A couple more tales of service improvement (opportunities) at Lehman Brothers & their mortgage-servicing subsidiary, Aurora Loan Services…
(Perhaps you’ve heard of Lehman Brothers, the once-prestigious Wall St investment firm, and the company that the Feds allowed to go belly up during the onset of the Great Mortgage Collapse of 2008…while simultaneously pouring billions & billions into other financial services companies (and/or helping consolidate shaky ones) like Citi, Chase, BofA, Merrill Lynch, AIG, Wells Fargo & hundreds of others!
Guess every crisis needs a sacrificial lamb, heh?)
The first “service improvement opportunity” involved some, er, very peculiar wording on the customer statements.
A little background info should help here.
While I was running Customer Service, the Great Mortgage Collapse began, probably around the 3rd quarter of 2007.
We started to experience a TREMENDOUS increase in our delinquency rates. After a few years where past-due accounts averaged ~3.4% of the total portfolio, that number started to rise.
The company had greatly increased its mortgage servicing portfolio over the past few years, hitting a high in originations during the latter part of 2004. In addition, Lehman was a huge player in the secondary mortgage servicing market, buying servicing rights to huge portfolios from other firms, in addition to specializing in “scratch-and-dent” mortgages (loans that were already in different stages of delinquency).
The philosophy was to buy these loans at bargain basement prices (often less than 20¢ on the dollar)…then “cure” them (get them current) and then reap the benefits!
And the main product being sold by mortgage brokers & correspondent banks was the ARM-3/Adjustable Rate Mortgage where the payments stood steady for the first 3 years, but on that 3rd anniversary, BOOM!!! 💥
The loan was subject to an instant rate increase…and even more as time went on!
All of a sudden, customers who were making payments on a 3.5% mortgage now saw their rates increase to around 6%!!!
In addition to many customers feeling the sudden impact of trying to make a significantly-higher minimum payment, a few other factors came into play.
Lehman (Aurora Loan Services) were offering “no income verification/no asset verification loans”.
In other words, whatever salary figure you wrote down on the application (or, for that matter, whatever figure the broker may have written) was assumed to be correct when it came time to approve or reject your mortgage application.
We heard many horror stories where, let’s say, a day laborer actually making $35K-$40K a year had a $195,000 salary written on the app!!!
We took the $195,000 figure into consideration during the approval process. “No income verification” means that we did NOT verify the income with your employer. We did NOT require that you provide a couple of pay statements as proof of the income you claimed!
And “No asset verification” means that if you had $45.76 in the bank, but $1,850,000 was written on the application, we used the $1,850,000 amount. And with no verification!
We didn’t ask for any copies of your bank statement nor did we verify the figure provided directly with your bank(s).
Holy 💩 💩!!!
Now it’s even scarier.
Aurora Loan Services is, er, was strictly a mortgage-servicing company. We handled all the servicing (collecting payments, issuing statement, handling phone calls, etc.), but never actually originated the mortgage loans ourselves.
There were no Aurora branches.
Instead, we used a network of different brokers & correspondent banks to originate the loans on our behalf.
No one wore an Aurora name tag as they were not Aurora employees & had little, if any, allegiance to, or loyalty with, us. Basically, they were money-hungry front men (“snake-oil salesmen” would be accurate), solely interested in making a fee for handing the customer solicitation & application process.
Some were fly-by-night brokers. Doing mortgages today (as the ABC Loan Store), then selling used cars the following week.
If the customer’s application wasn’t approved, they made -0- money on it & actually incurred some expenses.
It was not beyond reason to assume that they “coaxed” the customer to inflate their income &/or assets…or did so without the customer’s knowledge. But it was the customer who signed the app, no?
People were hungry to purchase a home & as long as they could somehow make those initial payments (while the interest rates were artificially low), everything would be OK.
But then the adjustable rate feature kicked it (usually after 3 years, then every year thereafter) & many customers could no longer afford to make their monthly payment.
Also, we had a significant portion of our customer base where English was not their primary language. Many of them later admitted to being completely steered by the mortgage broker or loan officer during the entire application process.
When we reminded them that they, indeed, signed the application as well as the mortgage note, they would say that they simply did as they were instructed.
Many had no idea (or claimed that they didn’t) that their income &/or assets were grossly inflated nor did they realize the payment implications when that first adjustment took place 3 years later.
Within probably 6-8 months time, our 3.4% delinquency rate that I quoted earlier climbed. And climbed.
I believe it may have hit 18% in less than 6 months!!!
From 3.4% to 18% in 6 months!
= Complete bedlam & insanity!
Another factor that played a big part is that Aurora would often provide 100% financing for the customer!
A first mortgage covering the entire purchase price?!? Nah, that’s absolutely insane. No down payment?!?
No silly. They would never do that!
They gave you a first mortgage for 80% of the purchase price…then piggybacked a second mortgage for the remaining 20% on top of that!!!
You could buy a house with little to no down payment, with an inflated & unverified salary along with an inflated & unverified asset amount.
We had gardeners owning $500,000 homes!
The ARM-3 offered a very attractive initial rate (again, artificially low) so most people could afford the early payments & that’s what was considered during the approval process.
Could the same customer now afford a payment after the rate adjustment?
A 30-year $200,000 mortgage @ 3.5% carries an $889 monthly payment (exclusive of property taxes & hazard insurance).
At 6.25%, the monthly payment jumps to $1,231…an increase of $352, or 38+%!!!
By financing 100% of the purchase price, the mortgage bank also had no built-in “buffer”…the down payment.
Normally, that $200,000 house would require a $40K down payment. Taking that, along with a modest 3% annual increase in the home value, into consideration, if the bank had to foreclose on that house 3 years later, it would now be worth $219,000…and the 80% mortgage was for $160K.
The bank could easily sell the foreclosed house at, say, $170K ($49,000 lower than its value) & still cover the entire mortgage plus any & all associated costs.
Not a big deal.
That’s how the entire mortgage industry…the House of Cards…was pretty much built, though not nearly as risky as OUR idiotic “no-income-verification, no-asset-verification, 100%-financed” mortgages!
Mortgage banks always depended on a constant & steady rise in home values, plus the initial down payment, to cover future foreclosures.
To mitigate risk.
To make giving out mortgages a solid move for the company.
A down payment.
PMI/Private Mortgage Insurance (when there was a down payment <20%).
A rise (often, meteoric) in the value of the house.
But what happened during the Great Mortgage Crisis of 2008 (actually started in earnest in 2007) is that the value of homes actually decreased.
Let’s use that same example of that $200K home, but now it’s 100% financed (no down pymt).
The mortgage bank forecloses on the loan 3 yrs later & now has possession of the house.
But the $200,000 house is now only worth $140K. And let’s say the whole foreclosure & resale process costs them another $10K (just like I did in the first example).
They’re in for $210K (mortgage + costs), but the home is only worth $140,000 & they’ll probably only get $110K.
That’s a $90K loss on a $200K Mortgage…due to falling home values & no down payment cushion!
That’s a big reason why the whole financial services industry came to its knees during the latter part of 2008. And so many mortgages were sub-prime (terrible credit history for the applicants) & Class B (semi-bad credit history) so the prospect of ever being paid back was slim to none.
The house of cards totally collapsed!
(Of course, if you had a fixed-rate mortgage, there were no rate increases, so the risk was minimal…to the bank…as long as you still had a job & could still make the same monthly payments.
And even if you had an ARM 💪🏼, as long as you could afford the higher monthly payments, no big deal.
But so many customers couldn’t!)
OK, class, enough of the history lesson.
Let’s go back to mid-2007 when the problem with delinquencies really began to grow.
As I walked the floor often (I’ll always believe in the MBWA theory…Management By Walking Around…regardless of how many management levels between me & the service representatives), I’d hear my reps constantly saying, “Your account is past due. Pls let me transfer you to our Collections Dept so they can further help you. If you have a pencil handy, I can give their direct # for future use or you can find it on your monthly statement next to Credit Counseling.”
In examining the center’s daily/weekly/monthly numbers, I would notice a significant increase in our volume of transferred calls (not a great sign for a Customer Service Center…you can’t help a customer who’ve you transferred elsewhere.)
And in speaking with my reps, they would tell me that they’re getting way more “misdirected calls than ever before”, the overwhelming majority of which were from delinquent customers.
With the constant upswing in delinquencies, more & more customers were contacting Aurora.
But why Customer Service?
In peeling back the proverbial onion further, I asked a few reps to ask the delinquent customers why they called Customer Service instead of Collections.
“But that was the only phone number on the statement!” many of them claimed.
However, we always provided the Customer Service toll-free phone number & hours as well as…
Instead of actually calling the Collections Dept “Collections” or maybe, “For delinquent or past-due accounts, pls call…”, Aurora, in all its infinite wisdom, had decided to “soften the blow” & call the unit “Credit Counseling”.
And you thought this whole “sensitivity” thingie was just created???
🤣 🤣 🤣
Credit Counseling? Really?
Were we providing couches for the customers to tell us about their dreams?
If you were a customer that received his statement & noticed that your minimum payment due was now twice the normal amount, plus a late fee, would you really select the “Credit Counseling” phone number to call???
I also believe that most normal people wouldn’t, either.
You would choose “Customer Service” as the better of the options provided…especially since there was no explanation provided of what this totally-nonsensical term meant or who should be using it.
I wouldn’t even understand what Credit Counseling meant!
“I know I missed making my payment, but I didn’t think I needed counseling.”
And when I addressed the issue with the beloved Service Committee, I got my normal response, “That’s what we’ve been using for the past few years! Besides, it’s much more customer-friendly and our customers are used to it.”
I didn’t wanna bang my head on the table…repeatedly…as that might be perceived as the actions of a mad man.
But I was a mad man.
“We do realize that our delinquency rate is spiraling upward. Out of control! We probably have at least 3-4 times as many delinquent customers as ever before. That’s means that the majority of today’s delinquent customers are new to the world of missing a payment.
“They have no experience whatsoever with what Credit Counseling means…or is supposed to mean!!!
“Besides, we’re trying to get a PTO/Promise To Pay, or possibly, an actual payment, out of them…there ain’t any damned counseling going on.
“You wouldn’t start to get into the customer’s finances & such with him until they’re at least 60 days late (2 payments) & by that time, they’ve already put your direct number into their phone’s contact list!
“We’re giving new delinquency customers no other choice on the statement than to call Customer Service. My people are getting killed with calls that should be going directly to Collections!”
The situation got so bad with Collections being unable to handle their own call volume (Service Levels in the teens while the standard was 80%…abandoned calls approaching 15%-20% while the standard was 2%), that I began training my own Customer Service representatives to handle “early-stage collection” calls (customers who’ve only missed 1 payment).
I figured that we could keep some of the calls that we were previously transferring over to Collections and handle those customers ourselves, thereby somewhat lightening the load on our Collections partners.
In addition, I worked closely with our Control Desk to create a “new phone skill” for my reps who were cross-trained to handle early-stage Collection calls.
We would add this skill to the call-handling profiles of the cross-trained reps so they would receive calls already waiting in Collections’ queues…and ONLY if there were no Customer Service calls waiting in my queues.
This would help to ensure that Customer Service was in good shape to handle calls that Collections was unable to even get to (as the customers were already waiting in queue for a Collection rep).
It would be a big help for Collections & it would be the best thing for the company.
It would “virtually” increase Collections’ call-handing capacity while using up “excess availability” in my unit (as we would have no calls in queue, but have reps sitting around just waiting for an incoming call).
It would also provide career pathing for my people as I created a unique job description for this new “hybrid” rep.
I didn’t have to do this.
I wasn’t asked to.
I simply saw an opportunity to help another business…make my shop more efficient without sacrificing our excellent Service Level…get more money from these delinquent customers (it’s frustrating when customers who actually owe you money are calling, but anywhere from 1 in 10 to 1 in 5 of them are getting tired of the excessive wait time & HANGING UP)…provide career advancement opportunities for my better-performing people…and help the customer by providing enhanced timeliness & causing fewer customers to abandon their calls.
BTW, the geniuses on the Service Committee still refused to change the stupid “Credit Counseling” wording on the statement!
(Remember, these were the same people who insisted that we continue to use MT/Mountain Time on the statement…despite the fact that ~98% of our customer portfolio lived in the other 3 time zones!!!
It was only until I directly contacted Lehman’s President…on Wall Street, ya know, in the Eastern Time zone…did we change after being ordered to!)
We had about 40% of my unit fully-trained on these early-stage Collections calls…when my peers in Collections put a stop to the Control Desk adding that special new phone skills to the cross-trained reps’ profiles.
And they told me not to handle any Collections calls we receive & simply transfer them over.
“My reps in Collections are complaining that with your Customer Service reps handing some Collections calls, they (the Collection reps) are having fewer opportunities to make variable compensation!”
I nearly dropped dead!
Collections had an incentive program that rewarded their people for getting PTO/Promises To Pay from delinquent customers. Not actual payments, but merely verbal promises to pay!
“But, Blake, you guys can’t even handle the calls you’re getting! Your call abandonment rates are in the teens! Customers are hanging up left & right. I only grab calls from your queues when I have no one at all waiting in mine!
“And I’m not paying my reps for getting PTPs nor charging your area. And the calls I handle – – instead of transferring over to you – – would either wait forever for one of your people or hang up!
“You’re forcing more & more callers to hang up on you as you guys are constantly underwater. And that’s a helluva lot more Collections customers than we could ever possibly handle anyway!”
“Sorry, Mike, but the people…”
“Who the hell is running the place over there? You or the people? You’re unable to properly address their concerns & explain what we’re doing here? You have no obligation to this company & to our customers?”
*pls insert your own version of &$@?#% here as I used my complete Brooklyn vocabulary on him…we were actually pretty good friends as we often bowled & golfed together…normally, he was a great guy – – with all of his faculties*
I came very close to asking him if he still had a pair, but I didn’t wanna endanger our relationship, personal & professional, by (further) stepping over the line.
“Pls let me talk with your staff, Blake. You guys can be there with me, of course!”
“Nah, that’s not gonna happen!”
Needless to say, I escalated the issue upstairs. My boss had been fired for screwing up the transition from several former buildings that housed our staffs to the brand-new $45MM facility that Lehman built for us.
Sad part is that the building could only be filled 40% since we stopped booking all new loans & discontinued all origination agreements with the mortgage brokers & correspondent banks a few months before we moved in.
The need for record-keeping & a whole bunch of other functions associated with the on-boarding of new loans was no longer necessary.
We continued to grow our portfolio, though, as Lehman, a major player in the wheeling & dealing of mortgages, bought the servicing rights to thousands & thousands of poorly-performing loans (at steep discounts) in the hope of bringing them current & making several kings’ ransoms in the process.
They bet wrong.
The housing market crashed instead of rebounding. The corporation wasn’t sufficiently insulated against the enormous risks they were taking (and had been taking for the past few years) as the rules of the game changed.
And the Feds allowed Lehman Brothers to fail & go bankrupt. They saved the more prestigious Merrill Lynch by helping them merge with Bank of America. The government poured billions & billions of TARP funds into hundreds of banks, including many of the major players who were deep into the sub-prime mortgage mess.
Oh, almost forgot…
No, they never changed “Credit Counseling” into something more understandable & better descriptive on the customer statement.
No, they didn’t allow Customer Service to handle early-stage Collection calls. They were hiring new classes for Collections just about every week, but the two nearest towns (Scottsbluff with 14,731 residents & Gering with ~9,000) just didn’t have enough qualified candidates!
The pickings were pretty slim & many people got job offers that they really didn’t deserve.
Plus, the delinquency situation was totally out of control. More & more customers began experiencing their first rate adjustment so the delinquency rate exceeded 20%!
Lehman didn’t go bankrupt because of its mortgage-serving subsidiary (us), but we were just one of the victims of a corporation that took on way too much risk in the hope of making windfall profits. But the housing market & the economy came crashing down & all their projections (both short- and long-term) weren’t worth the paper they were written on.
Oh, well! That’s life in the big city (NY’s Wall Street were Lehman Brothers was HQ’d) as well as the small one (Scottsbluff, Nebraska).
I still have a few more Lehman tales to tell so pls stay tuned.
Thanks so much for listening!