A New Look at B of A Home Loans
Bank of America Home Loans has forged its new identity with a focus on customer satisfaction and quality loan origination. The 2008 acquisition of Countrywide has given the bank the production platform and technology prowess of a former industry leader. Add to that, B of A's internal discipline and a focus on profitable origination, and you have the makings of a lending powerhouse.
By Robert Stowe England
Mortgage Banking
October 2009
“The whole is more than the sum of its parts,” the ancient Greek philosopher Aristotle famously stated.
It’s a powerful idea that resonates today in the dynamic business culture of mortgage banking, which has dramatically consolidated in these times of financial pain and market turmoil in ways no one would have imagined two years ago.
In the case of Bank of America Home Loans, Calabasas, California, the company has sought to implement a strategy to make the merged whole better than the sum of its parts. Those parts being the former Countrywide Home Loans, Calabasas, and Bank of America Home Mortgage, which had been headquartered in Charlotte, North Carolina, home of the company’s parent, Bank of America Corporation.
July marked the first year anniversary of the merger. It was a challenging year, but one marked by successful progress in integrating the two companies, according to Barbara Desoer, who took the helm as president in July 2008. She previously served as the chief technology officer and chief operations officer for Bank of America Corporation, overseeing its global technology platforms and operations capabilities at headquarters in Charlotte.
“Looking back over what has happened . . . the first year is a good story in terms of the two companies coming together and meeting all the major goals and milestones that we had set for ourselves for how we would work to integrate the companies,” says Desoer.
Desoer came to her post as a successful business manager whose skills have been recognized beyond Bank of America. In 2007, for example, she was named Business Leader of the Year by the Haas School of Business at the University of California at Berkeley. Last year US Banker magazine ranked her second on its list of the 25 Most Powerful Women in Banking, while The Wall Street Journal ranked her third on its list of 50 Women to Watch. She received her master’s degree in business administration from U.C. Berkeley.
The integration of the two mortgage operations was no easy assignment, given the considerable differences between the companies. For example, Bank of America was known for taking a more cautious and careful approach to the residential mortgage business, having gotten out of the subprime business in 2001. Countrywide, on the other hand, did a lot of subprime, as well as alternative-A loans including option adjustable-rate mortgages (ARMs), which give borrowers several choices for payments, including a minimum payment that may lead to negative amortization.
Countrywide, like its long-time former chief executive officer and co-founder Angelo Mozilo, was fiercely independent and passionately entrepreneurial. Bank of America Mortgage, on the other hand, was a creature of the commercial banking business, and operated within a strong corporate culture of business discipline and oversight.
Meeting sudden demand
Even before Bank of America could make much headway in the integration of the two companies, it was hit with a surprise refi boom.
While the refi boom pushed back the timetable for integrating the two companies, it gave Bank of America a huge shot in the arm financially and showed the value of the acquisition by demonstrating the value of Countrywide’s origination capabilities.
Indeed, bank analyst Dick Bove, senior vice president of equity research at Rochdale Securities LLC, Tampa, Florida, identifies Countrywide’s “multiple distribution platforms” as one of two benefits of the acquisition. The other was Countrywide’s “far more complex and sophisticated approach to the industry,” including its proprietary servicing and origination systems.
The refi boom hit suddenly after Nov. 25, 2008. That’s when the Federal Reserve announced it would buy up to $500 billion in mortgage-backed securities (MBS) from Fannie Mae, Freddie Mac and Ginnie Mae, as well as $100 billion in debt issues from the same government-sponsored enterprises (GSEs).
This unprecedented Fed intervention into the mortgage market was done to bring down mortgage rates to slow the rate of decline in the cratering housing market and hasten the bottoming process. The Fed’s announcement immediately prompted a significant drop in mortgage rates and launched a refi boom.
For Craig Buffie, mortgage sales and fulfillment executive with Bank of America Home Loans, Countrywide’s “big sales force and big fulfillment force” proved invaluable in helping manage the refi boom at a time before the integration of the two had been completed.
Importantly, legacy Countrywide had “correspondent lending, warehousing and wholesale lending that the Bank of America didn’t have, to deliver customers through third parties,” Buffie says.
Countrywide also brought to the table “great technology platforms and a great sales culture,” Buffie adds. Combining that with Bank of America’s “strong core-value system that is very customer-focused” and a “strong brand and a strong balance sheet” enabled the company “to lead in the jumbo market” with both fixed- and adjustable-rate products, according to Buffie.
Buffie catalogs some of the strengths at Bank of America that helped meet the rising home-loan demand through the first half of 2009. There are 6,100 bank branches; 600 home-loan offices; 6,000 loan officers; and “the globe’s most visited eCommerce Web site for financial services.” The site generates a steady flow of inquires about home loans to 2,500 associates at centralized sales sites to respond to inbound calls.
Today’s sales force, while being very large, is smaller than the 15,000 sales force Countrywide employed before the private label mortgage market crashed in 2007. The Countrywide number included both the retail and centralized sales forces. About 3,000 of those loan officers were in Full Spectrum Lending, Countrywide’s subprime lending group. It also included Countrywide’s Financial Centers, which have been shut down.
Today Bank of America has 6,000 mortgage loan officers and 2,500 people in telephone channels and centralized sales sites, for a total sales force of 8,500.
Looking forward, Buffie sees more ways to take advantage of the Countrywide/Bank of America combination. “We have begun to implement a business partnership with the retail deposit branches,” he says. “We will have mortgage loan officers who reside in those branches.”
Indeed, during the transition, “we tested and piloted [the approach of having a mortgage loan officer in the branches,] measuring the impact on sales, customer satisfaction and banking center satisfaction,” Buffie says. “There were strong results on all three measures, and an excellent lift in sales. Both customers and associates like having the expertise of the mortgage loan officers.
There was also another test at 600 bank branches that did not have sufficient mortgage business to support a mortgage loan officer in the branch. At these branches, Bank of America began referring customers to a centralized sales unit. “Results have been strong, as measured through customer satisfaction, associate satisfaction and a good lift in sales,” Buffie says.
Based on the positive results of its pilot projects, over the next several months, Bank of America Home loans will convert to a new banking center sales model that will create three echelons of sales support, according to Buffie. “For the banking centers with the most traffic, we will have a dedicated mortgage loan specialist available for customers. For banking centers with moderate business, we will refer customers to a local mortgage loan officer in the vicinity. For banking centers with less traffic, we will refer customers to the centralized sales team, which handle their mortgage needs with efficiency and procession,” Buffie says. At this point, the bank is not sure how many banks will fall into each of the three categories.
The new approach has other advantages. It “will benefit customers because [bank branches] will now have a full range of products to offer customers, as opposed to only specialized products, such as Flat Fee Mortgage Plus,” Buffie says.
Challenges along the way
Even in the midst of a transition and integration, Bank of America Home Loans has had to manage around a number of surprises that complicated its task.
One unexpected surprise, as noted above: the Fed’s Nov. 25 announcement of its plans to buy mortgage-backed securities and debt from the GSEs, prompting the refi boom noted earlier.
Desoer remembers how this surprise development accelerated the process of integrating the two companies. “It was all hands on deck in a way that squeezed capacity, and required a lot of new hiring, and delivered a lot more customers to take care of simultaneously,” she says.
“The good of that is it further accelerated our ability to come together as two companies--because it was a wonderful opportunity, we had to work on it together,” Desoer says. “It played to the strengths of why we did the acquisition, which is the diversity of business channels and capability.”
The refi boom, however, slowed the process of integration. “It stood in the way of [our] being on a timeline that we thought we had to be on [to complete the transition in a timely manner,]" Desoer says. Instead, the mortgage company had to expand origination and fulfillment capacity on separate Countrywide and Bank of America tracks before it had time to consolidate originations onto the legacy Countrywide platform.
During the first six months of 2009, as result of the refi boom, originations soared to $203.55 billion, according to data collected by (ital) Inside Mortgage Finance. (end) For all of 2008, the combined origination volume for both Bank of America Mortgage and Countrywide was $315.33 billion (see Figure 1).
The other ongoing challenge facing Bank of America Home Loans is the soft economy. This has meant that the servicing arms of both companies have been laboring to keep up with mounting delinquencies and have had to begin the time-consuming and expensive task of loan modifications in an effort to limit the losses facing all mortgage servicers. “We had to get up to speed to have sufficient capacity to take care of the customers,” Desoer recalls.
The experienced loan officers that come on board with the Countrywide acquisition proved invaluable during the refi boom. There was such a surge that “it required 400 to 500 loan officers dedicated to working with customers who already have a loan application in, to get them through the process and additional paperwork – and to keep them informed,” says Jack Schakett, credit loss mitigation strategies executive at Bank of America Home Loans.
Countrywide’s extensive origination network was also a big plus, even though the company had been paring down the list of institutions and people it would use in third-party originations. “In correspondent and broker relationships, we select clients and business partners who share our vision of mortgage banking, who share our focus on clarity, responsible lending and [loan] manufacturing quality,” says Schakett.
The refi boom also required Bank of America to scramble to expand its fulfillment staff to underwrite and execute the rising volume that surged in early 2009. The first quarter, for example, saw originations 90 percent higher than the first quarter of 2008.
While Bank of America was hiring from the outside, it also was able to reassign people internally. Some of those reassigned included 800 people from the home-equity division, which is under the oversight of Bank of America Home Loans, as well as additional people from the wealth-management division of the bank.
During this refi boom, Bank of America learned how important it was to keep the customer informed. “One of the things we learned from customers is that while it takes longer to get refis processed, what they really want to know after they locked in the rate, [was] will the rate lock be there for them,” says Schakett.
Competitive standing
While Bank of America scrambled to meet demand in the refi boom of 2009, it fell from first place in originations to second place behind Wells Fargo & Co., San Francisco, according to Inside Mortgage Finance. When asked if being the No. 1 originator was important, Desoer replied, “One of our few priorities is being profitable. That’s No. 1,” says Desoer. “And maintaining share position is [right behind that].”
“I always want to be No. 1 in originations, to be perfectly clear. And that’s what we work for day in and day out. But the production we’re generating needs to be profitable and of the highest manufacturing quality. And so the combination of volume that we’re doing and maintaining our share or position and profitability and quality is what we are striving to do, and I’m pleased with our ability to execute that balance,” Desoer says.
When Bank of America acquired Countrywide, a press release announced that it would be “accretive to earnings.” From Desoer’s comments, it would appear that this is occurring.
Rochdale Securities’ Bove says he “sees no reason to question” the claim by Bank of America as boosting the company’s bottom line. He points out that when Bank of America acquired Countrywide in an all-stock transaction worth about $4 billion, Countrywide had already recognized a lot of potential loan losses, and those losses were reflected in the price paid for Countrywide.
When the acquisition was announced in January 2008, Bank of America Chief Executive Officer Ken Lewis said that the bank was buying Countrywide at a deep discount of 31 percent of its common stock book value, or 2.9 times its 2009 projected earnings. Bank of America’s own stock shares plunged, however, after the onset of the financial crisis that began in September 2008. Bank of America shares fell from $37 on Sept. 18, 2008, to $3 on March 2, 2009. Since then, the share price has seen a recovery. It stood at 16.38 on October 2.
Investors drove down share prices after Bank of America had to go back a second time for $20 billion in government funds from the Troubled Asset Relief Program (TARP) in January on top of the $25 billion disbursed in October. On Sept. 1, 2009, Bank of America offered to repay $20 billion of the $45 billion in TARP funds, as well as end a loss-sharing deal with the U.S. government related to its acquisition of Merrill Lynch & Co., according to a Wall Street Journal report.
The extent to which Bank of America will continue to have costs and markdowns associated with Countrywide remains unclear. One key concern is potential buy-back requests from the GSEs.
“Countrywide did a lot of alt-A [loans], which they sold to the GSEs” in 2007 after the collapse of the private-label mortgage-backed securities market in August of that year, says Guy Cecala, publisher of Inside Mortgage Finance, Bethesda, Maryland.
“The type securitized by Countrywide was not eligible [for sale to the GSEs] because the underwriting was too loose. However, [Countrywide was] able to tweak that and funnel more stuff to Fannie and Freddie in late 2007 when other markets collapsed,” according to Cecala.
“The irony, as you look at Fannie and Freddie business, is that they acquired most of the problem alt-A loans in 2007, and Countrywide was their largest customer,” Cecala contends. He recognizes that the GSEs have not acknowledged they were acquiring alt-A mortgages from mortgage lenders then. However, he maintains, the indirect evidence comes from the fact that Freddie Mac recognized alt-A losses in the second quarter. “I assume the same thing is going on at Fannie Mae,” he adds.
Traditionally, the GSEs require lenders to buy back bad loans, but this may be “a little complicated with Countrywide,” which is no longer a separate identifiable business. “I’m not sure what Bank of America’s obligations are” in this regard, Cecala adds.
The integration process
Bank of America began the difficult process of integration by first putting together a team of people from both Countrywide and Bank of America Mortgage, starting as early as January 2008. The team was asked to look closely at the people, processes and technology within each entity to determine which one was best, according to Mary Kanaga, Countrywide transition executive, who oversaw the review process with the new team.
“It was an arduous process, understanding what the two companies did at a low level, through tools we have built over years and which have withstood the test of time,” Kanaga says.
The process was not one where each element could be viewed in isolation--each had to be viewed in relation to the other. “You can’t talk about one without the other two,” Kanaga says. “It’s an important tenet for Bank of America.”
In following this approach, the team had to be aware that it was creating “a mosaic” from pieces of a puzzle, one piece at a time, explains Kanaga.
“Part of what Bank of America does when it first starts the process is to do a quick side-by-side. You are looking at the processes, people and technology they use to drive their jobs. You get to know the players and tools they use,” says Kanaga.
“From there, we go through the process of determining what is best” in the side-by-side lists. “Locations, human resources, servicing, sales--every piece of the business goes through that process at the same time,” she says. After assessing each, the team makes a recommendation to Kanaga and the Transition Leadership Team, which has overall accountability for executing the transition, Kanaga says.
The review team also agrees on a target or goal for each segment of the business in terms of people, process and technology, and how much funding is going to be needed to reach that target. So, as the “mosaic” is pieced together, a budget is also being created for the new entity when the legal merger is completed--in this case, July 2008.
The review also looks at desktop tools, notebook tools, every single communication vehicle and device, and compares those used at Countrywide and those at Bank of America. It looks at how those tools drive the business.
There is also a look at all building facilities as the team puts together a “massive audit and inventory” before making a recommendation on which are needed and which are not.
Nothing in the puzzle is too small, Kanaga says. “Everything counts. Everything has to get there, whether it is the biggest project or the smallest project. It’s very much putting a puzzle together. If there is a missing piece, we have a broken chain and we can’t complete the mosaic.”
Each side comes to the discussion on management and process tools, for example, with an understandable preference for what has been tried and true for each side.
To resolve this potential conflict “means we have to create partnerships at our level first, and leave the businesses behind and think of a new company and what it needs to survive. At times, it creates a bit of arm wrestling and healthy tensions, and we learn how to leave biases behind quickly,” Kanaga says.
“Countrywide associates had a couple of hard years behind them. They had worked through how they would survive. They never thought about a suitor, and were proudly independent,” Kanaga says. “You have to add that to an already intense environment,” she explained. “So early on, it was about relationships and how to relate to one another.”
Notably, the review team did not consider other ways of doing things that were not either legacy Countrywide or legacy Bank of America, according to Kanaga. Why? “Our goal is never to have it be something else in terms of people, process and technology. There’s little time to build anything new. It adds risk and adds complexity. Our goal is to pick one or the other,” she explains.
What about hybrids? “We have created some hybrids, with a little bit of this and a little bit of that,” Kanaga says. “But experience tells me that hybrids are always harder. No one is expert in the hybrid.”
Once an analysis had been made, the time came to make decisions on which system or component to use. “In the core loan perspective and the mortgage business perspective,” for example, “it was predominantly Countrywide,” she says. “They were industry leaders,” she adds. “Their technology was superior to that of Bank of America because of the investment they had made,” she adds, referring to both legacy Countrywide’s servicing platform and its origination platform.
“When you look at deposits, customer, accounting, human resources, the decision was predominantly Bank of America, where we have the core discipline,” Kanaga says.
Executing the transition
Once decisions had been made about people, process and technology, then the integration team had to execute the transition beginning July 2008. The goal was to be “on time, on budget and flawless in execution,” Kanaga says. “Flawless doesn’t mean zero defects,” she explains. “It means our customers don’t pay a price for changes we’re going through.”
There was also another mantra to guide the transition: “associates, shareholders and customers,” Kanaga says. “Associates are to be trained; we have to do right by our customers; and if we do, then our shareholder wins.”
Take loan modifications, she says. The idea was to ask: How do you make the process better? The team had chosen legacy Countrywide’s loan-modification capability.
By early last month [September], the transition process was well along. In the large mosaic that is under construction, Kanaga explains, there are 300 active projects. “Many, many key components that set the foundations [for the integrated company] have been in the history books for months,” she says.
In 48 of the last 52 weekends, employees at Bank of America Home Loans had to do data migrations and be ready for business in the next week. The bank had chosen to use legacy Bank of America data centers, so Countrywide data had to be transferred over the weekend.
“There was a [Central Processing Unit] sitting in California running applications. We have to finish tonight’s process. By Monday, we’re talking to a data center in Texas,” says Kanaga. “The user should never care” about that transition. “We care because it worked on Friday, has to work on Monday. There were people executing every move, validating every move, watching the performance on Monday,” she says. The transfer is then certified. “This way, when associates return to work on Monday, they can go right back to work where they left off before the weekend,” Kanaga says.
So far, the process has been “flawless”--a term Bank of America defines as everything that worked on Friday works on Monday, explains Kanaga. She reports, looking back at the process so far, “Nothing went terribly wrong and had to be redone.” One reason is that the bank did “dress rehearsals on bigger events.”
She adds, “We’re [currently] doing a series of data-center migrations, and the biggest and most complex are done. In fact, we had to execute on that in peak origination volumes.” But much more remains to be done. “We have many months ahead of us of really complex work, which should not be a surprise,” Kanaga says.
For one thing, legacy Bank of America originations will be migrating to the Countrywide platform.
“We love what we do. There’s something exhilarating about transition,” Kanaga says.
Rich acquisition experience
Bank of America has a lot of experience with integrating acquisitions, including huge acquisitions such as when Charlotte, North Carolina-based NationsBank bought San Francisco-based BankAmerica in 1998 and then changed its name to Bank of America.
Indeed, Bank of America’s skill in integrating acquisitions is one of its notable strengths, according to bank analyst Bove.
“If you go back over the last 25 years,” Bove says, “Bank of America has acquired dozens and dozens of companies. They have acquired many companies greater in size than Countrywide--and I would say much more complex. In the final analysis, Countrywide is a one-product company. NationsBank bought the old Bank of America. Now, that’s complicated. You have to be integrated at many levels,” he says.
Bank of America’s other notable acquisitions include Montgomery Securities, San Francisco, in 1997; FleetBoston Financial, Boston, in 2004 (itself a merger of Fleet Financial Group and BankBoston in 1999); the credit-card company MBNA Corporation, Wilmington, Delaware, in 2005; and the acquisition of New York-based wealth manager United States Trust Company (U.S. Trust) from Charles Schwab in 2006. Most recently, the bank acquired giant retail brokerage firm Merrill Lynch & Co. in December 2008 as part of a rescue effort engineered by federal banking regulators.
Each of these acquisitions presented Bank of America with difficult challenges. For example, when the bank acquired Montgomery Securities, “[nearly] everyone walked out the door,” Bove says, but Bank of America “still made it work.” When the bank acquired U.S. Trust, again, “a lot of key players left.” And when the bank acquired Merrill Lynch, “3,000 brokers walked out the door,” Bove says.
“In each case when Bank of America acquires companies, a lot of people leave--some voluntarily, some involuntarily. For some reason, Bank of America makes these acquisitions work. The reason is [chief executive officer] Ken Lewis. He knows how to acquire,” Bove says.
With Countrywide, Bove says, Bank of America acquired superior technology--a point Desoer and her fellow executives readily acknowledge.
Customer Day One
After negotiating a few boulders along the way, the transition moved into high gear with Customer Day One, April 27, 2009. For Desoer, it was “the highlight of the year . . . when we retired the Countrywide brand and launched the new Bank of America Home Loans brand.”
That same day, the newly branded company unveiled three examples of its fresh focus on anticipating and meeting customer needs: a new Clarity Commitment(symbol)(TM), a new flat-fee mortgage for home purchases, and a redesigned Web site that provides more comprehensive information for consumers on the size of mortgage (and home price) they can comfortably afford.
The new Clarity Commitment is “a one-page, simple summary of the loan terms for the borrower,” Desoer explains. It is provided both at the time the loan is offered and again at closing. The document contains information that is above and beyond all the disclosure documents required by law.
All three initiatives came about after the bank invested heavily in customer surveys, focus groups and phone interviews, according to Aditya Bhasin, product, price and strategy executive at Bank of America Home Loans.
“One of the first things we did when we started the integration process, as we looked at product set, we realized we have an opportunity here to rethink and relaunch our brand in the context of a new market environment and new expectations from the customer,” says Bhasin.
“The first we thing we did before we started [was] to go and talk to customers. From July [2008] to April [2009], we talked to 5,000 customers--on the phone, online and in one-on-one interviews. We talked to Realtors®, builders, partners and our sales force. What we were trying to do is understand the new mortgage mindset of the American consumer,” Bhasin says.
“What we learned in the process is that some of the core features of mortgages have always been important--great rates, low fees and good service--those were still important,” Bhasin explains. “But what was becoming even more critical and important for consumers is a lender they can trust, clarity in what loan they were getting, transparency in what they were paying for and education [about loan products],” he says.
“We started to see a whole different side of the mortgage consumer. ‘Give me clarity, simplicity and transparency as well as great rates and low fees,’” the customer was telling the bank, according to Bhasin. “These were very much the overarching guiding principles behind the work we did when we launched our brand.”
Redesigning the Web site
Bhasin says the first step toward improving the customer experience focused on how consumers begin the process of determining how much mortgage and home they can afford. “A majority of consumers today begin that process online,” Bhasin says. So, the bank began to look at what other lenders do online. “We saw tons of tools at other sites, most of them calculators for how much home can I afford. That led to the creation of our online experience [at www.bankofamerica.com/homeloans],” Bhasin says.
The bank learned through its consumer research that mortgage lender sites were not asking the right questions. Nowadays it’s no longer a question of “How much home can I afford?” Instead, it’s “’How much home can I (ital) comfortably (end) afford?,’” Bhasin says.
At the redesigned Bank of America Home Loans Web site, “There are tutorials about the home-lending process. There’s a home loan guide, [and] an interactive tutorial that walks you through not just how much home you can buy and the cost of homeownership; it also asks you about other debt,” Bhasin says.
“We build up the customer’s debt-to-income ratio, explain what it means and why it is important,” Bhasin says. Visitors can change the monthly payment and see how it affects their overall budget and overall savings, he explains. “If this is your income, your tax, your other debts, then we say, ‘If this were your mortgage payment and real estate taxes and association dues and insurance, here’s what you have for savings,’” he explains.
The program then walks the consumer through the savings he or she has accumulated for a down payment and asks how much savings will be left after the home purchase. If the customer does not have enough savings set aside to meet expenses for a “certain number of months,” sometimes as many as six months, then the program advises the potential buyers they do not have enough to make a 20 percent down payment and they will have to pay for mortgage insurance and get into a government program that accepts a lower down payment.
When the program is completed, the consumer can print out a “loan snapshot,” which can be taken to a loan officer or used for reference in a call to a toll-free number or to apply online, Bhasin explains.
The new Web site has been a “great success,” and consumers have provided “great feedback” in support of the program, he reports. The bank has found consumers spend an average of five minute per session on the site, “which is high by industry benchmarks,” he adds.
Clarity Commitment
The second thing consumers told Bank of America they wanted was for the lender to help them understand the terms of the loan. “‘Give us clarity’” was the plea, Bhasin says.
“The challenge we gave ourselves [was] to find out what it would take to have on a single page a summary of the loan to understand exactly what it is they are [taking on as a responsibility],” Bhasin says. The bank came up with several iterations of what it thought consumers might like to see, and showed them to consumers before deciding on the final text.
The Clarity Commitment provides in plain English a description of the mortgage amount; the type of loan (fixed-rate or adjustable-rate); the interest rate; the term of the loan; the monthly payment, including how much is principal and interest and how much is escrow for taxes, insurance, etc., and the payment due date; and information about closing costs and fees.
For adjustable-rate mortgages, the Clarity Commitment also tells consumers when the rate will adjust and what the payment will be at current market rates, along with the worst-case scenario for how high the payment could go. Because the Clarity Commitment is not a legal document, the bank advises consumers to read all the legal documents they also receive.
There are two versions of the Clarity Commitment--one provided at the time the loan is locked, and one at closing, to capture any changes that might occur after the application process.
Since the Clarity Commitment went into effect April 27, the bank has provided 450,000 of the commitment statements to borrowers. It is currently being provided for more than 95 percent of loans, Bhasin says. The program is to be expanded to include other loan categories such as home equity, reverse mortgages and loan modifications.
The third part of the new customer focus is a new flat-fee mortgage product. This mortgage comes with a flat closing fee that may vary from state to state because of differing rules, but is typically $2,995.
The flat-fee mortgage comes with a closing date and a guarantee that “if we don’t close on that date, we’ll pay your first month’s payment,” he adds.
Besides the service guarantee, there is also a best overall value guarantee that states, “If you can find a better deal with somebody else and you go somewhere else, we’ll send you $250,” Bhasin says. The guarantee applies to the combination of rates, fees and service.
Product standardization
As Countrywide and Bank of America Home Mortgage began to come together in the spring of 2008, the bank began to make decisions on what loan products would be offered.
“We announced to the Fed a series of policies around responsible lending and products. There would be no negative-amortization products and no subprime lending, which Bank of America had not done,” Bhasin says.
Importantly, Bank of America decided it would offer jumbo prime mortgages at a time when there was huge demand and not many lenders offering them on terms that made sense to consumers. The bank saw this demand as a lending opportunity.
“There are plenty of borrowers who want jumbo mortgages with very good credit profiles,” Bhasin says.
The private-label jumbo market, which collapsed in August 2007, is still defunct as investors continue to lack the appetite for privately issued mortgage-backed securities. So, jumbo lending for Bank of America meant portfolio lending.
“Because of Bank of America’s size and scale, we were able to leverage our balance sheet and offer jumbo loans at competitive prices,” Bhasin says. “That’s an example of the power of this franchise.” These loans require a 20 percent down payment.
Desoer also says the jumbo product was important for high-priced markets, such as California and the Northeast, where Bank of America has a lot of existing customers who need jumbo loans.
“We led the industry in using our balance sheet to support those home loan products in jumbo markets,” Desoer says. “We like the quality we’re getting. We like the margin we’re getting. And it helps in that relationship with customers.”
The bank is hoping that because of its efforts to work hard to earn the business and trust of consumers, it will pay off with additional business.
The availability of the jumbo mortgage gets back to why Bank of America wanted to make the Countrywide acquisition, according to bank analyst Bove. “The mortgage product is still the most attractive product for any bank in the U.S. on the retail side, and more attractive than many commercial products. Becoming the largest mortgage company is not bad, if the product you are selling is the most preferred,” he adds.
In the final analysis, Bove says, “At all levels, I think the acquisition makes an enormous amount of sense.”
MB
SIDEBAR
Ramping Up Foreclosure Prevention
By Robert Stowe England
Getting the right loan-modification programs in place has been a challenge for all mortgage lenders, and Bank of America Home Loans, Calabasas, California is no exception, according to Jack Schakett, credit loss mitigation strategies executive who oversees 20,000 employees and a combined portfolio of 11 million loans.
Schakett has helped spearhead key initiatives to provide sustainable loan-modification solutions at Bank of America and some of its solutions have become models for the industry, he says.
“Job No. 1 is to mitigate losses,” Schakett says--a job complicated by having to balance investor and customer interests. “Fortunately, the balance is easier today than ever before,” he says. “Because the cost of foreclosure is so expensive, there is an opportunity to make large adjustments on the consumer side that are better for investors.”
Ironically, declining home values have come with “a silver lining” that “aligns investor and consumers more than ever,” Schakett says.
Loan modifications also come at a cost to the lender: The lender has to project losses and set aside loan-loss reserves.
To mitigate its own losses, Bank of America has a group that works with investors to settle claims, Schakett says. There are “both in-bound claims from someone asserting a claim against us, as well as outbound claims--people from whom we’ve bought loans,” Schakett explains. Thus, Bank of America can ask organizations that have sold it bad loans to repurchase them.
Schakett has worked with Seth Wheeler, senior adviser to the secretary of the Treasury on the Making Home Affordable (MHA) program, which includes the Home Affordable Modification Program (HAMP) as well as the Home Affordable Refinance Program (HARP).
In devising the MHA program, Treasury brought in investor groups, including the American Securitization Forum (ASF) and advocacy groups such as the Association of Community Organizations for Reform Now (ACORN), and tried to form a consensus, according to Schakett.
Before HAMP guidelines were announced last March and $75 billion was allocated for subsidies for sustainable mortgage modifications, Bank of America had already developed its own “robust” program known as the Home Retention Program, according to Schakett.
That program used a net present value (NPV) calculator to better balance the needs of the customer and the interests of the investor, and facilitate an agreement the bank expected to lead to a sustainable home modification and a better outcome for the investor. The NPV program computes two cash-flow streams: one assuming the loan is not modified and the other assuming it is modified. The program calculates the proceeds the investor would receive if the loan defaulted and went through foreclosure.
“As it turns out most of the time, the cost to the investor to lower the interest rate is a lower cost to the investor than would result from a foreclosure sale,” he adds. “The program has imbedded in it an assumption on the re-default rate for a given loan.”
In the early days of loan modifications, the industry standard was to reduce the mortgage so that the borrower had a debt-to-income ratio of 38 percent. “We recognized that 38 percent was too high, and that 34 percent was more affordable and reduced the risk of re-default,” Schakett says.
MHA reduced the target debt-to-income ratio to 31 percent. At the same time, the federal government authorized $75 billion to pay a subsidy to the investor so that the investor would still receive a payment stream that would represent an income based on reducing the debt-to-income ratio to 34.5 percent.
“The MHA program gives the investor the experience of a 34.5 percent modification and the customer the experience of the 31 percent mortgage,” says Steve Bailey, mortgage servicing executive for Bank of America Home Loans
“So investors today are in the same situation under MHA as they were under our program,” Schakett adds.
Building on the work at Bank of America Home Loans, Fannie Mae, under Treasury’s guidance, has built an industry-standard model to compute the net present value of loans that might be considered for loan modifications. This third version went into effect Sept. 1, according to Schakett. “On this topic, we were ahead of the pack,” he adds.
On the subject of re-defaults, Schakett says that instead of focusing on the re-default rate, people should instead focus on the “save rate.” If a group of loans had an anticipated 90 percent default rate and a loan-modification program brought it down to 50 percent, he says, “It means for 40 percent, you saved their home.”
What about the 50 percent who are still going to default? “Most of those default because they choose to default. We can’t help that customer,” Schakett says.
Bank of America has a limited program that will reduce principal for pay-option adjustable-rate mortgages (ARMs), which can create negative amortization. “For those loans, the first thing in the waterfall is to forgive the principal equal to the amount of the negative amortization,” Schakett says. The program is not part of MHA.
Bank of America and other lenders are working with the government to design a short-sale process where the government will provide some incentive for investors to do short sales. The program tackles the problem of low-ball short sales that occur because one cannot be sure the home was really marketed properly. To address this issue, the new program would ask investors to set a price at which they would be willing to accept a short-sale offer. If a buyer offers that price, the house is sold and there is no further negotiation. Under this program, Freddie Mac would audit lenders to make sure short sales comply with guidelines. Treasury has designated Freddie Mac as its Compliance Agent for the use of the NPV model in the Making Home Affordable program.
Bank of America has already unveiled its own new short-sale program under the MHA program that involves reaching an agreement in advance among the seller, the servicer and the investor.
In the most recent report on the number of loan modifications under the HAMP program, released in September, 1.88 million requests had been made from borrowers for financial information on the program. In return, lenders started 360,165 trial modifications from a total of 571,354 trial period plan offers they had extended to borrowers.
In the data released last month, Bank of America had only 7 percent trial-modification starts as a share of estimated eligible 60-plus-day delinquencies. (Saxon Mortgage Services Inc., Fort Worth, Texas, had the highest share share of trial-modifications started at 39 percent, and Nationstar Mortgage LLC, Dallas, Texas, was had the second highest share at 30 percent.
Among larger servicers, GMAC Mortgage, Horsham, Pennsylvania, JPMorgan Chase, New York, were near the top with 26 percent and 24 percent trial modifications started respectively, according to the government report.
Bank of America Home Loans has put in better than one out of five – or 125,000 of the 571,000 – offers made on MHA loan modifications. (
Bank of America was very active in successfully making loan modifications before MHA, Bailey points out. The mortgage lender did 230,000 modifications in 2008. In 2009, before MHA was unveiled, Bank of America did 150,000 non-MHA loan modifications, and it is continuing to do modifications outside the MHA program, Bailey reports.
The introduction of the Making Home Affordable program adds a “different wrinkle,” Bailey says, because the loan goes into a trial modification first, before there is a final modification. This has slowed down the process, and Bank of America Home Loans wants to “get it right” before it ramps up its volume of modifications. Getting it right will also limit customer frustration, according to Bailey. “We want to make sure the experience is a good one, and make sure the conversion is maximized,” he says.
Robert Stowe England
Copyright © 2009 by Mortgage Banking
Reprinted with Permission
By Robert Stowe England
Mortgage Banking
October 2009
“The whole is more than the sum of its parts,” the ancient Greek philosopher Aristotle famously stated.
It’s a powerful idea that resonates today in the dynamic business culture of mortgage banking, which has dramatically consolidated in these times of financial pain and market turmoil in ways no one would have imagined two years ago.
In the case of Bank of America Home Loans, Calabasas, California, the company has sought to implement a strategy to make the merged whole better than the sum of its parts. Those parts being the former Countrywide Home Loans, Calabasas, and Bank of America Home Mortgage, which had been headquartered in Charlotte, North Carolina, home of the company’s parent, Bank of America Corporation.
July marked the first year anniversary of the merger. It was a challenging year, but one marked by successful progress in integrating the two companies, according to Barbara Desoer, who took the helm as president in July 2008. She previously served as the chief technology officer and chief operations officer for Bank of America Corporation, overseeing its global technology platforms and operations capabilities at headquarters in Charlotte.
“Looking back over what has happened . . . the first year is a good story in terms of the two companies coming together and meeting all the major goals and milestones that we had set for ourselves for how we would work to integrate the companies,” says Desoer.
Desoer came to her post as a successful business manager whose skills have been recognized beyond Bank of America. In 2007, for example, she was named Business Leader of the Year by the Haas School of Business at the University of California at Berkeley. Last year US Banker magazine ranked her second on its list of the 25 Most Powerful Women in Banking, while The Wall Street Journal ranked her third on its list of 50 Women to Watch. She received her master’s degree in business administration from U.C. Berkeley.
The integration of the two mortgage operations was no easy assignment, given the considerable differences between the companies. For example, Bank of America was known for taking a more cautious and careful approach to the residential mortgage business, having gotten out of the subprime business in 2001. Countrywide, on the other hand, did a lot of subprime, as well as alternative-A loans including option adjustable-rate mortgages (ARMs), which give borrowers several choices for payments, including a minimum payment that may lead to negative amortization.
Countrywide, like its long-time former chief executive officer and co-founder Angelo Mozilo, was fiercely independent and passionately entrepreneurial. Bank of America Mortgage, on the other hand, was a creature of the commercial banking business, and operated within a strong corporate culture of business discipline and oversight.
Meeting sudden demand
Even before Bank of America could make much headway in the integration of the two companies, it was hit with a surprise refi boom.
While the refi boom pushed back the timetable for integrating the two companies, it gave Bank of America a huge shot in the arm financially and showed the value of the acquisition by demonstrating the value of Countrywide’s origination capabilities.
Indeed, bank analyst Dick Bove, senior vice president of equity research at Rochdale Securities LLC, Tampa, Florida, identifies Countrywide’s “multiple distribution platforms” as one of two benefits of the acquisition. The other was Countrywide’s “far more complex and sophisticated approach to the industry,” including its proprietary servicing and origination systems.
The refi boom hit suddenly after Nov. 25, 2008. That’s when the Federal Reserve announced it would buy up to $500 billion in mortgage-backed securities (MBS) from Fannie Mae, Freddie Mac and Ginnie Mae, as well as $100 billion in debt issues from the same government-sponsored enterprises (GSEs).
This unprecedented Fed intervention into the mortgage market was done to bring down mortgage rates to slow the rate of decline in the cratering housing market and hasten the bottoming process. The Fed’s announcement immediately prompted a significant drop in mortgage rates and launched a refi boom.
For Craig Buffie, mortgage sales and fulfillment executive with Bank of America Home Loans, Countrywide’s “big sales force and big fulfillment force” proved invaluable in helping manage the refi boom at a time before the integration of the two had been completed.
Importantly, legacy Countrywide had “correspondent lending, warehousing and wholesale lending that the Bank of America didn’t have, to deliver customers through third parties,” Buffie says.
Countrywide also brought to the table “great technology platforms and a great sales culture,” Buffie adds. Combining that with Bank of America’s “strong core-value system that is very customer-focused” and a “strong brand and a strong balance sheet” enabled the company “to lead in the jumbo market” with both fixed- and adjustable-rate products, according to Buffie.
Buffie catalogs some of the strengths at Bank of America that helped meet the rising home-loan demand through the first half of 2009. There are 6,100 bank branches; 600 home-loan offices; 6,000 loan officers; and “the globe’s most visited eCommerce Web site for financial services.” The site generates a steady flow of inquires about home loans to 2,500 associates at centralized sales sites to respond to inbound calls.
Today’s sales force, while being very large, is smaller than the 15,000 sales force Countrywide employed before the private label mortgage market crashed in 2007. The Countrywide number included both the retail and centralized sales forces. About 3,000 of those loan officers were in Full Spectrum Lending, Countrywide’s subprime lending group. It also included Countrywide’s Financial Centers, which have been shut down.
Today Bank of America has 6,000 mortgage loan officers and 2,500 people in telephone channels and centralized sales sites, for a total sales force of 8,500.
Looking forward, Buffie sees more ways to take advantage of the Countrywide/Bank of America combination. “We have begun to implement a business partnership with the retail deposit branches,” he says. “We will have mortgage loan officers who reside in those branches.”
Indeed, during the transition, “we tested and piloted [the approach of having a mortgage loan officer in the branches,] measuring the impact on sales, customer satisfaction and banking center satisfaction,” Buffie says. “There were strong results on all three measures, and an excellent lift in sales. Both customers and associates like having the expertise of the mortgage loan officers.
There was also another test at 600 bank branches that did not have sufficient mortgage business to support a mortgage loan officer in the branch. At these branches, Bank of America began referring customers to a centralized sales unit. “Results have been strong, as measured through customer satisfaction, associate satisfaction and a good lift in sales,” Buffie says.
Based on the positive results of its pilot projects, over the next several months, Bank of America Home loans will convert to a new banking center sales model that will create three echelons of sales support, according to Buffie. “For the banking centers with the most traffic, we will have a dedicated mortgage loan specialist available for customers. For banking centers with moderate business, we will refer customers to a local mortgage loan officer in the vicinity. For banking centers with less traffic, we will refer customers to the centralized sales team, which handle their mortgage needs with efficiency and procession,” Buffie says. At this point, the bank is not sure how many banks will fall into each of the three categories.
The new approach has other advantages. It “will benefit customers because [bank branches] will now have a full range of products to offer customers, as opposed to only specialized products, such as Flat Fee Mortgage Plus,” Buffie says.
Challenges along the way
Even in the midst of a transition and integration, Bank of America Home Loans has had to manage around a number of surprises that complicated its task.
One unexpected surprise, as noted above: the Fed’s Nov. 25 announcement of its plans to buy mortgage-backed securities and debt from the GSEs, prompting the refi boom noted earlier.
Desoer remembers how this surprise development accelerated the process of integrating the two companies. “It was all hands on deck in a way that squeezed capacity, and required a lot of new hiring, and delivered a lot more customers to take care of simultaneously,” she says.
“The good of that is it further accelerated our ability to come together as two companies--because it was a wonderful opportunity, we had to work on it together,” Desoer says. “It played to the strengths of why we did the acquisition, which is the diversity of business channels and capability.”
The refi boom, however, slowed the process of integration. “It stood in the way of [our] being on a timeline that we thought we had to be on [to complete the transition in a timely manner,]" Desoer says. Instead, the mortgage company had to expand origination and fulfillment capacity on separate Countrywide and Bank of America tracks before it had time to consolidate originations onto the legacy Countrywide platform.
During the first six months of 2009, as result of the refi boom, originations soared to $203.55 billion, according to data collected by (ital) Inside Mortgage Finance. (end) For all of 2008, the combined origination volume for both Bank of America Mortgage and Countrywide was $315.33 billion (see Figure 1).
The other ongoing challenge facing Bank of America Home Loans is the soft economy. This has meant that the servicing arms of both companies have been laboring to keep up with mounting delinquencies and have had to begin the time-consuming and expensive task of loan modifications in an effort to limit the losses facing all mortgage servicers. “We had to get up to speed to have sufficient capacity to take care of the customers,” Desoer recalls.
The experienced loan officers that come on board with the Countrywide acquisition proved invaluable during the refi boom. There was such a surge that “it required 400 to 500 loan officers dedicated to working with customers who already have a loan application in, to get them through the process and additional paperwork – and to keep them informed,” says Jack Schakett, credit loss mitigation strategies executive at Bank of America Home Loans.
Countrywide’s extensive origination network was also a big plus, even though the company had been paring down the list of institutions and people it would use in third-party originations. “In correspondent and broker relationships, we select clients and business partners who share our vision of mortgage banking, who share our focus on clarity, responsible lending and [loan] manufacturing quality,” says Schakett.
The refi boom also required Bank of America to scramble to expand its fulfillment staff to underwrite and execute the rising volume that surged in early 2009. The first quarter, for example, saw originations 90 percent higher than the first quarter of 2008.
While Bank of America was hiring from the outside, it also was able to reassign people internally. Some of those reassigned included 800 people from the home-equity division, which is under the oversight of Bank of America Home Loans, as well as additional people from the wealth-management division of the bank.
During this refi boom, Bank of America learned how important it was to keep the customer informed. “One of the things we learned from customers is that while it takes longer to get refis processed, what they really want to know after they locked in the rate, [was] will the rate lock be there for them,” says Schakett.
Competitive standing
While Bank of America scrambled to meet demand in the refi boom of 2009, it fell from first place in originations to second place behind Wells Fargo & Co., San Francisco, according to Inside Mortgage Finance. When asked if being the No. 1 originator was important, Desoer replied, “One of our few priorities is being profitable. That’s No. 1,” says Desoer. “And maintaining share position is [right behind that].”
“I always want to be No. 1 in originations, to be perfectly clear. And that’s what we work for day in and day out. But the production we’re generating needs to be profitable and of the highest manufacturing quality. And so the combination of volume that we’re doing and maintaining our share or position and profitability and quality is what we are striving to do, and I’m pleased with our ability to execute that balance,” Desoer says.
When Bank of America acquired Countrywide, a press release announced that it would be “accretive to earnings.” From Desoer’s comments, it would appear that this is occurring.
Rochdale Securities’ Bove says he “sees no reason to question” the claim by Bank of America as boosting the company’s bottom line. He points out that when Bank of America acquired Countrywide in an all-stock transaction worth about $4 billion, Countrywide had already recognized a lot of potential loan losses, and those losses were reflected in the price paid for Countrywide.
When the acquisition was announced in January 2008, Bank of America Chief Executive Officer Ken Lewis said that the bank was buying Countrywide at a deep discount of 31 percent of its common stock book value, or 2.9 times its 2009 projected earnings. Bank of America’s own stock shares plunged, however, after the onset of the financial crisis that began in September 2008. Bank of America shares fell from $37 on Sept. 18, 2008, to $3 on March 2, 2009. Since then, the share price has seen a recovery. It stood at 16.38 on October 2.
Investors drove down share prices after Bank of America had to go back a second time for $20 billion in government funds from the Troubled Asset Relief Program (TARP) in January on top of the $25 billion disbursed in October. On Sept. 1, 2009, Bank of America offered to repay $20 billion of the $45 billion in TARP funds, as well as end a loss-sharing deal with the U.S. government related to its acquisition of Merrill Lynch & Co., according to a Wall Street Journal report.
The extent to which Bank of America will continue to have costs and markdowns associated with Countrywide remains unclear. One key concern is potential buy-back requests from the GSEs.
“Countrywide did a lot of alt-A [loans], which they sold to the GSEs” in 2007 after the collapse of the private-label mortgage-backed securities market in August of that year, says Guy Cecala, publisher of Inside Mortgage Finance, Bethesda, Maryland.
“The type securitized by Countrywide was not eligible [for sale to the GSEs] because the underwriting was too loose. However, [Countrywide was] able to tweak that and funnel more stuff to Fannie and Freddie in late 2007 when other markets collapsed,” according to Cecala.
“The irony, as you look at Fannie and Freddie business, is that they acquired most of the problem alt-A loans in 2007, and Countrywide was their largest customer,” Cecala contends. He recognizes that the GSEs have not acknowledged they were acquiring alt-A mortgages from mortgage lenders then. However, he maintains, the indirect evidence comes from the fact that Freddie Mac recognized alt-A losses in the second quarter. “I assume the same thing is going on at Fannie Mae,” he adds.
Traditionally, the GSEs require lenders to buy back bad loans, but this may be “a little complicated with Countrywide,” which is no longer a separate identifiable business. “I’m not sure what Bank of America’s obligations are” in this regard, Cecala adds.
The integration process
Bank of America began the difficult process of integration by first putting together a team of people from both Countrywide and Bank of America Mortgage, starting as early as January 2008. The team was asked to look closely at the people, processes and technology within each entity to determine which one was best, according to Mary Kanaga, Countrywide transition executive, who oversaw the review process with the new team.
“It was an arduous process, understanding what the two companies did at a low level, through tools we have built over years and which have withstood the test of time,” Kanaga says.
The process was not one where each element could be viewed in isolation--each had to be viewed in relation to the other. “You can’t talk about one without the other two,” Kanaga says. “It’s an important tenet for Bank of America.”
In following this approach, the team had to be aware that it was creating “a mosaic” from pieces of a puzzle, one piece at a time, explains Kanaga.
“Part of what Bank of America does when it first starts the process is to do a quick side-by-side. You are looking at the processes, people and technology they use to drive their jobs. You get to know the players and tools they use,” says Kanaga.
“From there, we go through the process of determining what is best” in the side-by-side lists. “Locations, human resources, servicing, sales--every piece of the business goes through that process at the same time,” she says. After assessing each, the team makes a recommendation to Kanaga and the Transition Leadership Team, which has overall accountability for executing the transition, Kanaga says.
The review team also agrees on a target or goal for each segment of the business in terms of people, process and technology, and how much funding is going to be needed to reach that target. So, as the “mosaic” is pieced together, a budget is also being created for the new entity when the legal merger is completed--in this case, July 2008.
The review also looks at desktop tools, notebook tools, every single communication vehicle and device, and compares those used at Countrywide and those at Bank of America. It looks at how those tools drive the business.
There is also a look at all building facilities as the team puts together a “massive audit and inventory” before making a recommendation on which are needed and which are not.
Nothing in the puzzle is too small, Kanaga says. “Everything counts. Everything has to get there, whether it is the biggest project or the smallest project. It’s very much putting a puzzle together. If there is a missing piece, we have a broken chain and we can’t complete the mosaic.”
Each side comes to the discussion on management and process tools, for example, with an understandable preference for what has been tried and true for each side.
To resolve this potential conflict “means we have to create partnerships at our level first, and leave the businesses behind and think of a new company and what it needs to survive. At times, it creates a bit of arm wrestling and healthy tensions, and we learn how to leave biases behind quickly,” Kanaga says.
“Countrywide associates had a couple of hard years behind them. They had worked through how they would survive. They never thought about a suitor, and were proudly independent,” Kanaga says. “You have to add that to an already intense environment,” she explained. “So early on, it was about relationships and how to relate to one another.”
Notably, the review team did not consider other ways of doing things that were not either legacy Countrywide or legacy Bank of America, according to Kanaga. Why? “Our goal is never to have it be something else in terms of people, process and technology. There’s little time to build anything new. It adds risk and adds complexity. Our goal is to pick one or the other,” she explains.
What about hybrids? “We have created some hybrids, with a little bit of this and a little bit of that,” Kanaga says. “But experience tells me that hybrids are always harder. No one is expert in the hybrid.”
Once an analysis had been made, the time came to make decisions on which system or component to use. “In the core loan perspective and the mortgage business perspective,” for example, “it was predominantly Countrywide,” she says. “They were industry leaders,” she adds. “Their technology was superior to that of Bank of America because of the investment they had made,” she adds, referring to both legacy Countrywide’s servicing platform and its origination platform.
“When you look at deposits, customer, accounting, human resources, the decision was predominantly Bank of America, where we have the core discipline,” Kanaga says.
Executing the transition
Once decisions had been made about people, process and technology, then the integration team had to execute the transition beginning July 2008. The goal was to be “on time, on budget and flawless in execution,” Kanaga says. “Flawless doesn’t mean zero defects,” she explains. “It means our customers don’t pay a price for changes we’re going through.”
There was also another mantra to guide the transition: “associates, shareholders and customers,” Kanaga says. “Associates are to be trained; we have to do right by our customers; and if we do, then our shareholder wins.”
Take loan modifications, she says. The idea was to ask: How do you make the process better? The team had chosen legacy Countrywide’s loan-modification capability.
By early last month [September], the transition process was well along. In the large mosaic that is under construction, Kanaga explains, there are 300 active projects. “Many, many key components that set the foundations [for the integrated company] have been in the history books for months,” she says.
In 48 of the last 52 weekends, employees at Bank of America Home Loans had to do data migrations and be ready for business in the next week. The bank had chosen to use legacy Bank of America data centers, so Countrywide data had to be transferred over the weekend.
“There was a [Central Processing Unit] sitting in California running applications. We have to finish tonight’s process. By Monday, we’re talking to a data center in Texas,” says Kanaga. “The user should never care” about that transition. “We care because it worked on Friday, has to work on Monday. There were people executing every move, validating every move, watching the performance on Monday,” she says. The transfer is then certified. “This way, when associates return to work on Monday, they can go right back to work where they left off before the weekend,” Kanaga says.
So far, the process has been “flawless”--a term Bank of America defines as everything that worked on Friday works on Monday, explains Kanaga. She reports, looking back at the process so far, “Nothing went terribly wrong and had to be redone.” One reason is that the bank did “dress rehearsals on bigger events.”
She adds, “We’re [currently] doing a series of data-center migrations, and the biggest and most complex are done. In fact, we had to execute on that in peak origination volumes.” But much more remains to be done. “We have many months ahead of us of really complex work, which should not be a surprise,” Kanaga says.
For one thing, legacy Bank of America originations will be migrating to the Countrywide platform.
“We love what we do. There’s something exhilarating about transition,” Kanaga says.
Rich acquisition experience
Bank of America has a lot of experience with integrating acquisitions, including huge acquisitions such as when Charlotte, North Carolina-based NationsBank bought San Francisco-based BankAmerica in 1998 and then changed its name to Bank of America.
Indeed, Bank of America’s skill in integrating acquisitions is one of its notable strengths, according to bank analyst Bove.
“If you go back over the last 25 years,” Bove says, “Bank of America has acquired dozens and dozens of companies. They have acquired many companies greater in size than Countrywide--and I would say much more complex. In the final analysis, Countrywide is a one-product company. NationsBank bought the old Bank of America. Now, that’s complicated. You have to be integrated at many levels,” he says.
Bank of America’s other notable acquisitions include Montgomery Securities, San Francisco, in 1997; FleetBoston Financial, Boston, in 2004 (itself a merger of Fleet Financial Group and BankBoston in 1999); the credit-card company MBNA Corporation, Wilmington, Delaware, in 2005; and the acquisition of New York-based wealth manager United States Trust Company (U.S. Trust) from Charles Schwab in 2006. Most recently, the bank acquired giant retail brokerage firm Merrill Lynch & Co. in December 2008 as part of a rescue effort engineered by federal banking regulators.
Each of these acquisitions presented Bank of America with difficult challenges. For example, when the bank acquired Montgomery Securities, “[nearly] everyone walked out the door,” Bove says, but Bank of America “still made it work.” When the bank acquired U.S. Trust, again, “a lot of key players left.” And when the bank acquired Merrill Lynch, “3,000 brokers walked out the door,” Bove says.
“In each case when Bank of America acquires companies, a lot of people leave--some voluntarily, some involuntarily. For some reason, Bank of America makes these acquisitions work. The reason is [chief executive officer] Ken Lewis. He knows how to acquire,” Bove says.
With Countrywide, Bove says, Bank of America acquired superior technology--a point Desoer and her fellow executives readily acknowledge.
Customer Day One
After negotiating a few boulders along the way, the transition moved into high gear with Customer Day One, April 27, 2009. For Desoer, it was “the highlight of the year . . . when we retired the Countrywide brand and launched the new Bank of America Home Loans brand.”
That same day, the newly branded company unveiled three examples of its fresh focus on anticipating and meeting customer needs: a new Clarity Commitment(symbol)(TM), a new flat-fee mortgage for home purchases, and a redesigned Web site that provides more comprehensive information for consumers on the size of mortgage (and home price) they can comfortably afford.
The new Clarity Commitment is “a one-page, simple summary of the loan terms for the borrower,” Desoer explains. It is provided both at the time the loan is offered and again at closing. The document contains information that is above and beyond all the disclosure documents required by law.
All three initiatives came about after the bank invested heavily in customer surveys, focus groups and phone interviews, according to Aditya Bhasin, product, price and strategy executive at Bank of America Home Loans.
“One of the first things we did when we started the integration process, as we looked at product set, we realized we have an opportunity here to rethink and relaunch our brand in the context of a new market environment and new expectations from the customer,” says Bhasin.
“The first we thing we did before we started [was] to go and talk to customers. From July [2008] to April [2009], we talked to 5,000 customers--on the phone, online and in one-on-one interviews. We talked to Realtors®, builders, partners and our sales force. What we were trying to do is understand the new mortgage mindset of the American consumer,” Bhasin says.
“What we learned in the process is that some of the core features of mortgages have always been important--great rates, low fees and good service--those were still important,” Bhasin explains. “But what was becoming even more critical and important for consumers is a lender they can trust, clarity in what loan they were getting, transparency in what they were paying for and education [about loan products],” he says.
“We started to see a whole different side of the mortgage consumer. ‘Give me clarity, simplicity and transparency as well as great rates and low fees,’” the customer was telling the bank, according to Bhasin. “These were very much the overarching guiding principles behind the work we did when we launched our brand.”
Redesigning the Web site
Bhasin says the first step toward improving the customer experience focused on how consumers begin the process of determining how much mortgage and home they can afford. “A majority of consumers today begin that process online,” Bhasin says. So, the bank began to look at what other lenders do online. “We saw tons of tools at other sites, most of them calculators for how much home can I afford. That led to the creation of our online experience [at www.bankofamerica.com/homeloans],” Bhasin says.
The bank learned through its consumer research that mortgage lender sites were not asking the right questions. Nowadays it’s no longer a question of “How much home can I afford?” Instead, it’s “’How much home can I (ital) comfortably (end) afford?,’” Bhasin says.
At the redesigned Bank of America Home Loans Web site, “There are tutorials about the home-lending process. There’s a home loan guide, [and] an interactive tutorial that walks you through not just how much home you can buy and the cost of homeownership; it also asks you about other debt,” Bhasin says.
“We build up the customer’s debt-to-income ratio, explain what it means and why it is important,” Bhasin says. Visitors can change the monthly payment and see how it affects their overall budget and overall savings, he explains. “If this is your income, your tax, your other debts, then we say, ‘If this were your mortgage payment and real estate taxes and association dues and insurance, here’s what you have for savings,’” he explains.
The program then walks the consumer through the savings he or she has accumulated for a down payment and asks how much savings will be left after the home purchase. If the customer does not have enough savings set aside to meet expenses for a “certain number of months,” sometimes as many as six months, then the program advises the potential buyers they do not have enough to make a 20 percent down payment and they will have to pay for mortgage insurance and get into a government program that accepts a lower down payment.
When the program is completed, the consumer can print out a “loan snapshot,” which can be taken to a loan officer or used for reference in a call to a toll-free number or to apply online, Bhasin explains.
The new Web site has been a “great success,” and consumers have provided “great feedback” in support of the program, he reports. The bank has found consumers spend an average of five minute per session on the site, “which is high by industry benchmarks,” he adds.
Clarity Commitment
The second thing consumers told Bank of America they wanted was for the lender to help them understand the terms of the loan. “‘Give us clarity’” was the plea, Bhasin says.
“The challenge we gave ourselves [was] to find out what it would take to have on a single page a summary of the loan to understand exactly what it is they are [taking on as a responsibility],” Bhasin says. The bank came up with several iterations of what it thought consumers might like to see, and showed them to consumers before deciding on the final text.
The Clarity Commitment provides in plain English a description of the mortgage amount; the type of loan (fixed-rate or adjustable-rate); the interest rate; the term of the loan; the monthly payment, including how much is principal and interest and how much is escrow for taxes, insurance, etc., and the payment due date; and information about closing costs and fees.
For adjustable-rate mortgages, the Clarity Commitment also tells consumers when the rate will adjust and what the payment will be at current market rates, along with the worst-case scenario for how high the payment could go. Because the Clarity Commitment is not a legal document, the bank advises consumers to read all the legal documents they also receive.
There are two versions of the Clarity Commitment--one provided at the time the loan is locked, and one at closing, to capture any changes that might occur after the application process.
Since the Clarity Commitment went into effect April 27, the bank has provided 450,000 of the commitment statements to borrowers. It is currently being provided for more than 95 percent of loans, Bhasin says. The program is to be expanded to include other loan categories such as home equity, reverse mortgages and loan modifications.
The third part of the new customer focus is a new flat-fee mortgage product. This mortgage comes with a flat closing fee that may vary from state to state because of differing rules, but is typically $2,995.
The flat-fee mortgage comes with a closing date and a guarantee that “if we don’t close on that date, we’ll pay your first month’s payment,” he adds.
Besides the service guarantee, there is also a best overall value guarantee that states, “If you can find a better deal with somebody else and you go somewhere else, we’ll send you $250,” Bhasin says. The guarantee applies to the combination of rates, fees and service.
Product standardization
As Countrywide and Bank of America Home Mortgage began to come together in the spring of 2008, the bank began to make decisions on what loan products would be offered.
“We announced to the Fed a series of policies around responsible lending and products. There would be no negative-amortization products and no subprime lending, which Bank of America had not done,” Bhasin says.
Importantly, Bank of America decided it would offer jumbo prime mortgages at a time when there was huge demand and not many lenders offering them on terms that made sense to consumers. The bank saw this demand as a lending opportunity.
“There are plenty of borrowers who want jumbo mortgages with very good credit profiles,” Bhasin says.
The private-label jumbo market, which collapsed in August 2007, is still defunct as investors continue to lack the appetite for privately issued mortgage-backed securities. So, jumbo lending for Bank of America meant portfolio lending.
“Because of Bank of America’s size and scale, we were able to leverage our balance sheet and offer jumbo loans at competitive prices,” Bhasin says. “That’s an example of the power of this franchise.” These loans require a 20 percent down payment.
Desoer also says the jumbo product was important for high-priced markets, such as California and the Northeast, where Bank of America has a lot of existing customers who need jumbo loans.
“We led the industry in using our balance sheet to support those home loan products in jumbo markets,” Desoer says. “We like the quality we’re getting. We like the margin we’re getting. And it helps in that relationship with customers.”
The bank is hoping that because of its efforts to work hard to earn the business and trust of consumers, it will pay off with additional business.
The availability of the jumbo mortgage gets back to why Bank of America wanted to make the Countrywide acquisition, according to bank analyst Bove. “The mortgage product is still the most attractive product for any bank in the U.S. on the retail side, and more attractive than many commercial products. Becoming the largest mortgage company is not bad, if the product you are selling is the most preferred,” he adds.
In the final analysis, Bove says, “At all levels, I think the acquisition makes an enormous amount of sense.”
MB
SIDEBAR
Ramping Up Foreclosure Prevention
By Robert Stowe England
Getting the right loan-modification programs in place has been a challenge for all mortgage lenders, and Bank of America Home Loans, Calabasas, California is no exception, according to Jack Schakett, credit loss mitigation strategies executive who oversees 20,000 employees and a combined portfolio of 11 million loans.
Schakett has helped spearhead key initiatives to provide sustainable loan-modification solutions at Bank of America and some of its solutions have become models for the industry, he says.
“Job No. 1 is to mitigate losses,” Schakett says--a job complicated by having to balance investor and customer interests. “Fortunately, the balance is easier today than ever before,” he says. “Because the cost of foreclosure is so expensive, there is an opportunity to make large adjustments on the consumer side that are better for investors.”
Ironically, declining home values have come with “a silver lining” that “aligns investor and consumers more than ever,” Schakett says.
Loan modifications also come at a cost to the lender: The lender has to project losses and set aside loan-loss reserves.
To mitigate its own losses, Bank of America has a group that works with investors to settle claims, Schakett says. There are “both in-bound claims from someone asserting a claim against us, as well as outbound claims--people from whom we’ve bought loans,” Schakett explains. Thus, Bank of America can ask organizations that have sold it bad loans to repurchase them.
Schakett has worked with Seth Wheeler, senior adviser to the secretary of the Treasury on the Making Home Affordable (MHA) program, which includes the Home Affordable Modification Program (HAMP) as well as the Home Affordable Refinance Program (HARP).
In devising the MHA program, Treasury brought in investor groups, including the American Securitization Forum (ASF) and advocacy groups such as the Association of Community Organizations for Reform Now (ACORN), and tried to form a consensus, according to Schakett.
Before HAMP guidelines were announced last March and $75 billion was allocated for subsidies for sustainable mortgage modifications, Bank of America had already developed its own “robust” program known as the Home Retention Program, according to Schakett.
That program used a net present value (NPV) calculator to better balance the needs of the customer and the interests of the investor, and facilitate an agreement the bank expected to lead to a sustainable home modification and a better outcome for the investor. The NPV program computes two cash-flow streams: one assuming the loan is not modified and the other assuming it is modified. The program calculates the proceeds the investor would receive if the loan defaulted and went through foreclosure.
“As it turns out most of the time, the cost to the investor to lower the interest rate is a lower cost to the investor than would result from a foreclosure sale,” he adds. “The program has imbedded in it an assumption on the re-default rate for a given loan.”
In the early days of loan modifications, the industry standard was to reduce the mortgage so that the borrower had a debt-to-income ratio of 38 percent. “We recognized that 38 percent was too high, and that 34 percent was more affordable and reduced the risk of re-default,” Schakett says.
MHA reduced the target debt-to-income ratio to 31 percent. At the same time, the federal government authorized $75 billion to pay a subsidy to the investor so that the investor would still receive a payment stream that would represent an income based on reducing the debt-to-income ratio to 34.5 percent.
“The MHA program gives the investor the experience of a 34.5 percent modification and the customer the experience of the 31 percent mortgage,” says Steve Bailey, mortgage servicing executive for Bank of America Home Loans
“So investors today are in the same situation under MHA as they were under our program,” Schakett adds.
Building on the work at Bank of America Home Loans, Fannie Mae, under Treasury’s guidance, has built an industry-standard model to compute the net present value of loans that might be considered for loan modifications. This third version went into effect Sept. 1, according to Schakett. “On this topic, we were ahead of the pack,” he adds.
On the subject of re-defaults, Schakett says that instead of focusing on the re-default rate, people should instead focus on the “save rate.” If a group of loans had an anticipated 90 percent default rate and a loan-modification program brought it down to 50 percent, he says, “It means for 40 percent, you saved their home.”
What about the 50 percent who are still going to default? “Most of those default because they choose to default. We can’t help that customer,” Schakett says.
Bank of America has a limited program that will reduce principal for pay-option adjustable-rate mortgages (ARMs), which can create negative amortization. “For those loans, the first thing in the waterfall is to forgive the principal equal to the amount of the negative amortization,” Schakett says. The program is not part of MHA.
Bank of America and other lenders are working with the government to design a short-sale process where the government will provide some incentive for investors to do short sales. The program tackles the problem of low-ball short sales that occur because one cannot be sure the home was really marketed properly. To address this issue, the new program would ask investors to set a price at which they would be willing to accept a short-sale offer. If a buyer offers that price, the house is sold and there is no further negotiation. Under this program, Freddie Mac would audit lenders to make sure short sales comply with guidelines. Treasury has designated Freddie Mac as its Compliance Agent for the use of the NPV model in the Making Home Affordable program.
Bank of America has already unveiled its own new short-sale program under the MHA program that involves reaching an agreement in advance among the seller, the servicer and the investor.
In the most recent report on the number of loan modifications under the HAMP program, released in September, 1.88 million requests had been made from borrowers for financial information on the program. In return, lenders started 360,165 trial modifications from a total of 571,354 trial period plan offers they had extended to borrowers.
In the data released last month, Bank of America had only 7 percent trial-modification starts as a share of estimated eligible 60-plus-day delinquencies. (Saxon Mortgage Services Inc., Fort Worth, Texas, had the highest share share of trial-modifications started at 39 percent, and Nationstar Mortgage LLC, Dallas, Texas, was had the second highest share at 30 percent.
Among larger servicers, GMAC Mortgage, Horsham, Pennsylvania, JPMorgan Chase, New York, were near the top with 26 percent and 24 percent trial modifications started respectively, according to the government report.
Bank of America Home Loans has put in better than one out of five – or 125,000 of the 571,000 – offers made on MHA loan modifications. (
Bank of America was very active in successfully making loan modifications before MHA, Bailey points out. The mortgage lender did 230,000 modifications in 2008. In 2009, before MHA was unveiled, Bank of America did 150,000 non-MHA loan modifications, and it is continuing to do modifications outside the MHA program, Bailey reports.
The introduction of the Making Home Affordable program adds a “different wrinkle,” Bailey says, because the loan goes into a trial modification first, before there is a final modification. This has slowed down the process, and Bank of America Home Loans wants to “get it right” before it ramps up its volume of modifications. Getting it right will also limit customer frustration, according to Bailey. “We want to make sure the experience is a good one, and make sure the conversion is maximized,” he says.
Robert Stowe England
Copyright © 2009 by Mortgage Banking
Reprinted with Permission
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