With default volumes reaching historical lows, servicers nationwide are looking to get their houses in order by enhancing control environments, tightening processes, and redesigning or implementing new technologies to manage operations more efficiently while mitigating the risk to scale quickly in the next market downturn. While there is a massive push in the industry to tech-up with process automation, artificial intelligence, robotics, big data solutions, and the latest and greatest workflow tools, the cost to implement is high, the business requirements are complicated, and people with the right skills required to implement them are either non-existent or in excruciatingly high demand, especially with the default workforce steadily shrinking to meet operational bottom lines.
We have learned through trial and error that sometimes the high-cost of technological enhancement is the best answer. For instance, after conducting a deep dive into all of the available end-to-end loss mitigation options for better consistency and control in the loss mitigation workflow, Flagstar was unable to find a solution that met our goals. As a result, we are committing substantial resources to build our a proprietary tool that will be nimble enough to keep up with the bank’s conservative perspective on loss mitigation requirements, while maintaining the quality of a thorough evaluation with a robust audit package to meet regulatory needs in advance of a request. We anticipate that our solution will eliminate 10 days from the final conversion process but remain so user-friendly that even I could underwrite a loss mitigation application.
Learning From the Best
In the stability that a lower volume environment created, the Flagstar default team swapped our jackets for cardigans and slippers and took the time to develop better solutions to manage our bottom line.
Taking a page out of philosophical history (also a luxury in the mortgage servicing business), we leveraged Occam’s Razor and tried our best not to overcomplicate it. Academically credited to William of Ockham, a 13-14th-century friar, philosopher, and theologian, Occam’s Razor supposes that the best strategy among competing hypotheses is the one with the fewest assumptions.
Aristotle is first credited with the idea that, when capturing the inherent value in the simple solution, “we may assume the superiority, other things being equal, of the demonstration which derives from fewer postulates or hypotheses.”
The forefather of infectious disease, Theodore Woodward, once stated, “When you hear hoofbeats, think of horses, not zebras.”
Albert Einstein’s perspective? “Everything should be made as simple as possible, but not simpler.”
Said another way, the simplest solution is often the correct one.
The best news? We found that adopting this strategy in default servicing operations is a veritable gold mine. We looked at the rules, the people, our P&L, our service providers, and our customers. We evaluated expensive technologies and cringed at implementation calendars. We scratched our heads. And then, we endeavored to define a series of small wins—simple changes—that have yielded significant returns.
Keep It Simple
Most significant among the small wins in our new strategy was connecting our two favorite groups of lawyers—our internal legal department and our business line foreclosure/bankruptcy attorney network (the “business line attorney network”).
At many servicers, the foreclosure and bankruptcy departments carry the responsibility to manage the contested foreclosure or adversary proceedings, by leveraging the business line foreclosure and bankruptcy attorney network managed by the business. For matters that fall outside the general contested rubric, the bank’s in-house legal department will review the matter to determine whether its intervention of a file is warranted—based on risk factors such as a proactive claim against the bank.
If the matter meets the criteria and is escalated, then the legal department will take jurisdiction and manage the matter through their process. In turn, the legal department appropriately leverages their network of attorneys to manage these files—these attorneys are typically not in the business line foreclosure and bankruptcy attorney network and carry a multi-state or national presence.
Although this strategy generally works, we learned that it was not the best approach in all cases.
When we evaluated our litigation expense budget and the litigated matters portfolio for default loans, we found it largely consisted of cases arising from a foreclosure or bankruptcy matter, and the crux of that litigation was residing within the foreclosure or bankruptcy matter itself—comprised of an attempt to avoid the underlying foreclosure. We realized that, instead of leaving the foreclosure avoidance matters with the business line attorney network firm managing the actual foreclosure or bankruptcy, we were moving them to another law firm—one residing in the corporate legal department network. Typically, these firms are used to charging the hirer hourly rates to support the management of matters of much greater diversity and complexity (requiring independent research, and time spent by associates), and of much higher operational, reputational, or financial risk to the bank.
In partnership with our trusted legal department partners, we posed a simple hypothesis, which becomes a key cost savings initiative that was put into action through a pilot program wherein we believe, conservatively, that we will reduce our litigation expense budget by at least 30% for these matters within the next year.
The Case for Cost Savings
What if we leveraged the line of business attorney network (the litigation department at an assigned foreclosure firm) instead of the corporate legal department network (frequently national firms, with enhanced cost structures)? Said another way, what if we did nothing and left the cases where they were?
Total timeline to implement: Hours. Comprised of coordinating the right partners both internally and externally, and conducting the steps necessary for the legal department to leverage the business unit attorney network.
Total cost to implement: $0
The total effort on behalf of the BU: Nothing
Key factors leading to the success of this program include:
- It is not only what you know, but who you know that is important in matters having a geographic origin. Default matters are sensitive, deserve compassion, and are frequently litigated in the counties and municipalities where our customers live. Banks and servicers are outsiders, and when it comes to default, especially, we are often viewed as the bad guy. Frequently, the outcome of a matter is dependent not only on the merits of a case, but also on geography, local practice, judicial disposition, judicial appointment practice, and many other characteristics tied to the community wherein they are litigated.
Firms in your business foreclosure and bankruptcy network have inherent ties to the states, communities, and municipalities in which they operate. Compared to a firm with a multi-state or national presence who may either hire a local attorney to achieve the above objectives (thus increasing the cost); or send a young associate to a neighboring state where they happen to have a bar card to manage the matter in an unfamiliar court—which can be detrimental and undermine the increased expenditure.
- The firm in the business line attorney network has both a history with the file and a vested interest in the litigation resolving well.
Foreclosure avoidance lawsuits, more often than not, arise out of an attempt by a borrower to delay what is often inevitable, the loss of their home through a foreclosure process. Given the fact that real harm to borrowers in servicing is rare, frequently borrower’s counsels are left with the only strategy they have to accomplish their clients’ goals. They challenge the veracity of the underlying foreclosure process itself, whether at the servicer or at the foreclosure firm.
We have learned that the most interested party in defending a compliant foreclosure, is the party conducting it—the foreclosure firm used in the underlying foreclosure action. The foreclosure firm is responsible for ensuring under their state’s legal framework and federal law that files are in ship shape at every juncture of the process. Who better to address challenges to the underlying action, then the firm that did the doing? Additionally, the business line firms are incentivized to succeed because their business depends on client service to generate referrals. With low default volume, the competition is fiercer than ever, and the business line firms are keenly aware that the stakes are high.
- Would you rather pay a legal expert $20,000 to resolve your lawsuit, or a foreclosure legal expert $10,000 to resolve your lawsuit?
This is neither news nor a shocking revelation. Your business line foreclosure and bankruptcy attorney network are regulated by governmental agencies requiring caps on the fees and expenses associated with litigation. Their rates are fundamentally lower.
In a high-level cost analysis of our legal spend in 2018, we found that, for an average foreclosure avoidance matter, we would spend between $15,000 and $25,000 on legal fees (on matters not going to trial). Applying the same files to the capped foreclosure/bankruptcy firm hourly rate structure would yield at 30-50% savings, by simply keeping the file with the local experts—the business line firms.
Assuming you close 100 matters in a year, this initiative could save you $500,000 annually, with zero overhead associated with changing this strategy.
- Et cetera.
While the straightforward math and the limited implementation cost yields a direct financial benefit to the bottom line, there are some potential intrinsic benefits to leveraging the business line attorney. We can also hypothesize cost savings in the approach to file management.
Namely, your foreclosure and bankruptcy network firms are in the business of practicing foreclosure and bankruptcy law—it is what they know. Further, in any given state, this also means that you are allowed to have a much higher expectation of efficiency with the management of your matter—this is what they do. Your business line foreclosure and bankruptcy attorney network should know the players (both plaintiff’s counsel, and the judiciary), have the experience with the right arguments to plug and play into your matters (brief banks), and have previously synthesized almost every legal issue that could be presented. In short, you should not be billed for excess legal research, motion practice, and brief writing. Finally, and the key to the underlying resolution of these matters, they tend to have a higher level of expertise with investor/insurer level requirements—they recognize the stakeholders in the case. The business-line firm’s operations are evaluated by these requirements, and thus, the firm’s ability to maintain a viable practice depends on this knowledge. As more than half of these matters resolve with some sort of loss mitigation solution, this is important.
In potential contrast, the legal department networks are frequently comprised of lawyers from national firms, with a recognizable name, with smart and capable lawyers from notable law schools; they will likely do a good job. These service providers are legal experts, no doubt. However, because they are typically used to managing larger, high-stakes, high-dollar matters, they are not spending their hours becoming experts in state-level foreclosure matters, developing the brief banks, or developing a relationship with the local bar. Moreover, it doesn’t make financial sense for these firms (with multiple locations, and generally higher paid associates), to reduce their hourly rates for less complex matters. There are cases that come through the door that will be best managed by these firms and some that aren’t. Knowing the difference is key.
In philosophy, a razor is a rule of thumb that allows one to avoid unnecessary actions. In default servicing, the best solution is often the quickest solution, which has a clear potential of mitigating risk and reducing cost. We would suggest “doing nothing” like us, and adding your business line foreclosure and bankruptcy firms to your legal department network.