REQUIRED READING: A Peek Inside Wells Fargo’s Loss Mitigation Machine

Mary Coffin, Wells Fargo's executive vice president of servicing, likes to compare the role historically played by mortgage servicers with that of the iconic Maytag Repairman.

Both operated behind the scenes. Both performed functions that the average American would consider critical, if not esoteric. And, for the most part, both accomplished their duties smoothly. The ordinary homeowner did not understand the intricacies of payment collection and disbursement, nor was he aware of how a broken washing machine returned to operational form.

‘Now, everyone knows who we are, and everyone knows what we do – and everyone wants to know every last pinch of everything we do,’ Coffin said at the California Mortgage Bankers Association's (CMBA) Western States Loan Servicing Conference in August. "We're in a world of full transparency."
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Perhaps no one understands servicers' transition from the back office to the front page better than Coffin. As the head of Wells Fargo's servicing division, the nation's second-largest servicing shop after Bank of America, she has quickly become something of an envoy for the once-anonymous segment of the mortgage industry. In July, she was one of two servicing executives called to testify before the Senate Banking Committee to explain why struggling borrowers hadn't received greater relief.
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In August, a federal bankruptcy judge in Phoenix made the unusual demand for a Wells Fargo executive, not representative, to field his questions regarding a particular borrower's trouble obtaining a loan modification. Once again, it was Coffin who replied with a statement thanking the court for giving the company an opportunity to share its servicing practices.
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Of course, Coffin's de facto ambassadorial role is in addition to her day job, which is to oversee the administration of a colossal loan portfolio. Wells Fargo serviced 8.16 million loans totaling $1.42 trillion at the end of June, according to Fitch Ratings. The company's servicing portfolio has ballooned over the past two decades – the result of Wells Fargo's mortgage servicing rights-buying binge. It picked up a $40 billion portfolio from Prudential Home Mortgage in 1996, a $35 billion portfolio from First Union in 2000 and a $140 portfolio from Washington Mutual in 2006. At the onset of this year, Wells Fargo completed its purchase of Wachovia, whose legacy loans are expected to be integrated at the beginning of the fourth quarter.
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So in early August, when the Treasury Department issued its first report on the Home Affordable Modification Program (HAMP), the performance of Wells Fargo's loss mitigation initiatives was on full display. Sort of.
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Six percent of Wells Fargo's 329,085 HAMP-eligible 60+ day delinquencies had entered trial modifications, the Treasury's report showed. What wasn't evident in the HAMP report was the number of modifications executed outside of the program's purview between January and July: about 220,000.
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"There are a lot of mods that still have to be performed outside of HAMP, and our government doesn't seem to care about these," Coffin said at the CMBA conference. "But they're very important to us and, I'm sure, to many other servicers."
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A press statement released by Wells Fargo on Aug. 4 reiterated the bank's support for the program and pledged to accelerate the use of HAMP modifications, but Coffin emphasized the point that one program alone will not stem the foreclosure tide. Wells Fargo has implemented several proprietary modification programs that are designed for borrowers who do not qualify for HAMP – a sizable group. Many loan modification requests come from borrowers whose mortgage debt-to-income ratios are already below 31%, Coffin said.
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Wells Fargo is also contending with a large volume of pay-option adjustable-rate mortgages (ARMs) – fallout from the company's acquisition of Wachovia. Coffin characterized Wells Fargo's servicing of loans originated by third parties as one of her division's greatest learning experiences. When comparing loans underwritten and serviced by Wells Fargo with loans underwritten by another company but serviced by Wells Fargo, steep variations emerge regarding delinquencies, foreclosures and obstacles to modifying. These variations drive loss mitigation strategies.
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With pay-option ARMs, for instance, Wells Fargo takes an aggressive approach to loan modifications. Borrower hardship, affordability issues and low or negative equity are all common traits associated with the product, and the bank's loss mitigation department often pushes principal forgiveness or forbearance to the top of the modification waterfall in these situations.
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"We're seeing very, very good results on redefault rates initially," Coffin said, adding that Wells Fargo has shared the modification results with investors, implying that the company is trying to get investors to budge on principal reductions.

"Outside our realm'
When Coffin testified before the Senate committee, she told lawmakers that servicers had been slow in implementing HAMP, in part, because the program's core guidelines were rolled out to servicers over a 90-day time frame – despite the fact President Obama had already publicly announced the initiative.
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"Customer expectations were set the day the president announced the program," Coffin said. "Our job was to manage those expectations."
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Wells Fargo, like all servicers, experienced huge increases in inbound calls following HAMP's unveiling, including many inquiries that came from borrowers current on their mortgages. Effectively handling the influx of current borrowers in loss mitigation is "the most serious thing we're up against today," Coffin said.

Historically, 5% or less of borrowers who engaged in loss mitigation were current on their loans, according to Wells Fargo's records. That percentage doubled to 10% in the second half of 2008 and stands at an astounding 40% today.
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In response, Wells Fargo had to retool some of its technology – specifically, some of its automated default management platforms that would not allow current borrowers to be entered.
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Being able to understand, anticipate and manage consumer behavior is top of mind for many servicing shops – Wells Fargo included. The company has dissevered certain functions. Employees who speak to borrowers do not underwrite, and those who underwrite are kept away from document management duties.
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"They're different skills – different competencies – that are needed for all three of those," Coffin said. In other words, an individual whose strength is underwriting should not be communicating with borrowers, as that person may speak in underwriter jargon that, more times than not, only confuses already stressed borrowers. Documentation and workflow issues – a larger aspect of loss mitigation than ever before – deserves dedicated resources.
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Wells Fargo has also turned to its marketing group in an effort to support consumer-centric behavior (for example, achieving the correct tonality in explaining to borrowers why specific documents must be collected or why a modification request was denied).
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"You have to engage with your marketing group, statisticians and people who understand regression analysis, because I can tell you, we are trying to understand consumer behavior at this point," Coffin said. "We are way outside our realm of our skills."

Operational efficiencies
Thirty percent of Wells Fargo's 60+ day delinquencies are provided workouts, which include home retention options (e.g., HAMP loan modifications, "proprietary" modifications, payment plans) and non-retention alternatives (e.g., short sales, deeds-in-lieu). Five percent of the delinquencies are denied loss mitigation.
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The remaining 60% of borrowers who are at least 60 days past due is where Wells Fargo expends the most energy researching. A significant portion of the 60+ day delinquencies – 10% – actively engage in loss mitigation but fall out somewhere in the process. A whopping 55% do not engage at all.
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Bill Merrill, senior vice president of Wells Fargo's default servicing operations, noted at the CMBA conference that return rates on pre-approved modification packages have been particularly difficult to manage because servicers aren't always in control of the process.

Six Sigma experts, brought in by the bank as consultants, "were going crazy" when they reviewed the typical loan modification process and found servicers only looked at a file for 45 minutes in a 30-day time period. And while the package sits with the borrower for the better part of a month, outreach campaigns – which include phone calls and letters – ratchet up costs.
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"It's a very broken process in the sense that you move quick, stop. Move quick, stop," Merrill said, pointing out that investors and insurance companies have to sign off on packages. "The time we actually touch the files is pretty limited when you look at just one file."
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Wells Fargo's answer to this challenge, so far, has been a combination of expanding staff, automating decisioning and leveraging outsource partners. By automating much of the decisioning involved with modifications, the company has added the equivalent of 250 negotiators, Merrill added. In addition to that, Wells Fargo's default management division has grown by over 50% in the past year, swelling to 11,000 employees.
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Even with the boost in staffing, employees are working longer hours than before. A mandatory overtime policy was instituted in June, meaning hundreds of employees are working on Saturdays. During that month alone, more than 14,000 loans were decisioned during overtime hours. Merrill is very aware that the added work runs the risk of burning out employees.
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"They're tired," he said. "Our turnover is a lot lower than we would've expected at this point, though that's probably due a lot to the economy. But all of our team members are very intrinsically motivated to help borrowers. They recognize that."
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But despite all the operational improvements that Wells Fargo has made in its loss mitigation and default management areas, and despite all the capacity added by way of automation and staff growth, the bank is still evidently struggling to present a unified message to troubled borrowers.

The aforementioned bankruptcy judge in Phoenix, Judge Randolph J. Haines, finally had his opportunity to question a servicing executive in early September. The executive who appeared was not Mary Coffin, but rather Joseph Ohayon, senior vice president of Wells Fargo Home Mortgage Servicing.
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During the court hearing, Ohayon was asked to read a letter that Wells Fargo had sent to the borrower, Bobbi Giguere, who had filed for bankruptcy in an effort to keep her home. Giguere previously said she had submitted on three separate occasions all the paperwork that the bank had requested in order for her loan modification to be processed. Wells Fargo's counter argument was that Giguere had failed to include a financial worksheet with any of the paperwork she submitted.
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After reading the outbound letter, Ohayon admitted that Giguere had indeed followed Wells Fargo's instructions to a T. "The letter did not ask for a financial worksheet," Ohayon testified.
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"I don't necessarily think we've done a poor job of communicating with our customers, but I think there is an opportunity to improve the overall customer experience during what is a very difficult time for them," he added.

– John Clapp, editor, Servicing Management

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