An article in the Wall Street Journal about Bank of America’s says a great deal about the woes afflicting Bank of America, thanks to its enthusiastic embrace of Countrywide, both the biggest subprime lender and the biggest subprime servicer.
The irony is that one of the reasons BofA coveted a criminal enterprise like Countrywide (they knew it well enough that they cannot plead ignorance of its overly aggressive sales techniques, like calling customers six months into a mortgage and pushing them to refi with phony claims that their loans were about to reset) is that it was a very efficient servicer, at least before volumes exploded in the housing bust. Indeed, in a post last week at Institutional Risk Analytics last week (now sadly behind its firewall), Chris Whalen stressed how Countrywide was widely seen as having particularly well run servicing operations (note that being one of the best of breed may still not set the bar very high).
It is clear reading the WSJ article that the acquisition, at least on the servicing side, was botched.
The article starts out by indicating that it is going to be harder for the Charlotte bank to clean up its 102,000 foreclosures with phony affidavits than it has confidently asserted to the public:
At five offices around the U.S., hundreds of Bank of America Corp. employees are slogging through 102,000 foreclosure files, trying to fix any problems.
The grunt work is slow. Just a “handful” of new affidavits were submitted to courts last week, a company spokesman says. Documents on “more than a handful” of restarted foreclosure actions will be handed over this week.
Fixing 102,000 foreclosure filings a handful at a time is going to take pretty close to forever.
And we soon get to the part that points to what went awry:
Cleaning up the mess is a huge challenge for the Charlotte, N.C., bank, a modest player in the mortgage-servicing industry before the 2008 acquisition of Countrywide Financial Corp.
Yves here. To make it blindingly obvious, BofA did not have a ton of expertise in servicing, particularly a big volume operation. This is an indirect acknowledgment of the point made more forcefully by Whalen and other industry experts, that Countrywide was better skilled here.
But nine time out of ten, even when buyers know they want to preserve skills and staff of the businesses they buy, territorial behavior takes over. The acquired business is an occupied nation, its leaders and much of its staff tribute to the acquirer’s managers. It’s much more attractive for them to occupy the new terrain rather than keep the best staff and systems of their purchase, and worse, have to fire their own staff. That’s a tacit admission their team was not as good, which of course ultimately reflects badly on them (and worse, those better skilled employees of the target might outclass the manager and put them out of a job. Can’t have that).
This part is telling:
After buying Countrywide, Bank of America decided to adopt the Calabasas, Calif., company’s homegrown mortgage-servicing technology. For more than a year, though, the combined company used two core systems that didn’t communicate with each other. The company’s resources were strained by the integration, the need to roll out new loan-modification programs and rising delinquencies.
I’ve seen quite a few deals between financial firms get nixed even though they made great strategic sense over concerns about IT systems issues. Some shrewd buyers simply won’t touch a business that needs to be integrated if the technologies are not pretty compatible. BofA appears to have underestimated the difficulties of dealing with a custom-built system.
There is a second issue:
Bank of America soon discovered that information was missing from many Countrywide loan files, making it more difficult to communicate effectively with borrowers. “You would shake your head and say: How can that be?” this executive says.
From what I can tell pre-crisis (and securitization experts are welcome to chime in) crappy loan files were pervasive in subprime (since may loans were no doc or low doc, inattentiveness to loan files is not exactly surprising). So this goes back to the idea that Countrywide was a relatively good performer; its absolute standards were no doubt lower than that of more mature areas of banking. And recall also, as we have stressed, that all kinds of processes went out the window as transaction volumes exploded, starting in the 2004-2005 timeframe.
And whether Countrywide was as good as Whalen suggests, or merely one of the best in a bad breed, it was still more skilled in this area than Bank of America. But as predicted earlier, BofA drove out key Countrywide employees:
It didn’t help that many Countrywide executives were let go during the integration, with Bank of America installing its own employees in key posts…. Former Countrywide executives ran the servicing operation until recently, says Dan Frahm, a company spokesman.
Fixes sometimes caused new headaches. Earlier this year, Bank of America installed new image-capturing fax machines to address borrower complaints of lost paperwork, but the machines didn’t work properly. “Those problems are long since taken care of,” Mr. Frahm says.
I’m not certain I trust Frahm on the issue of how many former execs were overseeing the servicing unit, given what appears to be an overstatement of the case on the matter of the troublesome fax machines. And while the execs are important, the staffers you really need to keep are front line managers. It appears they were driven out.
Now it is a fair point that all servicers are in world of hurt, between having to at least act like they are doing loan mods (this is a new operational demand) and the crushing volume of foreclosures and delinquencies. But it’s awfully convenient to blame the environment, when anyone could see the volume of subprime and later Alt-A and Option ARM resets, and figure out what the implications would be with refis for weak borrowers very hard to come by. Good managers plan for foreseeable probems, and this did not take place across the entire banking industry as far as servicing was concerned. As MBSGuy pointed out:
The real causes have little to do the difficulty of the task, and everything to do with management.
One of the reasons they don’t have the people to work all this complicated stuff out is because they fired all of the experienced people and kept the cheapest staff. As the market has modestly improved, anyone with any skills left the places that put such a low value on them, leaving behind the weakest workers (there has been a lot of turnover in the last 9 months or so).
Somehow, the big bosses are convinced this is not their fault.
It never ceases to amaze me how diseased the culture of American management has become: take credit, and of course, demand pay for any success, whether or not you had anything to do with it, and be sure to dodge responsibility for any failings.