Friday 5/18 Hearings Part 2:
1 hour recess given
Late Start 1:34
DFS: Welcome back to Afternoon day 2
Bank of America: Steve Smith National Association for LPI err Mortgage Servicing as stated in Written testimony I’m SVP since Nov 2010.
Everyone needs hazard and other coverage. The servicer may obtain if necessary
On June 2011, sold to QBE, which provides LPI Services.
Procedures are written. Bank of America practice performed by QBE First.
Typically 60 days from expiration.
For escrow, they contact the insurer directly.
Even after obtained they can provide proof (not to BAC, but to QBE/Balboa).
LPI is necessary risk mitigation facilitating liquidity (like foreclosures?)
Only 5% of our portfolio ultimately has LPI
DFS – Your competitor Chase chose not to cooperate. BofA by being willing to send you is putting your money where your mouth is in doing the right thing.
Bank of America Insurance Corporated: Tim Berdick Bank of America Insurance Agency
I am currently an executive. I serve as an officer of BASI, which I’m president since 2011. I did not become personally involved with LPI until mid 2011. Part of my role since June 2011 is to move asseets to QBE. During 2 year transition, QBE acts on behalf of Balboa and Bank of America, John Meadows is available.
BASI sells voluntary insurance to BAC customers.
Balboa: John Meadows SVP at QBE First
June 1, 2011 joined QBE. Prior, I was SVP of LPI at Balboa. Today I’m joined by CFO of Balboa prior to QBE, and Operations Risk for Bank of America. LPI protects the collateral. If insurance lapses, we obtained LPI, which is more costly because standard insurance carriers look at the house. Balboa provides portfolio coverage without Homeowner’s Insurance, regardless of location, damage, uninsurable, on fire, etc. extenuating, etc. Premiums in NY are based on Balboa filings in 2004.
In terms of how it works, the tracking vendor monitors to confirm adequate coverage. When we don’t have documented proof, we place and blame the borrower (even if escrowed). Notice sent on servicer’s letterhead. Includes LPI cost (no personal coverage, only collateral).
Borrowers are encouraged to obtain insurance right away (on date of lapse, no matter when lapse occurs).
DFS: LPS is a spiral that you can’t get out. On the other hand, it’s a huge profit center. Borrowers have no idea. It ruins their lives. Assurant’s executive says he hears the stories 3 or 4 times a year.
To what extent in your daily work, how does the borrower factor in?
BofA: I’m not focused on the bottom line. I’m more in the case of multiple times a day or week helping customers personally through these situations. We have 10 million customers, and 1 million are distressed. It’s not perfect. I strive for perfection. There’s a number of complex steps. The customers (and employees and often clients) don’t understand. We have SPOC’s.
Myself as an executive, all the way up to Brian Moynahan, receive the complaints first hand and proactively reach out and try to help to understand.
It is not a distant item. It’s not the bottom line. I do it accurately and timely daily. We create solutions that do help customers.
Balboa/QBE: We support Steve in that. Those issues come to us for background info to help him (why would the insurance company be doing that for the mortgage servicer?)
DFS: My question for the million customers, the premiums are quite high. I take your point Balboa, there’s more risk when it’s force placed and your premiums would come up somewhat, and throughout the industry the loss ratios are in the 20’s. You made the point we approved the rates for a predicted 50% Loss Ratio, and in reality, they’re much closer to half of that. How can we do that for the good of our country (I’ve already stated it a million times…check my blog ;))
(I really like Ben Lawsky. His team is awesome, but he’s completely taking charge. I love it.)
Balboa: If you look at the 2004 rate filing, it was expected 50% if you look over the past 10 years, the actual loss ratio over that period is in the mid 40’s, but you have several years in excess of the 50, so uh, um, etc.
DFS: I understand. I have, for example the Meritplan (also check Newport).
Balboa: in 2010 we voluntarily submitted a rate reduction at that time. It’s a new book of business, but we monitor this business on a regular basis. If they say we need to make a change, we’ll submit it (we’ll do what we’re required to do).
DFS: It stayed loan during Hurricane Irene correct?
Balboa: I’m not trained. In discussions I’ve had with actuaries, once you make a rate change up or down you have to wait a certain amount of time, not just 14 or 15 months (what about 3 years? SPS had 3 years).
DFS: Address the lack of competition in the force placed insurance market.
Balboa was Countrywide originally then in 2008 it’s Bank of America, and then for about 2 years Balboa is Bank of America
Balboa: Almost 3
DFS: In 2011, it’s spun off to QBE?
BAC: Bank of America sold a majority of the assets ($1.5 billion) to QBE for 2 years, blah blah blah (by the way, this was to pay back HAMP bailout loans).
DFS: Didn’t Balboa get an agreement back for a certain percentage of premiums back.
Bank of America: There was $700 million up front, then an earn out I won’t pretend to understand and in addition, overall for the Balboa Insurance companies, Meritplan, Newport, all the companies across all lines of business. Also there’s a profit share agreement. Those have caps to the earn out as well as the profit share. In addition, there are performance deals where Bank of America may be lliable.
Balboa is ultimately QBE starting in June of this year. And 10 years Bank of America will send all it’s business to QBE.
DFS: It seems to be nationwide 90% is with Assurant and QBE and when we see these kind of 10 year agreements, the worry is there’s so little competition that there’s no real effort to keep premiums down, can you respond?
BAC: There are 2 dominant players. The size piece is something to consider, but I have to have an insurance provider that can handle the size of the portfolio. The size and scale, the efficiency.
DFS: It becomes chicken and egg.
BAC: There’s still 80% of the market that’s not with us. I understand, I do, but it has to be balanced with size and scale, have a vendor (Balboa, their subsidiary).
DFS: Bank of New York vs Bank of America, as part of the plan introduced in the settlement is subservicing, which I understand is subservicing for your exact argument. They must handle capacity. Part of the result BAC came to was to chop it up. I guess I’m wondering here whether a similar structure is viable (thus breaking up the big banks).
BAC: I don’t know the details but we have a strategy for servicing and subservicing. That entails moving customers off our platform (They all use the same platform. Run through Fidelity Information Systems and Lender Processing Services).
DFS: Do those sub servicers handle LPI?
BAC: yes, separate from Bank of America. They handle all of lender placed activities with Assurant, QBE, and other providers. We’re not affecting who it is.
DFS: so when you entered the quota share agreement with Assurant those won’t transfer down to the subservicer
BAC: No, taxes, insurance, etc (i.e Escrow Services) gets transferred to the new servicer and then we delete everything. They’re gonna use the tracking services and administrating process, but I don’t control them, I don’t wanna control them (them is Balboa).
BAC: They’re underwriting individual risk, but the voluntary have decided where not to write. We have to write all risks, so part of the challenge is how can we get voluntary insurers in the market?
DFS: At one time there was Countrywide that did everything. It packaged loans, serviced loans, and provided insurance. It’s take as it comes. When Balboa was Countrywide had all the underwriting, many subprime. Did Balboa have any access? (YES!!!! System of Record information on an AS400 based system, which shows all loan information)
Did Balboa have that benefit when getting a sense of liability?
Balboa: The answer is no, we have no access to that information J (fucking LIAR!! HAHAHA, oh Balboa…you can’t even hide your corruption).
DFS: So for a policy the company earns both an earn out and profit share.
BAC: I don’t know
DFS: so every policy to QBE a percentage goes to Bank of America. If Bank of America is being paid twice and gets a percentage, what incentive is there to keep premiums down.
BAC: Bank of America doesn’t set the rates it’s up to QBE (actually it’s up to Balboa). The premiums have nothing to do with commissions. It’s BAC trying to get fair value for their assets.
We don’t know. I wasn’t involved.
DFS: You could have taken $1.5 billion instead right?
BAC: I wasn’t involved *swallow*
BAC: We rely on the insurance experts. They’re supported by actuarial practices and GENERALLY filed through Bank of America through contracts signed on a go forward basis.
DFS: But sorry, QBE First is taking over where the prior ratios were far far less than what the rates were both for QBE and Balboa and the Loss Ratios don’t match on any side.
BAC: I didn’t know, but I do now. I don’t have that formulated how, but annual certification from QBE is first and foremost.
DFS: with BAC getting Balboa and that integrated operation the customer is unclear. It’s one thing if BAC is servicing the trust it is a customer of the trust. It owes obligations in the trust. At the same time, it’s bound to reasonable servicing standards for these trusts, so BAC is being pulled in several different directions. The homeowners are suffering, and at the end of the day the investors are picking up the tab, and you have Bank of America as the Servicer with obligations to both. Owning the Insurance company providing the insurance. And that is a lot of roles for one family of companies to hold. People are wondering what’s driving it, it’s hard not to look at who’s being served by whom. The customer isn’t so clear so banks can do it right.
It’s an inappropriate product to protect the collateral?
BAC: It’s very complex. There’s a lot of complexity. There’s multiple investors we must comply with. That’s one element. We’re introducing an insurance product (actually service). There’s no easy solution (there’s an easier one than you’re pitching…regionalized and localize banks)
Blah blah blah
DFS: Something more straight forward and simple. You need to make them reassess and if you don’t, we’ll do it, and if it ain’t reasonable, we can’t certify, and if we can’t certify, we can’t buy your product. You have an obligation.
BAC: That’s on QBE, QBE, QBE
Can we predict the future, blah blah blah (sounds like an insurance problem, not a mortgage servicing problem).
DFS: is a Minimum Loss Ratio set by us good for you?
BAC: I’m not qualified to say what a Loss Ratio is. It’s complex transaction. If it’s approach take make sure the last thing I wanna see happen is get left with no major providers maybe like the NFIP, where you don’t have carriers in the flood program.
We want it sound going forward.
DFS: Maybe it’s some sort of requirement . Everything in New York is based on 94 rates when Loss Ratios on Average 86%. Now you’ve got Loss Ratios in the teens.
BAC: I agree once every 18 years isn’t good. It does seem like a long time to me.
DFS: Different rules in Different states. Homeowner Notification. Something that came up in the earlier panel and yesterday as well as well as from foreclosure advocates. When they get Bank of America mail, but then they get letters from Balboa or QBE they know nothing about, the worry is they won’t pay attention, so I wonder maybe you’re notifying with the mortgage statement. Or putting them into the statement.
BAC: The notices go out under BAC Letterhead (Inside the envelope). We make sure it’s Bank of America. Including them in the statement is…there’s a lot of info. Escrow Analysis on Page 2 (also related to Force Placed Insurance, so make it subset b on page 2, son).
I’m not sure. Would we confuse it more? There’s tradeoffs.
DFS: Put it on the first page.
BAC: We tried to make it a letter as much as possible to reorder the statement. Don’t rule it out, but it’s gotta balance with what’s there (like in your escrow account…it’s the same thing)
DFS: Anything on the envelope saying it’s about your mortgage statement and not a solicitation?
BAC: I’ve focused on this a lot for the last year (Auto is just a postcard).
Balboa: When a lapse occurs and letters go out for the Tracking Management, they all went out on the lender’s letterhead (inside the envelope) so the borrower knows clearly who it’s from. Everything is clear (inside the envelope).
There’s no contents, no liability to catch their attention so they’ll respond and 50% respond. Those that don’t it repeats. Nothing is on the envelope.
DFS: Can I change topics? Housing advocates brought up troubling points. One fact is LPI issues, penalties, etc had interfered with a Loan Mod (HAMP).
BAC: It’s an interesting consideration. 31% helps the customer. We’re proactive.
DFS: when there’s escrow do you pay their voluntary insurance?
BAC: To frame it, the majority are escrowed. Approximately 80% are escrow. There has been pricing incentives relative to their rates to have an escrow account up front (as opposed to tacked on later). It’s more seemless. We’ve done it in the past. 85% is a pretty good number. The bigger is those distressed. BAC is developing a process to proactively reach out to non-escrow account to ask if we can SET UP AN ESCROW ACCOUNT FOR YOU AND CHARGE IT TO YOU IN ABOUT A FEW MONTHS (!!!!!!!!!)
We can set up an escrow account and advance your premium in advance for every customer. We’re working on that for every customer (It’s something you MAY be able to look at LATER?!?!?!)
I don’t have the details of your agent (why not? Their agent is Balboa. You own Balboa)
We’ll be proactive, etc etc
DFC: One of the warning bells is delinquency. Can they tell them at 30 day delinquency?
BAC: Escrow today, even if delinquent? The Non Escrow we have the effective and expiration but it’s an interesting concept of if it’s paid for a full year (almost always) or month by month (like REO, which they process billing for covering the servicer).
DFS: Lack of underwriting explains premiums. Historically before the sale, BAC/Balboa had Meritplan (and Newport) Can you explain Meritplan?
Balboa: Risk based through Meritplan was a little different than what was seen previously (fiddles with mic).
Can you hear me?
Sorry about that. Yes Risk Based, but different than normal product. Taking in account age and square footage of the home, occupancy risk, etc.
The idea is to mix risk (loss from REO to gain for LPI). Territories, etc, blah blah blah
This was in 2004, but didn’t begin until 2008.
BAC: both these programs, no one at the time anticipated the economy crashing.
Ultimately the writings aren’t until 2008 (trails off).
Balboa: in 2010, we reproduced it. (so they started RBP, Risk Based Premium in 2008 for one lender…IndyMac Federal. Then in 2010, they rolled out to Aurora Loan Services and PennyMac, a Countrywide spin off)
Vacancy rates, but they can’t find the homeowner so they’re sending a letter to a house they know is vacant? An unmarked letter.
DFS: Assumptions going back in history are really not relevant to today and we need to revisit this?
Balboa: That’s why we monitor the program. We’ll continue to actually do that. It’s the Actuaries looking at factors and making change (Michael Jackson looked at the Man in the Mirror for that)
BAC: It’s low probability in New York but very large extent (not according to Chase).
How do you determine rates?
DFS: what about catastrophic reinsurance?
BAC: That’s for solvency issues. It’s really against the 1 in 50, 1 in 100 year event. There’s a deductible is cost prohibited to get 0 exposure it would have been $200 million per event. And with multiple events that occurs as well.
DFS: That’s true. We’ve heard similar explanation other places but for factual event, Balboa went through Katrina with everyone else in 2005 and you had a loss. You made up that loss in less than one month of profits in 2006. (pauses and laughter)
We’re gonna end a little early and be back on Monday for GMAC, American Home Mortgage Servicing, Inc, and an Advocate. It’s unclear for the public who’s here I may get called out of town, but my hearings will go forward.