At JPMorgan Chase, they were derided as “Burger King kids” — walk-in hires so inexperienced they barely knew what a mortgage was.
At Citigroup and GMAC, dotting the i’s and crossing the t’s on foreclosures was outsourced to frazzled workers who sometimes tossed the paperwork into the garbage.
And at Litton Loan Servicing, an arm of Goldman Sachs, employees processed foreclosure documents so quickly that they barely had time to see what they were signing.
“I don’t know the ins and outs of the loan,” a Litton employee said in a deposition last year. “I’m not a loan officer.”
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As the furor grows over lenders’ efforts to sidestep rules in their zeal to reclaim homes from delinquent borrowers, these and other banks insist they have been overwhelmed by the housing collapse.
But interviews with bank employees, executives and federal regulators suggest this mess was years in the making and came as little surprise to industry insiders and government officials.
The issue gained new urgency Wednesday, when all 50 state attorneys general announced they would investigate foreclosure practices.
That news came on the same day JPMorgan Chase acknowledged it had not used the largest U.S. electronic mortgage-tracking system, known as MERS, since 2008. That system has been faulted for losing documents and other sloppy practices.
The root of today’s problems goes back to the boom years, when home prices were soaring and banks pursued profit while paying less attention to the business of mortgage servicing, or collecting and processing monthly payments from homeowners.
Banks spent billions of dollars in the good times to build vast mortgage machines that made new loans, bundled them into securities and sold those investments worldwide. Lowly servicing became an afterthought.
Even after the housing bubble burst, many of these operations languished with inadequate staffing and outmoded technology, despite warnings from regulators.
When borrowers began to default in droves, banks found themselves unable to devote enough manpower to modify or ease the terms of loans to millions of customers on the verge of losing their homes. Now banks are ill-equipped to deal the foreclosure process.
“We waited and waited and waited for wide-scale loan modifications,” said Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp (FDIC).
Bair was one of the first government officials to call on the industry to act.
“They never owned up to all the problems leading to the mortgage crisis,” she said. “They have always downplayed it.”
In recent weeks, revelations that mortgage servicers failed to accurately document the seizure and sale of tens of thousands of homes has caused a public uproar and prompted lenders like Bank of America, JPMorgan Chase and Ally Bank, which is owned by GMAC, to halt foreclosures in many states.
But for all the outrage over individual examples like having one employee approve 10,000 foreclosures a month — the so-called robo-signers — the bigger question remains: Why were banks so ill prepared, despite warnings that plunging home values would push many owners to the brink?
Some industry executives add that they’re committed to helping homeowners but concede they were slow to ramp up.
“In hindsight, we were all slow to jump on the issue,” said Michael Heid, co-president of Wells Fargo Home Mortgage. “When you think about what it costs to add 10,000 people, that is a substantial investment in time and money along with the computers, training and system changes involved.”
Other officials say as foreclosures were beginning to spike in 2007, no one could have imagined how rapidly they would reach their current level. About 11.5 percent of borrowers are in default today, up from 5.7 percent two years earlier.
“The systems were not ever that great to begin with, but you didn’t have that much strain on them,” said Jim Miller, who previously oversaw mortgage-servicing units for troubled borrowers at Citigroup, Chase and Capitol One. “I don’t think anybody anticipated this thing getting as bad as it did.”
Almost overnight, what had been a factory-like business that relied on workers with high-school educations to process monthly payments needed to come up with a custom-made operation that could solve the problems of individual homeowners. Gregory Hebner, the president of the MOS Group, a California loan-modification company, likened it to transforming McDonald’s into a gourmet eatery.
”Never catch up”
“You are already in chase mode, and you never catch up,” he said.
To make matters worse, the banks had few financial incentives to invest in their servicing operations, several former executives said. A mortgage generates an annual fee equal to only about 0.25 percent of the loan’s total value, or about $500 a year on a typical $200,000 mortgage.
That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans.
“Investment in people, training, and technology — all that costs them a lot of money and they have no incentive to staff up,” said Taj Bindra, who oversaw Washington Mutual’s large mortgage-servicing unit from 2004 to 2006, and was previously Chase Mortgage’s finance chief.
And even when banks did begin hiring to deal with the avalanche of defaults, they often turned to workers with minimal qualifications or work experience, employees a former JPMorgan executive characterized as the “Burger King kids.”
In many cases, the banks outsourced their foreclosure operations to law firms like that of David Stern, of Florida, which served clients like Citigroup, GMAC and others. Stern hired outsourcing firms in Guam and the Philippines to help.
The end result was chaos, said Tammie Lou Kapusta, a former employee of Stern’s who was deposed by the Florida Attorney General’s Office last month.
“The girls would come out on the floor not knowing what they were doing,” she said. “Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents.”
Citigroup and GMAC say they are no longer giving new work to Stern’s firm.
In some cases, even steps that were supposed to ease the situation, like the federal program aimed at helping homeowners modify their mortgages, actually contributed to the mess.
Loan-servicing companies complain that bureaucratic requirements are constantly changed by Washington, forcing them to overhaul an already Byzantine process of nearly 250 steps.