counselor. Hence, their incentives and fee structures must be appropriate arid aligned with the economic value produced to enable them to perform or manage these expanded functions profitability.

There are many challenges to successfully designing, implementing and executing a solid rent-to-own program. Variables--such as the local rental and real estate market, investor/owner strategies, property values and other factors may have the strongest effect on success, yet servicers have little to no control over these factors. In addition, some asset ownership structures may also prohibit a servicer from offering rent-to-own as a solution. An effective, high-quality servicer should help asset owners design solutions that make sense for their portfolios, subject to any restrictions or investment strategies.

Once these hurdles are navigated, the servicer needs to have a very well-designed, end-to-end servicing program to ensure long-term success. The servicer must be able to work with multiple, unique and perhaps new third parties to manage a rent-to-own borrower and must also have the ability to build a custom borrower and delinquency management program. Rigid technology or reliance on a slow software vendor will significantly hinder a servicer's ability to build a fully integrated solution.

From a servicer's perspective, the company must be able to integrate with or perform asset management functions and have the capacity to identify properties that may fit into the rent-to-own category. Once you find the right situation (borrower and home), the hard work begins.

I have seen multiple versions of the rent-to-own borrower/transaction type, but most common is a land contract or contract-for-deed. In this situation, a third party, the asset manager and/or owner of the property will qualify a new homeowner and execute a contract-for-deed. The front end of the process requires some expertise as well as licensing to originate the necessary documents for this transaction type.

Counseling and education are two key components to success in helping a borrower understand his or her situation and opportunity in a rent-to-own home. To improve the overall performance of the rent-to-own asset and to assist the new homeowner in understanding the nuances of his or her situation, servicers should develop a custom counseling solution and perhaps work with a non-profit organization to deliver valuable education sessions. The purpose of this counseling is to improve the likelihood of the borrower staying in the home and really treating the property as if it was a home he or she owned, and not just a rental.

The pride of true ownership can also improve overall property values in some of the hardest-hit communities. In addition, many of these borrowers are just getting back on their feet or going through some financial crisis where standard debt counseling may be of significant help.

Another interesting element of the rent-to-own scenario is that it may require some level of property management and unique asset management capabilities. Matching the property to the rent-to-own profile in line with the asset owner's requirements is lust the first step.

Marketing the property, finding a tenant and managing the unique elements of a rent-to-own transition are very specialized skills, and can require the assistance of a licensed and registered loan officer and lender. The asset manager or servicer must have the capabilities to manage the property during the interim vacant period and have property management support across the entire nation. This sounds simple, but finding and managing a network of property managers who can perform a consistent level of work on single-family homes can he challenging.

A servicer also should treat these borrowers in a manner similar to the way they treat a new mortgage loan by making welcome calls, setting up escrow accounts, calling for delinquent payments and providing workout solutions (such as modifications or deferment agreements). Some companies also have taxes escrowed and manage the tax process similar to a traditional mortgage.

The rent-to-own model is a unique niche that is likely an evolving solution to assist a group of borrowers who need help transitioning or are on their way to financial recovery. It will require some creative solutions and great execution to ensure the assets are managed properly. Leveraging the right experienced partners is an obvious but critical factor to success.

By providing consumers the potential to he homeowners again, certain communities may stabilize while leveraging the pride of ownership from this borrower group. in addition, certain servicers that can react to this demand and unique market need could create a great business opportunity while making a significant contribution to solving the housing crisis.

David Vida is president of loan servicing division at LenderLive Network Inc., Glendale, Colorado. He can be reached at [e-mail].