Oops. . . We Rejected Your Application Again

I've written a few times about banks and servicers struggling to modify mortgages for underwater homeowners in accordance with the Obama Administration's foreclosure prevention program. Is it incompetence? Is it a lack of resources? Is it a stubborn refusal to cooperate? In the case of some mortgages owned by now defunct Wachovia, it was something else: a computer glitch. Well that's embarrassing.

The Wall Street Journal reports that Wells Fargo's home mortgage head Michael Heid confirmed the problem. Wells acquired Wachovia last year.

Wachovia was forced to "re-code" its computer systems because of "some of the tweaks to the program" the government made earlier this year, Mr. Heid said. Wachovia will begin accepting applications under the Obama administration's loan-modification program in the next couple of weeks, he added.

And that explains this chart (via WSJ):

wachovia v wells.gif

Wachovia is well behind the curve because their computer systems couldn't handle certain applications.

Now stop: this isn't the beginning of the computer resistance to irresponsible consumer lending. Get those I, Robot thoughts out of your head. This is likely the opposite. I'd be willing to bet that Wachovia's computer systems were outdated. During the credit boom, many banks put most resources into their lending and grew so fast that their technology fell behind. Through my work as a consultant visiting consumer lending companies, I saw this problem regularly. Many computers systems looked like something out of the late 1980s or early 1990s. It was terribly frustrating when I wanted to query, manipulate or aggregate data.

I think this episode also reveals something important to note about the consumer credit industry: computers, not humans, run the business. Do you really believe there are actual people evaluating thousands of loan applications that big banks receive each day? Most loans will go through several rounds of automated underwriting before a person looks at it. In some cases, no manual underwriting ever occurs.

Clearly, this saves banks lots of money on overhead. It also, however, relies a lot on computers. While some might argue that computers are more reliable than humans, anyone with a Wachovia mortgage who tried to get a modification recently may beg to differ.

Like it or not, I wouldn't expect this precedent to change anytime soon. Banks won't have money to burn in the near term to improve infrastructure or expand underwriting teams, so their antiquated systems and lack of personnel isn't likely to improve.