While all the allegations in the leaked documents involve Bank of America (BAC) -- through a soon to be ex-subsidiary called Balboa Insurance -- they also implicate many other big banks that are clients of Balboa, including: "GMAC, Aurora Loan Services [a subsidiary of Lehman Bros Holdings], IndyMac Federal Bank [a subsidiary of OneWest Bank], Saxon, HSBC, PennyMac [a collection agency started by former Countrywide Home Loans executive Stan Kurland after CHL and Balboa were sold to BAC], Downey Savings and Loans, Financial Freedom, Select Portfolio Services, Wells Fargo/Wachovia and [BofA]."
Note: Unless otherwise linked and stated without caveat, all the information in this article comes from the documents posted at the site.
Who Is the Anonymous Leaker?
The leaker claims to be a former seven-year employee of Balboa Insurance -- first, when it was part of Countrywide and then under Bank of America when it took over Countrywide -- who alleges that he was persecuted by BofA, labeled a terrorist, and had his career destroyed. Much of the information on the site is a Q&A with the leaker, although one email chain is included.
As to the leaker's credibility, Naked Capitalism's Yves Smith notes that he makes a number of typos and also uses some terms incorrectly, saying "lienholder" when "servicer" is clearly meant. Nonetheless, Smith finds the allegations credible. So do I.
Importantly, the information is not from the same database that Wikileaks reportedly has, as the leaker offers to decode that information if it's made available to him.
As the documents are labeled "Ex Bank of America Employee Can Prove Mortgage Fraud 1," but the information thus-far revealed doesn't really involve mortgage fraud, perhaps a "Part 2" will include such documents, translated Wikileaks or otherwise.
Force-Placed Insurance Scams
The leaker's information relates primarily to "force-placed insurance" -- insurance taken out by a mortgage servicer on a home when the homeowner doesn't maintain the level of insurance required by the loan -- and the role of Balboa Insurance in that industry.
Force-placed insurance is such a problem that the proposed bank settlement on improper foreclosure and loan-servicing practices currently in the work contains many "shall nots" regarding it, including such things as: Thou shalt not buy force-placed insurance, charging a borrower and taking borrower's money from escrow to pay for it, when borrower already has an insurance policy in place.
Felix Salmon details the kind of scams involved, discussing reporting by Jeff Horowitz at American Banker, including these examples:
and"A homeowner had a $4,000 insurance policy, which was paid by the loan servicer, Everbank, from an escrow account. But Everbank allegedly let that insurance policy lapse, allowing it to replace the policy with a different policy, this one costing more than $33,000. The insurer, a subsidiary of Assurant [the market leader ahead of Balboa], then paid Everbank a $7,100 kickback for giving it such a lucrative policy. And, writes Horwitz, 'left the door open to further compensation' down the road."
So force-placed insurance involves grossly inflated premiums, something the leaker also reported. And the servicer can simply decide not to use a borrower's money that is specifically set aside in escrow to pay the insurance premium for the existing insurance."Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, 'the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.'"
Why the Scam Works
When the borrower experiences force-placed insurance, it is his servicer that is the one buying the insurance. The leaker's first big revelation -- at least to industry outsiders -- is that only a handful of companies do this for many servicers. So if the insurance tracking and purchasing is done by an insurance company like Balboa, why do borrowers think their lenders are doing it? The employees of Balboa Insurance falsely present themselves as employees of the servicer when dealing with borrowers:
Horowitz seemed to find the same situation. He noted that when a borrower's attorney tried to investigate a force-placed policy, he discovered that:"When you call in to customer service, for say, GMAC, you're not actually speaking to a GMAC employee. You're actually speaking to a Bank of America associate working for Balboa Insurance who is required by their business to business contract with GMAC to state that they are, in fact, an employee of GMAC. The reasoning is that if you do not realize you're speaking to a Bank of America/Balboa Insurance employee, you have no reason to question the validity of the information you are receiving from them [about the price of the force-placed policy]. If you call your insurance agent and ask them for the lienholder information for your GMAC/Wells Fargo/etc lien (home or auto) you will be provided with their name, but the mailing address will be a PO Box at one of Balboa's 3 main tracking locations (Moon Township/Coreaopolis, PA, Dallas/Ft Worth, TX, or Phoenix/Chandler, AZ)."
A Different Kind of Assembly Line"While the people [responding to requests about the force-placed insurance] there claimed to represent the servicer, they were operating out of an office belonging to a force-placed policy insurer since acquired by QBE Insurance Group.
[The attorney] didn't understand why the insurer would be speaking on behalf of the servicer. But shortly after he began asking questions about the relationship between servicer and insurer, the case settled. Confidentially. At the insurer's request. . . ."
One of the hallmarks of the foreclosure scandals is how much of the problem was caused by outsourcing relatively high-level functions to companies that minimize costs by industrializing processes that really aren't amenable to that treatment. One small example is preparing court filings like affidavits of indebtedness or assignments of mortgage.
By using an assembly-line system of blank-fillers, signers, notarizers, and witnessers, document creation became very efficient, but also flawed -- both legally and substantively. The industrialization of the paperwork was driven by incentives and disguised by having the single-task completers act in the name of the various servicers, rather than their true employers.
According to the leaker, force-placed insurance works precisely the same way. The processes within Balboa have been industrialized such that people are only doing one step of a multi-step process, over and over, and never see the full picture. Processing speed is a focus and is financially rewarded. The bonuses require people to process 200 to 2,000 loans per day, depending on the job function.
And even though having Balboa do the work for the various servicers is in itself a type of outsourcing, Balboa reduces costs further by outsourcing work to SPi in the Philippines and MphasiS in India, according to the leaker. (Homeowners I've spoken with have gotten calls in the name of their servicers from such countries, so the leaker's explanation of this is very plausible to me.)
The one email chain that is included in the leak reflects the dynamics that result in such a set up. The chain describes employees of BofA/Balboa trying to hide the fact that they sent out erroneous letters relating to some 80 GMAC loans by delinking the letters from the loan files. Even though concern was expressed in the email chain that such delinking would be problematic from an audit perspective, it was authorized.
Fixing the Wrong Mistakes
Another dynamic that results from the cost-cutting focus of the system, according to the leaker, is this: A lot of effort is spent fighting over trivial errors by the foreign data entry companies because proving such errors results in big savings to Balboa. The leaker was not, however, authorized to spend money to fix more substantial problems:
"If I bring up a system glitch that's affecting 10,000 loans held by real human beings in the real world, in the system, that's a $25,000 project to fix that only truly affects .001% of the loans on paper (discussing numbers like that in a dozen meetings only to have the initiative turned down is the real waste). If I can drop one of our offshore vendors' quality below a certain level, however, than I've just saved the company $250,000."
An unrelated and unsubstantiated allegation that is leveled almost incidentally must also be mentioned. The leaker claims that Balboa/Countrywide:
The leaker makes this claim without supplying an email to back it up. It's perhaps worth noting, however, that fabricating letters to facilitate a foreclosure is a type of document fraud that has shown up in a Countrywide-turned-BofA foreclosure case in Pennsylvania, so the allegation sounds plausible to me."knowingly hid foreclosure information from federal auditors during the takeovers of IndyMac Federal (a subsidiary of OneWest) and Aurora Loan Services (a subsidiary of Lehman Bros Holdings), falsifying loan documentation in order to proceed with foreclosures by fixing letter cycles in the system, reporting incorrect volumes to all of their lenders and to the federal auditors to avoid fines for falling behind on Loan Modifications, purposely and knowingly adjusting premiums for REO (Real Estate Owned) insurance for their corporate clients while denying forbearance for individual borrowers, etc, etc, etc."
It would certainly be provable/disprovable by subpoenaing documents. But I have little hope of that happening. Gretchen Morgenson reports in the New York Times that the attorneys general did not investigate the servicers before they created their proposed settlement of the mortgage mess, relying instead on the many, many complaints their offices received from borrowers.
Talk to the Waitresses and Bartenders
A rich set of future sources, according to leaker, are the drunken BofA employees and the waitresses and bartenders who serve them at the happy hour spots near BofA processing centers. Leaker claims they all have many stories to tell. I'm not sure where the nearest one of those to me is, but I'll look into it. As should you.