A funny thing happened on my way to talking about WordPress technical support – I told a story about a mortgage company I worked at while I was a consultant. A couple of weeks ago, I told you about how a crude flow diagram helped me “figure out” where the problems were – hint, they were everywhere. Today, I want to share a story about one of the things we discovered after we started working our way through that diagram. Warning: some of you expressed a bit of outrage over the way people with fiduciary responsibilities were handling the money of Mr. and Mrs. Joe Average – you guys better buckle up.
If you’ve ever bought a house that involved taking out a mortgage, you’re familiar with the frantic pace at which things start to happen in the days before the closing. One of the essential things is that your lawyer, perhaps your real estate agent, or perhaps some trusted fellow at the bank is given the money for the mortgage amount. This amount, along with your down payment amount is held in escrow until the closing is complete, when the trusted third-party presents a cashier’s check to the seller.
As you might expect, if anything fouls-up along the way, the closing is postponed, and the amounts being held in escrow are returned to the various parties…unless they aren’t.
Our process flow documented the flow of funds to “Third-Party Escrow Agents” as well as the potential flow of those same funds back to the bank. This little data flow represented a portion of the “pipeline” that the bank was using as an excuse for losing track of $93 million. Our team needed to figure out how much money was in this portion of the pipeline, since the mortgage company wasn’t paying attention. Considering the volume of mortgages each day throughout the system and the average mortgage amount, two to three days of funds in escrow was a sizable amount of money. Even a small portion of it was sizable, at least to an enterprising attorney.
You see, in addition to not paying attention to how much money was “out for escrow,” no one in the mortgage company was responsible for notifying the bank to call the funds back when a closing was cancelled. Instead, they relied on the third-party agent holding the funds to return the money.
The keen but sleazy attorney forgot to return the funds one day, after a closing had to be cancelled. Then he noticed that no one ever asked for the money. The money was sitting in a money market account at the parent bank of the mortgage company. And, in 1985, that money market account was paying slightly over 7% interest – a nice little benefit for the trusted third party, albeit only for a few days.
When the attorney made his observation, he put his own process in place. Whenever one of his clients told him they were applying for a mortgage, he offered them this apparent bit of sage wisdom:
“When you apply for the mortgage, we’ll schedule the closing for a month before you really want to close. That place is so screwed-up, they never have the paperwork ready on time. I’ll take care of notifying them that there’s been a delay, and everything will be ready the day you really want to close.”
At least part of that wasn’t a lie – the bank was screwed-up.
The lawyer was involved with 10-to-12 closings each month, for an average mortgage amount of over $100,000. This amounted to a rolling bank balance of between 1.25 and 1.5 million dollars – of the bank’s money – sitting in a money market account – where the bank was paying the attorney 7%. I know you don’t like to do math on Mondays, but that works out to about $95,000 a year in interest.
I don’t want to aggravate your math anxiety but suffice it to say it was worse for the bank. Not only were they paying the attorney interest, but because it was their money, they were losing the interest they could have made in the overnight investment opportunities available to them.
In case you’re wondering, it was determined that no crime had been committed. The attorney was careful not to ask his clients for their down payment amount until just before the real closing. Since the bank had, in fact, been late on several closings, he retained a plausible excuse for his action – he was looking out for his clients and the bank should have asked for the money to be returned. And, in case you’re wondering further, he wasn’t the only attorney along the East Coast who had noticed this opportunity.