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S&P |

Servicer Evaluation: Bank of America N.A.

Publication date: 10-Apr-2012 16:30:09 EST

Opinion

Our rankings on Bank of America N.A. (BofA) as a residential loan servicer, subprime loan servicer, subordinate-lien servicer, and residential special loan servicer are AVERAGE.

We based our rankings on the company's seasoned senior and middle management team, many of whom do not have significant tenure at BofA. The bank hired many key members of the management staff in the past 12 to 18 months, and it will take time for necessary changes and improvements to occur. In an effort to address the issues and challenges facing its residential mortgage servicing platforms, the bank has also begun restructuring its mortgage servicing management. Significant portfolio growth, most recently driven by the acquisition of mortgage servicing rights and the purchase of other large servicers, has caused stress on the operation and difficulties in maintaining the expected level of overall servicing administration, particularly default management. However, we believe that BofA maintains satisfactory, comprehensive, and timely training programs for employees and an efficient technology environment.

We believe BofA maintains overall satisfactory performance in its "nondefault" functions of residential loan servicing; specifically escrow administration, customer service, and investor accounting. The bank maintains effective internal controls including quality control and internal audit oversight. However, the operation remains severely challenged overall. Specifically, the bank's capacity is challenged in the default management, loss mitigation, and foreclosure administration departments. The bank needs to revamp its foreclosure affidavit preparation for the states and jurisdictions where required. Along with the other federally regulated institutions, BofA's primary federal regulator ordered the bank to reassess its foreclosure process in late 2010. Size, capacity, and timeline standards have lead to a number of internal audit findings and Regulation AB violations noted during recent audits. Certain performance metrics have deteriorated since our last review.

All of the aforementioned references to significant and rapid growth have prompted BofA to hire many new staff, train them, and try to manage staff turnover. The bank continues to invest in human resources as it grows staff where appropriate, especially in the areas of default management, loss mitigation, and homeowner retention initiatives. Due to the lack of experience in key areas such as loan administration, the bank has increased its staff. In fact, staff dedicated to default management now totals more than 3,500 permanent staff in early stage collections and more than 1,100 temporary employees hired to further assist the bank, approximately 5,800 in loss mitigation functions, and approximately 4,300 in foreclosure administration. These staffing totals, reported as of June 30, 2011, represent an increase of approximately 70% in loss mitigation staff and approximately 22% in foreclosure administration staff over the prior six to 12 months.

The bank has made a considerable number of changes to the executive and senior residential mortgage servicing management over the past several years. These changes include the bifurcation of its residential portfolio into a separate mortgage servicing unit, known as legacy asset servicing, to manage loans in default along with other discontinued loan types. A second unit consists of staff to administer the performing loans that will remain in the bank's home loan division; and represent borrowers with whom the bank has additional retail banking relationships After June 30, 2011, BofA continued to make changes to align the management of its performing loan portfolio under its mortgage servicing unit known as Legacy Asset Servicing, which also manages BofA's nonperforming loan portfolio. Previously, BofA's performing and nonperforming loan portfolios had been bifurcated between two separate servicing units. The Bank believes the realignment of both servicing operations under one unit will further enhance the effectiveness of its servicing operations. Challenges due to the overall weak economy, high unemployment, and deteriorating housing market further exacerbate complications caused by the bank's acquisition of Countrywide Home Loans in 2008 and other smaller portfolios. Moreover, BofA continues to respond to the directives given by federal and state agencies over the past several years in an effort to increase home retention and loan modifications. Management and staff turnover and new hire training, while not unmanageable, remains an issue for the servicer due to the significant size of the operation.

In order to address delinquency and loss mitigation matters, BofA has opened multiple servicing sites and developed proactive borrower outreach programs to help to curtail defaults, promote home retention, and loan modification, while minimizing investor risk. The company continues to coordinate with various nonprofit organizations in order to further enhance communication with borrowers in distress and maximize the potential for successful loan workout opportunities, minimize losses, and promote homeownership retention. The company was appropriately aggressive in adapting to and completing both trial and permanent loan modifications under the U.S. Treasury's HAMP program.

We believe that the new senior management in place and the emphasis the bank has placed on residential mortgage loan servicing, will begin to result in improved performance. We believe that new management has been responsive to the requirements and directives included in the agreed upon consent order including taking the steps necessary to establish a single point of contact (SPOC) assigned to homeowners with delinquent mortgage loans. However, ongoing major challenges include continuing to address the overall rise in borrower default by meeting the demand for additional default management personnel (both supervisory and staff) commensurate with the significant increase in loss mitigation activity, loan defaults, and asset disposition due to current market conditions.

Outlook

The outlook is positive. BofA has made several acquisitions over the past several years, which significantly increased its servicing portfolio. This increase has resulted in stress and overall deteriorating performance, particularly in default management, loss mitigation, and foreclosure administration. However, we believe that BofA took a major step in turning around its operation when it made major additions and changes to its senior servicing management team. Based on our knowledge of the new management's experience and abilities, we believe management in place will address and meet these challenges. Management has been implementing process changes throughout the platform and we anticipate improvement in performance. Standard & Poor's will monitor the company's progress in integrating the changes and new leadership into its existing operations.

Profile

BofA remains one of the largest banking organizations in the U.S. by asset size, with approximately $2 trillion of assets. The company's business profile is characterized by its preeminent retail-banking franchise. BofA's retail operations have a large national deposit market share. It also has broad product offerings and geographic diversification in its highly attractive footprint. The company maintains top positions in credit card lending, mortgage lending, and retail deposit banking. The franchise includes investment banking and a wealth management company.

BofA's Consumer Bank offers an extensive line of consumer real estate products and services nationally. With the acquisition of Countrywide, BofA became a leading mortgage lender and residential mortgage servicer. The bank offers residential lending through banking centers, mortgage loan officers, and a sales force that utilizes telephone and online access. However, management recently decided to discontinue its correspondent loan acquisition channel. The bank either sells first mortgage loans to investors in the secondary market or holds them on its balance sheet in a separate segment for asset-liability management (ALM) purposes, although it retains the servicing rights. BofA holds funded home equity lines of credit and home equity loans on its balance sheet. In 2011, BofA completed the sale of Balboa Insurance Group, part of Home Loans & Insurance, which provided primarily lender-placed insurance.

In 2010, BofA began realigning its business strategy by moving away from a scale-driven earnings model to a customer relationship, a model enhanced by cross-sell customer-based analytics and a properly balanced cost structure. Noncore investments have been sold and represent the execution of the strategy to simplify the franchise. That same year, the firm segmented its residential mortgage loan portfolio into legacy asset servicing and home loan servicing.

BofA remains one of the industry's largest servicer of prime mortgages. It services for over 830 private investors. The company now operates its servicing operations in 37 domestic sites including major platforms in Simi Valley, Calif., the Dallas area (including Plano, Fort Worth, and Richardson, Texas), Charlotte, N.C., and Buffalo, N.Y. BofA also leverages the services of four domestic vendors (nondefault), and four offshore captive sites (three in India and one in Costa Rica). The portfolio contains approximately 13 million loans with an outstanding balance that exceeds $2 trillion.

Management And Organization

The subrankings for management and organization are ABOVE AVERAGE for prime, subprime special loan, and subordinate-lien servicing. BofA's overall residential mortgage servicing and default management has been severely challenged by the housing market and the increase in portfolios and additional difficulties brought about by the acquisition of the former Countrywide portfolio. However, the bank recently fortified its management team by adding a number of very seasoned and experienced mortgage servicing professionals and our subranking reflects this. We believe this management team, consisting of those retained, along with the new team brought in from other large servicing operations, has the expertise, background, and leadership skills necessary to lead BofA forward.

Management and staff recruitment, development, and training

Attributes of BofA's management and staff include:

  • Senior managers with adequate industry experience, in our view, and approximately nine years tenure with the company;
  • Middle managers and supervisors who, we believe, are well-seasoned and average over five years tenure at the company; and
  • A manageable annualized turnover rate for management and staff of 6% and 18%, respectively as of June 30, 2011.

In our opinion, mortgage servicing management and the bank's overall culture has always promoted a sufficiently effective training environment at its corporate and departmental levels. The company has been successful in attracting new management and staff and has added a significant number of experienced employees as it continues to restructure its residential mortgage servicing platform. The ability to attract new management as well as retain and develop key staff remains critical to the firm as it engages in the considerable task of better monitoring default management and foreclosure administration in the current housing environment. In our view, BofA's well-structured and comprehensive training curriculum, with course offerings available on the company intranet site and in the classroom, will be a source of improvement.

The bank's training program includes the following specifics:

  • A total of 40 hours of new hire training and orientation;
  • Instruction is tailored for specific roles and job functions with, in our view, capable training management and trainers;
  • All new customer service employees receive an additional 240 hours of specialized classroom instruction followed by an additional 160 hours of on-the-job instruction and coaching, depending on assignment and previous experience;
  • Equally aggressive training for new collection and default management staff, who receive 104 hours of classroom instruction followed by an 80-240 hours of on-the-job instruction and coaching, depending on assignment and previous experience;
  • A major focus on skill-set job placement and job assessment testing;
  • Global learning focus that includes preparing new hires to perform at the defined, expected level, educate staff on all federal, state, and local compliance issues, and partner to remediate findings discovered in quality control and audit reviews, and promote career mobility; and
  • Many training resources that are available 24/7 on the company learning and development Web site.

Chart 1

Internal controls

In our opinion, BofA has a robust, multitier system of internal controls, including separate quality control and internal audit functions. The corporate audit department's mission is to support the company's risk governance framework by determining whether controlling processes and controls over strategic, market, liquidity, credit, operating, and compliance risks are adequately designed and functioning effectively. Internal audit activities are designed to provide reasonable assurance that resources and assets are adequately protected and employees' actions are in compliance with BofA policies, standards, procedures, and applicable laws and regulations. The internal audit department is responsible for assisting the operation in fulfilling its corporate governance and oversight responsibilities. The BAC General Auditor reports directly to the bank's board of directors audit committee, with a dotted line to the bank president, in order to maintain the appropriate level of independence. Corporate Audit has full, unrestricted access to any and all of the organization's records. The audit group uses a central issues tracking (CIT) database to track remediation of findings identified and has comprehensive reporting to highlight areas of concern for senior management.

There are separate audit teams for mortgages; one for the front end sales function and one for the back end servicing functions. A seasoned senior audit director leads the audit team responsible for the audit review of residential mortgage loan servicing functions and transactions. The legacy asset servicing audit team consists of one experienced senior leader, four Audit Directors, and has a total of 59 full-time equivalents (FTEs). The front end sales function is covered by the broader Consumer Audit team which has another experienced audit leader and consists of two Audit Directors and a total of 25 FTEs. The staff is experienced and tenured in the following manner:

  • The average audit experience is eight years, seven with BofA;
  • Staff averages 13 years experience in financial services;
  • 51% of staff hold relevant certifications (CPA, CIA, CBA,CFE, and CISA);
  • 38% of the audit team hold an advanced degree; and
  • Audit best practices have been developed and are adhered to.

In our opinion, BofA maintains a competently fashioned training curriculum for its internal audit management and staff. Subject matter includes new hire-related sessions, audit skills reinforcement (given by the quality assurance team highlighting recent trends and findings), Sarbanes-Oxley training (both new training and refresher courses), and monthly leadership education sessions.

BofA's audit department conducts a periodic risk assessment in collaboration with other business units to determine and prioritize future audit activities. Audit scope and schedules are evaluated at appropriate intervals or as events or recent audit results necessitate. Future audit activities are modified as necessary. The overall corporate audit approach consists of the following:

  • Risk assessment;
  • Annual planning;
  • Execution of audit activities (audit reviews, continuous testing programs, and SOX testing all using robust sampling methodologies);
  • Audit report preparation and delivery to management; and
  • Tracking (issue tracking and management action plan validation).

The bank uses comprehensive risk assessment and audit planning to support reasonable assurances about the effectiveness of internal controls across the organization. Audits are completed on a three year cycle based on the risk rating assigned. Risk categories include strategic risk, credit risk, market risk, operational risk, and compliance risk. Risk assessments are defined as "High," "Medium," and "Low." The audit cycle is 12 months for a high risk rating, 18 months for a medium/high risk rating, 24 months for a medium risk rating, and 36 months for a low rating. While determining a risk and audit plan, the bank considers the results of management's self/testing assessments including Sarbanes-Oxley testing, compliance audits, external audits and regulatory examinations. BofA reviews the audit plan quarterly to ascertain if risk assumptions need to be amended. Audit effectiveness ratings are categorized as satisfactory, needs improvement, or unsatisfactory.

Standard & Poor's reviewed the audit department's audit schedule for 2011, which, in our view, is appropriately established. We also reviewed audits prepared in 2009, 2010, and first-quarter 2011 and found them to be satisfactorily comprehensive. There were a number of issues and findings noted, which were written clearly and effectively. The findings were mostly related to default management and capacity issues. There were repeat findings, mostly the result of the size of the bank's portfolio growth and capacity issues. USAP Attestation letters for both 2009 and 2010 were without issues noted.

In addition to the internal audit discipline, BofA has an established compliance department reporting to a separate management hierarchy. A compliance unit is assigned to servicing that conducts random testing and tracks the need for remediation where necessary.

In late 2010, in order to strengthen default management and loss mitigation oversight, management took the initiative to enhance quality control within legacy asset servicing. A director of quality control leads the legacy asset servicing leadership team. Components of this unit include inventory (control standards and rules), assess and mitigate (control assessments, testing, and mitigation of control design gaps), testing, and analysis.

Policies and procedures

BofA has solid controls in place for developing and updating procedure manuals. Policy and procedure manuals are available on the company intranet and managers must sign-off on all new procedure updates. We found the servicing platform's policies and procedures, including the administration of updates and changes made thereto, to be satisfactory.

Management believes that accurate, documented, and approved policies and procedures are the first line of defense in mitigating risk. Changes are reviewed by the line of business manager, the subject matter expert, compliance, and legal. Policies and procedures are kept on an internally developed web-based platform. All document versions are stored.

BofA has a well-developed centralized vendor management area. This group is responsible for all vendor relationships including offshore relationships. All key partners are continually monitored to ensure the following are being performed and are current:

  • Contracts and statement of work;
  • Service level agreements and quantitative scorecards; and
  • Business continuity plans.

Technology

Because of the size of its portfolios, the types of loans serviced, and the numerous investors and trusts serviced, BofA operates in a robust and sophisticated technology environment. The primary system of record for home loan servicing is IBM's iSeries LS. This system is supported by a series of BofA enterprise systems, Web applications, and servicing desktop applications. There are numerous other applications and systems built around the iSeries to support the servicing platforms across the country (investor accounting/reporting, treasury and corporate accounting, telephony interaction, vendor interface, etc.). Servers are geographically disbursed in Texas, Arizona, California, and Virginia. System hardware equipment is primarily located in two data centers. Disaster recovery backup is located in Richmond, Va. There are command center operations located in Richmond and Singapore. Customer service functions include a variety of full-service and self-service channels (call centers, IVRs, and the enterprise Web site). Significant effort has been made to develop applications to assist with loan modification and home retention endeavors. The bank has implemented several technology solutions to support the HAMP program, loss mitigation efforts, and special loan servicing. New loss mitigation work flow scripts have been developed, greatly improving productivity.

BofA's disaster recovery and business continuity plans are comprehensive and global in scope. At a minimum, the system is designed to meet Federal Financial Institutions Examination Committee (FFIEC) standards. The multiple domestic locations serve as redundant sites if necessary.

Loan Administration

The subranking for loan administration is AVERAGE.

Overview

As noted above, a seasoned, senior executive, hired from a competing operation, is responsible for legacy asset servicing management and another executive has been appointed and is now responsible for home loan services. The servicing staff consists of over 45,000, including full-time employees and contract staff. As of June 30, 2011, the company serviced a portfolio of approximately 10,140,715 prime, first-lien residential loans representing a total unpaid principal balance (UPB) of just over $1.7 trillion. The company also services approximately 620,000 subprime mortgage loans representing an UPB of just less than $110.4 billion, and 25,358 special loans totaling UPBs of approximately $2.6 billion. In addition, BofA services 2,167,885 subordinate lien mortgages representing an UPB of approximately $110.6 billion. The geographic diversity of the portfolio is typical for a large mortgage servicer. The largest concentrations of all loan types are in California, Florida, and Texas.

Chart 2

New loan boarding

Management reports that 100% of new loan boarding is electronic. The following data integrity controls are in place:

  • There is 100% data upload and 100% quality control (document to system check) on all new loans; and
  • All key loan documents are imaged and stored online for efficient research/retrieval.
Cash management and investor accounting

BofA has an efficient cash management operation incorporating good internal controls to minimize risk of loss due to human error or fraud. We believe there are efficient controls governing payment processing.

In our view, the annualized turnover rate of cashiering staff is very good at only 4%. Planet code tracking utilized to update system for payments in transit. Unprocessed items are stored in a secured payment posting area. There are dedicated posting personnel for the application of bankruptcy payments. There is an appropriate level of security in payment posting area, including employee card key access. Payment clearing account is reconciled daily by a dedicated individual disassociated from the payment posting function to ensure proper segregation of duties.

Investor remitting, reporting, and account reconciliation is properly managed to minimize risk of loss. The approximately 350 associates assigned to this function are located in three domestic (Thousand Oaks/Simi Valley, Calif., Fort Worth, Texas, and Chandler, Ariz., {legacy Countrywide})and one offshore site in Mumbai where associates perform custodial account reconciliations. The following risk management methodologies are in place:

  • Appropriate segregation of duties among staff handling remitting, reporting, and bank account reconciliation functions;
  • Investor remitting is exclusively (100%) electronic;
  • Approximately 99% of investor reporting is electronic;
  • The company provides Web portal access for investors to download reports and stratify and sort data at the pool level;
  • Custodial accounts are reconciled monthly by a dedicated staff disassociated from reporting and remitting functions; and
  • A total of 9,027 investor custodial accounts are reconciled monthly.

The bank's IBM iSeries system accommodates different reporting methods. Loan-and pool-level activity is captured for the corresponding monthly accounting cycle and sent to investors via secured email or loaded into the investor Web site for retrieval by the investor. Investor remittances are validated against the final and approved cutoff reports for each report cycle. If necessary, advances are made in accordance with the relevant pooling and servicing agreement. Disaster recovery/business continuity plans in place provide backup data and applications to ensure reporting to investors is not interrupted.

Our review of the company's internal audit reports revealed that the 2010 audit of investor asset management's key controls and operations yielded a "satisfactory" score. Moreover, it is reported that there were no material findings in the 2010 Sarbanes-Oxley review. The quarterly self audits related to the 2011 Regulation AB control testing were without material findings.

Chart 3

Customer relationship management

BofA's customer service initiative is fully automated utilizing an interactive voice response unit (IVR) to provide account-level data to customers and an automated call distribution system (ACD) efficiently routes call volume to appropriate queues. The customer service staff appears to be able to properly service borrower inquiries and requests. BofA refers to its customer care as the Customer Contact and Relationship Deepening Functional Areas (CCRD). Responsibilities include: virtual call centers distributed across the country, customer relationship advocacy (to prevent escalation), property claims, and portfolio communications. In our view, it appears that BofA recently enhanced management in this area and disbursed key leaders throughout all relevant locations. The manager to associate ratio is now approximately 15 to one. We believe that is a little high when compared with other larger servicers. There were 4,293 full-time, 105 part-time, and 390 temporary customer service associates as of June 30, 2011. Customer service employees are located in 10 domestic sites. There are approximately 700 customer service related positions offshore, and all of them perform "back office" functions. Customer service staff turnover is 20%, which is somewhat high due to the large number of employees in the department. The bank appears to be in full compliance with the Real Estate Settlement Procedures Act (RESPA) guidelines. BofA provides an effective level of service to its customers as indicated by the following:

  • The average speed of answer is measured at 19 seconds, abandonment rate is reported at 1.38%, and there is no blockage rate;
  • Wrap time is measured at 29 seconds;
  • IVR capture rate of approximately 71%, which we believe is effective;
  • Trending analysis performed on IVR routing to identify problem issues and measure overall IVR efficiency;
  • Bilingual 24/7 IVR and bilingual customer service representatives that deliver account information in English and Spanish and access to other languages to accommodate diverse portfolio demographics;
  • An effective first call resolution rate of 87%;
  • Silent call monitoring (using NICE), screen monitoring, side-by-side monitoring, and peer monitoring;
  • Quality assurance testing for all written and email correspondence;
  • Smart call routing is used and calls are routed to automated call handling applications based on recent transactions specific to the loan;
  • Scorecards are used to measure agent performance;
  • Calls are recorded;
  • A minimum of eight calls per agent are monitored monthly, with four monitoring sessions every month;
  • Sufficient hours of operation to handle inbound calls;
  • Advanced skill-based and delinquency routing logic that delivers borrower calls to the correct associate; and
  • Written correspondence is handled in a dedicated research and correspondence unit and tracked to ensure RESPA compliance.

During the past 12 to 18 months senior management guided key process and organizational changes. Key goals and metrics are aligned to associate scorecards. Scores are focused on customer, teammate, and shareholder measurements. Customer requests can be serviced by phone, IVR, Web site access, fax, and e-mail. A separate customer relationship advocacy group is responsible for addressing borrower issues directed to senior management. While there is presently no "root cause analysis" in place, the staff maintains a "top 10" list of complaints addressed to senior management. The customer contact group is also responsible for handling insurance claims when a borrower has sustained damage to their property. Duties include either endorsing a loss draft to send to a homeowner or, if the claim is large enough, depositing the check and release funds as repairs are completed.

The company has established high standards for its customer care employees and provides an effective level of customer service, given the size of the portfolios and the current environment. There is appropriate associate tracking and performance scoring. BofA provides customers with a functional Web site. Overall, we believe BofA provides a multilayered, functional customer relationship experience. In our view, mortgage reconveyance processing is properly controlled to reduce risk of loss due to failure to comply with state reconveyance statutes. Vendor assisted performance measurements include:

  • A reported 100% payoff quote completion rate per state guidelines;
  • Requests for a payoff statement are provided in one business day or less; and
  • An approximately 2% reconveyance documentation rejection rate.

Chart 4

Escrow administration

We believe that BofA operates a well-controlled escrow administration department that benefits from highly effective oversight of its new, third-party vendor relationships for hazard insurance and its real estate tax bill procurement. The company collects escrow funds on approximately 78% of its combined portfolios (approximately 8.5 million loans) and has implemented the following controls:

  • BofA Tax Services Corp. is the in-house tax service company for the servicing operation. Primary business objectives include the accurate set-up of tax data on the servicing system, the timely procurement and payment of tax amounts for all escrowed loans, the monitoring of tax payments on the nonescrowed portfolio and resolving all tax related research issues in a timely manner;
  • BofA Tax Services has established relationships with several third party vendors. On an as needed basis, these vendors provide property tax information, conduct delinquent tax searches, and provide delinquent redemption accounts;
  • Management reports that 99.9% of all tax amounts due were procured and paid in advance of the delinquency date;
  • BofA Tax Services regularly performs on-site business reviews of vendors and monitors performance in accordance with agreed-upon service levels;
  • Hazard and flood insurance tracking and monitoring is now provided by QBE FIRST, a third party vendor. Previously, Balboa, an affiliated company of the bank, had provided these services. Certain assets of Balboa, including its insurance tracking and monitoring operations, were sold by BofA to QBE FIRST in June of 2011;
  • Vendor services include tracking hazard and flood coverage and force providing lender placed coverage, when necessary;
  • Escrow analysis is performed annually in accordance with RESPA guidelines;
  • When loans without escrow are modified, escrow funds are added to monthly principal and interest payments as required (HAMP);
  • Vendors perform letter and calling campaigns both prior to and subsequent to the expiration date of insurance and tax items for escrow and nonescrowed items;
  • Nonreimbursable tax penalties are effectively low and average less than $0.01 across the three first-lien products that BofA services;
  • Lender-placed hazard insurance coverage represents approximately 3.28% of the combined portfolios;
  • The lender-placed insurance cancellation rate is reported to be 21.42% and the renewal rate is measured at approximately 39%;
  • Lender placed flood insurance coverage represents less than 1% of the combined portfolios;
  • Life of loan flood certification is obtained; and
  • The vendor reviews insurance carrier ratings to ensure sufficient claim paying ability in the event of a hazard or flood insurance loss.

Management of the nondefault portion of subordinate-lien/home equity line of credit (HELOC) portfolio is decentralized, and servicing of these loan types is systemwide throughout the bank. The product servicing oversight department is the focal point and "owner" for post-boarding and HELOC servicing oversight. Responsibilities include product servicing expertise, specialized servicing functions, monitoring of reported service levels, as well as policies and procedures for efficiency, compliance, risk mitigation, and reporting. Administration of HELOCs includes:

  • Oversight of servicing systems/processes to execute programs and loan-level decisions;
  • Monthly servicing product review;
  • Partnership with existing customer credit/line management actions and credit loss mitigation strategies; and
  • Support initiatives for regulation and legal compliance.

The bank is in compliance with Treasury requirements for subordinate-lien portfolio modifications (2MP) and allows revolving lines to be converted to closed-end loans. Modifications also include conversion to interest only loans. Staff works with other "home retention" personnel. A new closed HELOC resolution team reviews closed HELOCs for potential reinstatement.

Chart 5

Default management

The legacy asset servicing portfolio consists primarily of delinquent and distressed mortgage loans and the special servicing loan portfolio. The collection staff continues to grow and now totals 3,096 full-time employees, 517 part-time employees, and 1,167 temporary employees. The front-end collectors utilize autodialed technology for all collection efforts and are less experienced than the back-end collectors. Key characteristics of the company's effective approach to early-stage collections for the first-lien portfolio include customer advocacy and collections. This group includes over 6,200 collections and support associates disbursed over 16 sites accommodating both inbound and outbound calls. Attempts are made to engage delinquent borrowers with targeted outreach and determine ability and willingness to reinstate. Calls begin at day three of delinquency for high/medium risk borrowers and by the 17th day for low risk borrowers. Skip-tracing and field visits are proactive. Loans are referred to the loan modification team to review workout options when it cannot be brought current in a reasonable timeframe. In addition to telephone contact, borrower contact is attempted by direct mail, e-mail, text messaging, interactive messaging, and property visits. An appropriate menu of correspondence types (modification solicitation, breach letter, foreclosure notices) are used and sent at the proper times. A letter referencing the Service Members Civil Relief Act is sent by the 60th day of delinquency regardless of loan type. Other characteristics include:

  • Appropriate collection timelines and strategies for all products based on investor requirements and prudent loan servicing practices;
  • Managers who have, in our view, adequate industry experience along with approximately five years of tenure with BofA. Collectors have an average of a little less than two years tenure with BofA;
  • A high collector turnover rate of 29% (30% at year-end 2010);
  • Early stage collection strategies that include dialer technology, dialer development, workforce management, and contact management;
  • Files per collector in the 30 and 60 day bucket total approximately 1090 and 605, respectively, for prime loans, 975 and 626, respectively, for subprime loans, and 1,345 and 814, respectively, for special mortgage loans. Files per associate managing the 90-plus-day delinquency buckets for prime, subprime, and special loans are 484, 545, and 595, respectively. These distributions appear to be high and difficult to manage–especially with inexperienced collectors;
  • 30-plus-day collections include loss mitigation processing;
  • Average speed of answer (ASA) for inbound collection calls is 32 seconds and the abandonment rate is reported at 3%;
  • Outbound calling campaigns are performed during prime time calling hours and range between 27% and 35%. BofA utilizes best-time-to-call methodology (Optimizer);
  • We consider the overall right party contact rate low at 12%;
  • Delinquent borrowers are typically routed from the VRU to a collection representative;
  • Promise-to-pay success rates in the 30-day and 60-day delinquency buckets range between 85% and 79%, depending on the loan type;
  • Risk modeling and early indicator scoring is a part of early stage strategy; and
  • The annualized skip tracing success rate is reported to be approximately 56%.

The internal controls audit team tests operational processes within the collection and customer advocacy group on an ongoing basis. Results are reported to executive management and site managers using a monthly scorecard and are shared with the associate.

Chart 6

Like other large residential mortgage loan servicers, BofA has been significantly increasing the size of it late stage collections and loss mitigation staffs. BofA now has 5,520 full-time and approximately 275 part-time employees assigned to loss mitigation. Characteristics of the loss mitigation team include:

  • Attempt to provide fair and transparent borrower solutions;
  • Loss mitigation management average approximately six years with BofA;
  • Loss mitigation counselors average approximately three years with the company;
  • Loss mitigation mailing begins by the 45th day of delinquency, but loss mitigation counseling can commence at any time;
  • There has been very little recent turnover in the loss mitigation staff; and
  • "Best workout" strategy analysis is always followed;
  • Loan modifications and short sales have recently been the primary means used by loss mitigation staff to avoid foreclosure

Chart 7

The bank has added a major focus to all home retention options, loan modification production and completion, process improvement, borrower experience, and associate performance.

BofA has the appropriate management structures in place including control reporting (monitoring of loan progression thru modification process), inventory management, and the development of a mortgage servicing dashboard to enable senior executive oversight of the modification process.

BofA remains focused on loan modification efforts and attempts to promote home retention. Staff dedicated to loan modification functions now totals over 6,000. There are offices in 18 cities in eight different states. These locations are an attempt to increase borrower outreach. In order to accommodate all time zones, the hours of operation are 6 a.m. to 12 a.m., Monday through Friday. Intake into the loan modification process begins primarily through early stage collections, dedicated outreach centers, and targeted solicitations. Decisions most often result in a HAMP, non-HAMP, or alternate resolution option such as a short-sale or deed-in-lieu of foreclosure. Overall management of this area includes operational policy execution (intake), program management (strategy), and program enhancement/analytics/design (execution). Modifications have been segregated by investor and employees assigned to that team to promote consistency.

Borrower assistance outreach centers now total seven, with more openings planned. The bank also schedules borrower outreach events.

The forbearance cure rates reported are an effective 61%, 53%, and 50% for prime, subprime, and special loans, respectively. However, we consider the recidivism rates for loans that cure and redefault in six months high at 61% for the prime loan portfolio, 81% for the subprime portfolio, and 60% for special mortgage loans.

  • BofA is a participating servicer in the HAMP program and is also compliant with the requirements for the 2MP, HAFA, and Hardest Hit Fund (HHF) programs. The bank also offers a variety of proprietary modification programs. The company has both hired and trained significant numbers of new staff. A team of highly trained HAMP experts review internal and external exception reports validating the process and taking corrective action as appropriate;
  • The bank works directly with the program's reporting system to ensure front end processes result in a flawless HAMP execution within service level goals;
  • The bank employs an appropriate end-to-end process to initiate the modification, gather required documentation, underwrite, decision and close the HAMP mod; and
  • Management has reported the overall percentage of HAMP modifications converted from trial to permanent modifications were 11.85%, 11.65%, and 6.12% for the prime, subprime, and special loan portfolios, respectively as of June 30, 2011. The percentages for non-HAMP modifications were 2%, 3%, and 6% for the same respective portfolios as of June 30, 2011. More information on BofA's performance is available on the U.S. Treasury's Web site.

The bank has established a SPOC for all borrowers more than 60 days delinquent in accordance with one of the requirements outlined in the consent order entered into with its primary regulator. Senior asset managers have been designated as SPOCs. BofA has decided to stratify the SPOC/loss mitigation process by investor. The bank has minimized the number of loans assigned to a SPOC to maximize service.

Chart 8

BofA has developed and grown a department responsible for other alternatives to foreclosure. This department, managed by a seasoned servicing executive, attempts to mitigate loss by offering short-sale and deed–in-lieu opportunities to mortgagors unable to reinstate delinquent loans or otherwise take advantage of loan modification opportunities. This unit is strategically disbursed across 11 domestic sites and two offshore locations. The unit is structured in a team-based format and work volumes divided by function and investor. In addition to the proprietary developed efforts to increase short-sale solutions, BofA is also active in the HAFA program. Overall short-sale volumes continue to increase. Volume doubled between 2009 and 2010 as the bank became more proactive in this alternative to foreclosure. Staff proactively reaches out to distressed homeowners to discuss the short-sale alternative. Deeds-in-lieu of foreclosure discussions frequently commence with a homeowner after a declined short-sale. Compliance and relevant vendor oversight is embedded within the short-sale and deed-in-lieu efforts.

The bankruptcy and foreclosure staff roles have evolved and now include providing service to borrowers active in bankruptcy or foreclosure while meeting all applicable investor, agency, insurer, state and federal requirements. Loss mitigation activities continue throughout the foreclosure process, following a dual path that consists of loan workout activities designed to minimize risk of loss to investors, while simultaneously adhering to timelines critical to the foreclosure process. BofA proactively monitors its foreclosure and bankruptcy caseload to maximize performance and minimize risk of loss. The following procedures and controls are in place:

  • There are now over 4,100 full-time and approximately 220 part-time employees responsible for foreclosure administration;
  • Management has almost six years of tenure with BofA and staff has almost three years;
  • There is an extensive process (including technology support and manual reviews) when reviewing all loans before they are referred to outside foreclosure counsel to initiate formal foreclosure actions;
  • Automated file referral to foreclosure pursuant to investor timeline;
  • Electronic file referral to foreclosure counsel;
  • Foreclosure cases completed to government-sponsored entity (GSE) standards are reported to be 19%;
  • 2% of mortgage insurance (MI) claims for prime loans are curtailed and 3.9% of subprime loans are curtailed;
  • The percentages of MI claims denied for prime loans, subprime loans, and special loans are 2.6%, 7.6%, and 7.1%, respectively;
  • Attorney scorecards are maintained and monthly conference calls are held;
  • Foreclosure cure rates of 10%, 5%. 7%, and 11% for prime, subprime, special loan, and subordinate lien loans, respectively;
  • The bankruptcy department is staffed by 585 full-time and 26 part-time staff;
  • Department management averages seven years with BofA and staff averages just under six years at the company;
  • The bankruptcy area has added new management and staff with strong mortgage backgrounds;
  • Manage the attorney network to ensure that bankruptcy and foreclosure actions are completed in a timely manner;
  • Work and communicate with loss mitigation personnel to achieve maximum workout potential;
  • Monitor loans in bankruptcy to ensure proper positioning and tracking of pre- and post-petition payments and advances;
  • Approximately 40% of Chapter 13 bankruptcies are currently performing according to plan; and
  • Escrow analysis is performed on all bankruptcy accounts.

Chart 9

When the company has exhausted all attempts to mitigate loss and when it completes the foreclosure sales, it has what we believe to be sound procedures in place for maximizing recovery of its REO portfolio via a combination of internal staff and third-party vendors. Commensurate with the significant increase in its REO portfolio, BofA has increased the number of REO staff to approximately 954. It also added capable, experienced personnel from other large servicers to augment management. Primary objectives are to maximize asset velocity and recovery, capitalize on vendor relationships to maintain and market assets (property preservation, eviction services, valuation services, cash for keys, traditional real estate agent marketing, nontraditional auction, and bulk sale online marketing), and quickly and efficiently bring to an act of sale. The following demonstrate the effectiveness of BofA's REO asset disposition group:

  • An enhanced vendor scorecard to monitor broker/agent performance;
  • REO management averages almost 15 years of industry experience and approximately seven years of tenure with BofA. REO asset managers are tenured with approximately 11 years of industry experience and six years of tenure with the bank;
  • An individual marketing plan is developed for each asset that requires management approval;
  • Cash for keys is used to avoid protracted eviction proceedings and expedite REO marketing time. The cash for keys success rate is 54.5% as of July 2011;
  • Cost benefit analysis is done when considering repairs;
  • Average inventory turnaround time is satisfactory at 140 days;
  • Average eviction time is 136 days, 160 days, and 205 days for prime, subprime, and special loan related properties, respectively;
  • REO inventory turn rate is an effective 27%, comparing favorably with the company's SEAM peer group;
  • Average days to market post eviction to closing is 176 for properties formerly secured by prime loans, 189 for properties formerly secured by subprime loans, and 192 days for properties formerly secured by special loans;
  • Gross sale to market value ratio is 98%, 95%, and 98% for properties sold from the prime, subprime, and special loan portfolios, respectively; and
  • Net sale to market value ratio is 90%, 85%, and 84% for prime, subprime, and special loan foreclosures, respectively.

Financial Position

BofA's financial position is Sufficient.

Related Criteria And Research

Servicer Analyst:Robert Mackey, New York (1) 212-438-1268;
robert_mackey@standardandpoors.com

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