Originally Broadcast May 12, 2008
Announcer: Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about The Center by visiting us on the web at businessofgovernment.org.
And now, The Business of Government Hour.
Mr. Morales: Good morning, I'm Albert Morales, your host, and managing partner of The IBM Center for The Business of Government.
The U.S. Department of Veterans Affairs provides services that are varied as the veterans and family members it serves. From operating one of the largest health care systems in the world to managing a loan guarantee program which assists eligible veterans to become homeowners, VA's commitment to those who have borne the battle continues.
With us this morning to discuss the VA Loan Guaranty program is our special guest Mike Frueh, assistant director, Loan Guaranty Services at the U.S. Department of Veterans Affairs.
Good morning, Mike.
Mr. Frueh: Good morning, Al.
Mr. Morales: Also joining us in our conversation is Maria Paz-Barrientos, partner in IBM's financial management practice.
Good morning, Maria.
Ms. Paz-Barrientos: Good morning, Al. Good morning, Mike.
Mr. Morales: Mike, before going into some of the particulars of your program, perhaps you could start by giving us an overview of the history and mission of the U.S. Department of Veterans Affairs.
Mr. Frueh: The Veterans Affairs started in 1930. It was created as the Veterans Administration by Herbert Hoover. At the time, it had about 31,000 employees. It became a cabinet-level agency, the Department of Veterans Affairs, in the '80s under Ronald Reagan, and now has about 250,000 employees. We're the second largest government employer after DOD, with a 2009 budget request of over $93 billion. If we were in the private sector, we'd be in the top 25 companies in the world in terms of budget.
We have medical benefits that you mentioned. We are the largest medical provider in the country, which is our Veterans Health Administration. We have over 155 hospitals, with one in each state, including Puerto Rico. We have about 870 community based health centers and 108 nursing homes that we administer nationwide. We also have the Veterans Benefit Administration, which is an agency that administers five key benefit programs for veterans.
The Compensation and Pension Program is the largest of those, which provides pensions and compensation payments to over 3 million eligible veterans. The VA Home Loan Program, which is where I fit, we have an Education Program that's provided money for more than 22 million veterans to go to college. The Vocational Rehabilitation and Counseling program which provides services to enable veterans who have service-connected disabilities to achieve maximum life capacity. It also helps them to the maximum extent possible to obtain and maintain employment.
We have an insurance program, which is one of the largest insurance programs in the world. We also have the National Cemeteries, which administers 124 national cemeteries nationwide.
It's an enormous and diverse organization, wholly focused around service to veterans.
Mr. Morales: Could you tell us a bit more about your specific program, the Loan Guaranty Service? How is that organized? Perhaps you can tell us a little bit about the size of your budget, how many employees you have, and perhaps your geographic footprint.
Mr. Frueh: Sure. Now, the Home Loan Guaranty program provides assistance and other benefits to veterans who have served or are serving in the U.S. uniformed services. Home loan guarantees are issued to help eligible veterans obtain a home loan. We don't actually underwrite loans ourselves for the most part, but we provide a guarantee so that veterans can go to a lender with a guarantee, which will allow the lender to provide a home loan for that veteran or service member.
In addition, we offer grants to veterans who have specific service-connected disabilities, so they can rehabilitate a current home they have, or actually build a home designed to facilitate their getting around with their particular disability.
And finally, we have a direct program. This is a smaller program where we actually do underwrite loans directly to certain Native-American veterans who require assistance to obtain a loan.
There's really three major objectives to the program. You know, one is assisting veterans and active duty service members to obtain home loans. And as I mentioned, we do that by providing a guarantee and our guarantee is typically about 25 percent. And that 25 percent basically serves to cover the need for a veteran to supply a down payment. So in fact the majority of the veterans who use the VA Home Loan program to get a loan end up not paying a down payment at all. Today we've helped about 18.2 million veterans obtain home loans at a value of about $1 trillion.
The second thing that we do, and that's the area that I'm responsible for, is we help veterans who have a VA-guaranteed home loan retain their home. So if they ever experience an event of default, such as they have an illness, go through a divorce, or have some other issue that doesn't allow them to maintain current on their home loan payment, we'll actually step in. We have 350 staff nationwide that help them, work with the servicer in obtaining some resolution to their default, so hopefully they can retain their home.
In terms of staff, we have about 800 staff nationwide. Most of those are located in nine regional loan centers, or RLCs, in various strategic geographical areas around the nation so they can reach the most veterans. We have about 100 staff located in D.C. in our central office, whose main goal is to provide policy and create regulations to help deliver the benefit to veterans nationwide.
Our budget is about $900 million a year. Most of that is used to pay claims on the guarantee. If a loan does go into default and the lender loses money; we'll pay a portion of that loss for the lender.
Ms. Paz-Barrientos: Mike, try to focus a little bit more on loan administration. Can you tell us a little bit more about your specific responsibilities and duties as assistant director for Loan Guaranty Service at VA?
Mr. Frueh: Sure. As assistant director, I'm responsible for creating the policies and procedures, and most notably the regulations that direct servicers and the VA staff at the regional loan centers, and assisting veterans to avoid foreclosure, to retain their homes to all extents possible.
You know, in some cases when a loan does go to foreclosure, the service that we are responsible for is actually paying the loan guarantee to the holders. This involves paying claims to servicers who lose money when a VA home loan actually does foreclose, and selling properties that VA receives when a home loan forecloses. We try to sell those properties for the maximum amount possible to recover money for the government and to lower the actual cost of the foreclosure process.
You know, we are largest business line in the loan guaranty service and we have the most direct contact with the veterans. In order to assist them with retaining homeownership of their house when they experience in the event of default, the first thing we try to do is contact the veterans.
So in a given year we might contact 90,000 to 100,000 different veterans when we find out that they are experiencing some event of default, either through notification from the servicer, or when the veteran calls us themselves and says, look, I've had an illness, I've had a problem, I've lost my job. I need some help in keeping my house.
So we have staff located nationwide, about 350 staff, whose sole focus is to try to keep the veteran in their house to the maximum extent possible.
We're also responsible servicing our own portfolio of loans and for the Native American Direct Loan Program which are loans that we underwrite directly to eligible Native-American veterans, and other types of loans that we assume in the process of trying to help veterans keep their homes. Sometimes we'll purchase a loan from a servicer and then we'll service it ourselves. We have about 12,000 of those kind of loans totaling about a $1 billion.
Ms. Paz-Barrientos: Mike, what do you see as the top three challenges that you had faced in your position and how have you addressed those challenges?
Mr. Frueh: One of the biggest challenges in any government agency, and I've certainly noticed it at VA, is bureaucracy. Things that we want to do quickly, if something is a good idea, it's a good idea now, you can't necessarily do right now. There's a lot of necessary time that you need to invest to get a certain amount of buy-in from the various key levels of the organization and from the various stakeholders inside and outside of the organization.
So one challenge is, especially in a market like now, where the mortgage market is in the news all the time, and people come and say we want immediate action now to help people retain their homes, we've got a process that allows us to help, but to change the process takes a long time. I'd say bureaucracy is one challenge.
Staffing is another challenge. There are a lot of wonderful people that work in government, there are a lot people committed to public service, and I think at VA we probably have the cream of the crop in terms of commitment to our mission, to care for those who have borne the battle, to serve veterans.
I think everyone that I've worked with there, from before when I was in the private sector, at Pricewaterhouse, consulting at VA, they always impressed me with that. And now inside VA, I've seen the commitment that everyone makes every day to help veterans in our program to keep their homes and other programs at VA to help them compensate for various disabilities or injuries that they've suffered during their service.
Everyone there is committed, so we've got a staff that's very, very dedicated to their work, but there's also a huge amount of people that are facing retirement. And that's a challenge for those of us that are left behind. So we need to look to the future in terms of what type of people and what type of skills do we need to get in to fall behind the people while they are still here, learn from them, and get some download of their knowledge and transfer of their understanding of the program, and then move forward for the next several generations.
And I guess, finally, something totally outside of our control are the macroeconomic factors that are in the mortgage industry, and in particular today, with the subprime crisis. That's something that so far hasn't had a dramatic impact on delinquencies and foreclosures in our program, but as more houses are on the market through foreclosure sales, it's going to impact the value of the houses that veterans have today, and consequently their ability to retain their house, or work out some options that will help them not suffer a loss if they do have to sell their house.
Mr. Morales: Now, Mike, you mentioned Pricewaterhouse, and I understand that you've actually spent the bulk of your career in the private sector. Can you just give us an overview of how you got started, and how you found your way over to the VA?
Mr. Frueh: Sure. I would say that I became a consultant kind of accidentally. When I went to college, I was a math major, a computer science major with a side degree in pre-medicine, so I thought I would be a doctor. And then when I got to graduate, and I realized I didn't want to spend an another eight years in an academic institution waiting to earn a living, the one company that came that was interviewing for math majors was Andersen Consulting, which become Accenture.
And I took that job and absolutely loved it. Because the people that worked there were wonderful. They were just top-caliber young people from top colleges around the Southern California area where I went to school. At that time I had a lot of opportunity to go do diverse projects. And you know, once you do a couple, and you get your say, you sort of make a name for yourself, you can pick projects. And I always tried to do something that was different, and something I didn't quite know how to do, but I always felt it was a positive to try to apply what you know in the past and expand and grow to what you have.
So what I did is I jumped ship from consulting to investment banking. And I had an opportunity to go overseas and develop the international operations for a big investment bank that was called Bankers Trust at the time. So a group of us were asked to go overseas and live overseas and expand operations through Asia and Europe and the Pacific. And that opportunity was a great eye-opening challenge and certainly exposed me to the difference in capital markets, and especially the mortgage market, which has been my focus throughout my career.
So the mortgage market in Europe is completely different than the traditional mortgage market in America. And what we've seen in the last couple of years in America is a dramatic change in the mortgage market, as different products and different, I guess, degrees of risk that underwriters and lenders were willing to assume were tried out. And now we're seeing the results of some of those efforts.
But in general, you start to see how the whole world financial focus is coming together. There are no independent pockets of debt or liquidity. Everything in America is really spread out through Europe and Asia, as the investor base of the world mortgage market and the secondary market for finances is definitely not localized, it's global. So the career I've had has allowed me to see that world, and to see how it fits into our local environment.
And then from investment banking I went back to consulting for about six years with Pricewaterhouse, where I was able to grow and develop a group that focused strictly on certain aspects of mortgage finance, which led directly to a project at VA. And working at the Department of Veterans Affairs every single day with the people that were committed to serving veterans' needs absolutely showed me what life in public service was like.
And it sort of went back to my days in pre-medicine, where I wanted to be a doctor and wanted to help people. I wanted to give back to the community. I saw people doing that on a massive basis -- 250,000 people that are totally committed to helping serve a very deserving segment of our population. And it made me feel good to know I was helping them from the private sector as a consultant.
And when a job opened and it fit my background with certainly a lot of unknown in terms of what I would do, I jumped at it. And I've been very grateful for that opportunity ever since.
Mr. Morales: That's great. That's a wonderful story. So as you reflect back on those experiences, Mike, how have they prepared you for your current role and how have they perhaps shaped your current leadership style?
Mr. Frueh: Well, I'd have to say that consulting and investment banking are definitely high pressure, lots of hours invested in a limited amount of time. And all of that time spent helped me learn my capacities and ability to do certain things under pressure, whether it's budgetary pressure or time pressure. And one thing that's good is a lot of what we deal with in any job is fighting fires.
There's a lot of crises that come up, and now the subprime crisis is something that's large and sort of covering the nation. But it's a lot of little things that require a lot of effort and thought and energy to address on a day-to-day basis. So having the background in basically crisis management has kind of allowed me to take a step back and say, how do you set a vision for the future when you are so busy in the weeds dealing with day-to-day crises?
So now I have an ability to recognize my own capabilities and to hopefully see that in my staff and in the people around the nation that are working to deliver these benefits, so that we can get certain people with their abilities, give them projects, allow them to grow, and give them guidance and the tools to do their job, but hopefully step back enough so that I'm not getting in their way. I definitely want people to take on projects that are a little above what they are able to do. And I want to give them the tools to succeed and then step back and let them succeed, so that I can focus on other things.
You know, I'd love to say that I have all the wonderful skills and abilities of a good leader, like vision and passion and integrity and curiosity and trust. And I think it's a sort of learning as you go. I certainly have plenty of a lot of that to hopefully inspire people for our big vision for keeping veterans in their home for our division, and for giving the home loans to every veteran who wants to get a VA home loan guaranteed by VA.
But it's absolutely a process where if we set the vision -- you know, I have a vision for my program to make sure that everyone can stay in their home, to give every opportunity to keep a veteran in their home -- and let the people underneath me do their work the best way they can.
Mr. Morales: Great. What about the VA's loan administration and redesign efforts? We will ask Mike Frueh, assistant director, Loan Guaranty Services at the U.S. Department of Veterans Affairs, to share with us when the conversations about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Mike Frueh, assistant director, Loan Guaranty Services, at the U.S. Department of Veterans Affairs. Also joining us in our conversation, from IBM, is Maria Paz-Barrientos.
Mike, I understand that the VA loan administration has undergone some changes recently. Could you give us an overview of some of these redesign efforts?
Mr. Frueh: Sure. I think the biggest thing that we've done is to continue the efforts that Loan Guaranty has been making over the last ten years to standardize processes nationwide, to delegate responsibility to those in the mortgage world that do these things on a daily living for us, like underwrite loans and service the loans, and to automate. And with all of that standardization, the delegation, and the automation to help us do our work, we're building a robust oversight capability over all of it so that we know that the underwriters and the servicers, the lenders in the mortgage world are doing what we want them to do.
This redesign effort really started almost ten years ago in 1999 when our senior leadership from the field offices were gathering to prepare for a servicing conference to explain to the servicing world how we want them to treat our veteran borrowers when they experience an event of default. And we found that each of the offices had different rules, had different policies, had different procedures for dealing with servicers' questions and saying, this is how we want you to treat a servicer in Texas versus this is how we want the servicers to work for veterans in Alaska.
And we realized that that's really not effective, that's not giving the veterans the best service they can. So it took several years to compose a team of all of the various stakeholders from inside VA and outside of VA and evaluate the program from top to bottom. What do we do well, what do we not do well, what does the outside mortgage industry really detest about the VA program that adds burden of expense and staff to their bottom line, and consequently we think deters them from offering VA-guaranteed loans in the first place.
And with those suggestions and ideas in mind and criticism in the mind, we designed the process from top to bottom as a new model from beginning to end. You know, how do we want the servicing world to work for every single veteran who has a VA-guaranteed loan.
Mr. Morales: So can you provide us some specifics on how these redesign efforts benefit the veterans themselves?
Mr. Frueh: Well, we actually, in every single thing that we did with the program, we wanted to keep three things in mind. You know, how does this benefit the veteran was our key thing for every single element that we came up with. And there are nine elements that we focused on as our objectives for the program and we came up with hundreds and hundreds of requirements for the redesigned environment.
But for all of the nine objectives, we said, how is this going to benefit the veteran? How is it going to benefit the industry, and consequently, make them desire to give more VA-guaranteed loans, so that more veterans could benefit from it? And finally how is it going to benefit government in terms of cost-saving and efficiency in the program?
So a lot of the benefits that we have are one consistency. We standardized all of the service that veterans are going to get nationwide so that any veteran who experiences an event of default is going to get the same help, no matter where they are, from their servicer, because we're going to require servicers to do that and we're going to provide oversight of servicers to ensure that they do that.
So all of the tools that we have at our disposal to help veterans retain their home, whether it's workout of a payment plan with the servicer, forbearance where, if they know they're going to have some money coming to them in the future like a tax refund is going to come, then the servicers are going to treat every veteran who has some money coming in the near future the same way.
And they'll stop an episode of default and let them repay it at a certain time in the future, or modify loans where they have recast the principal balance of the loan to incorporate the event of default, and hopefully lower the payment to the veterans, so that for the future they'll be able to make their mortgage payments and have a current active loan in the servicer's inventory.
Or if they can't keep their home, we're trying to apply standard ways for servicers to dispose of loans where veterans can work out a compromise sale with their servicer. And VA will help make sure that the servicer doesn't lose money and consequently they'll approve a compromise sale for a veteran where you sell the house for less than the amount you owe and VA will pay the difference to the servicer. Or offer a deed in lieu of foreclosure where the foreclosure can't be avoided and they're going to lose the house, then we will offer a relatively painless way to get out of that without an actual foreclosure occurring.
Ms. Paz-Barrientos: Mike, I understand one of the primary changes to the program involves automatically paying claims that pass certain business rules, and post-auditing a statistically valid sample of these claim payments after the fact, something I believe you referred to as a post-audit process. Can you expand on this innovative process and how you ensure the fiscal integrity of the program?
Mr. Frueh: Thank you, Maria. That's a very important question because part of our three components of change in the last decade is delegation. It was standardize, delegate, and automate, and when we delegate key components to servicers to perform work for veterans, we need to make sure that they're doing it properly.
So we always encourage them to follow our rules, to obey the new regulations, and to help veterans retain their homes and we incentivize them to do this as well with certain financial incentives to keep veterans in their homes.
But on the back end we want to audit, and this is where the automation really helps us maintain this critical success factor, so that we are not making bad payments to servicers for losses. So what we do from the onset is design a system called VALERI that will actually analyze every single element of a claim that servicers file for a loss on a home loan.
And this is something that was done manually before. In the past, every single loan that actually went to foreclosure and a servicer submitted a claim to VA, we would request paper. We want them to substantiate every element of their claim and someone at a regional loan center would go through every single paper element for every single claim to make sure that the total was valid and that every element was a legal, valid expense that we would pay.
What we've done is take all of that manual process and put it in a system and the system actually has about 12,000 different financial elements that it will check on every single claim that's submitted to VA, automatically, and it will cut off any claim for an amount that's greater than the amount that we think is valid.
Now, for example, mowing the lawn. Mowing the lawn should cost a certain amount of money in a certain state, and you wouldn't expect an expense for lawn mowing in January in Minnesota. Likewise, you wouldn't expect an expense for a snow removal in Florida in July. So the system automatically checks that and it will identify a statistically valid sample of cases for a technician to review after the fact.
So the servicers are paid more quickly and we get a statistically valid sample to review and if we find errors then we will go back to the servicer and we'll get those errors corrected either through a financial adjustment to the claim, or we will put them on a watch list and say, you should do a better job in training your staff and submitting claims. If things continue then we'll put them on a different list where they won't earn as much incentive for the work that they do.
Ms. Paz-Barrientos: As part of the loan administration redesign, another innovative aspect of this is that VA partnered with several private sector external stakeholders, including loan servicers and other members of the mortgage banking industry. Can you describe how you were able to successfully develop this private-public partnership and how it contributed to the success of the program?
Mr. Frueh: Yes, one of the very key things about this program, the redesign of loan admin, has been an involvement of every stakeholder that could be involved. I think we recognized early on to succeed on a long-term project -- and I mentioned bureaucracy and patience at the very beginning of this program -- everything takes a long time and in order to ensure success several years down that road, we wanted to make sure that anyone that had any stake in the Loan Guaranty program and that's primarily servicers and lenders and the mortgage industry, we wanted to make sure that they were heard and that we listened to them and that they felt that their suggestions were incorporated in the program.
One thing that we did is we teamed up with Pricewaterhouse and IBM now to develop a team to go out to leaders in the industry, whether they were guarantors, insurers, servicers, and lenders, and ask them, well, what do you like about the VA home loan program? What do we do that's very good that you think we should continue? As well as, what do you think that we could do a lot better?
You know, if you have an ideas for how to improve our program, give us your wish list. And we took their suggestions to heart. We had a document with, I think, over 200 suggestions from the servicing and lending community as a whole that we incorporated into the requirements of our reengineered or redesigned loan administration program.
And not only did we do this many years ago, I guess five or six years ago, but when we went out to them, we've kept up a constant dialogue with the servicers and lenders to make sure that they know that we care about them, because without them we really don't have a program for veterans, since we're not making the loans ourselves.
So to that extent, we developed a new position out of central office who reports to me, who is our servicing liaison. It's one person whose sole job is to interface with the servicing and lending community to make sure that they understand where we are, we understand where they are, and they have a point of contact at any time to talk to VA to make sure that they know that we support their efforts to help veterans retain their homes and to help veterans obtain new VA-guaranteed loans.
And with that partnership I think we've seen a really positive benefit. A, we have better relationships with all of the servicers, all of the large servicers of VA-guaranteed loans, and B, I think with that relationship they feel more in tune with VA and they understand we are there to support them and that on the back end is going to help reduce their cost for servicing VA loans which on the front end should lead to a lot more impetus for them to make VA loans, because we've made it cheaper for them to service it.
And we've already started to see an up-tick in that on the origination side. I think our originations of VA-guaranteed loans are up 25 percent from the last quarter of '07 to the first quarter of '08 and that's exactly what we expected to see out of this relationship.
Mr. Morales: So, Mike, with the current subprime market issues, foreclosures are obviously a concern, you know, across the country. How does the VA home loan program help to minimize these foreclosures for our veterans and how does the loan administration redesign that you've talked about help with this mission?
Mr. Frueh: Well, first of all I'd like to say that VA home loans, the guaranteed loans guaranteed by VA are not subprime loans in general. You know, the subprime crisis is sort of generated around alternative loan products that lenders put out to offer no down payment and low down payment home loan options to the general public. You know, the VA home loan program, as a cornerstone of the program, has always been a no-down-payment program, but we've always had robust underwriting and the robust underwriting is the fact-checking that goes into creating the loan to make sure that a veteran has the capacity and the ability to make their payments under the loan terms.
So we have very vanilla loan products, fixed rate loan products, and very minor adjustable loan products that tend to not cause the problems that the subprime crisis has generated that we're seeing.
Mr. Morales: It's very traditional-type products?
Mr. Frueh: Absolutely. And that's been a boon for us, now. You know, in the past, I think we were criticized for not being agile and adding new products to meet the demands of the mortgage industry, but that's really helped us in the current market in that all of our loans are underwritten very well. And what we have seen in a default perspective over the last several years is our defaults haven't gone up at all.
Our defaults mimic the prime loans, which are the very best loans in the private industry. If the private industry default rate is about 2.4 percent, ours is just over 3 percent. And the subprime default rate is over 18 percent, right now. So we are very happy that the loans we have are not defaulting at the rate that others are, mostly because the people that have our loans are veterans and we're here to support veterans.
On the back end when those 3-1/2 percent or 4 percent of the VA loans do go into default, we have 350 people nationwide whose sole purpose in working is to help veterans keep their homes and that program or the group of people has been there for the life of the VA home loan program. It's not a new reaction to the mortgage crisis.
So they're there to offer assistances to veterans, to contact the servicers for the veterans, or to contact the veterans themselves and say, you're not going to have to go this alone. We're here to help you. And a lot of times the veterans that experience default don't realize they could save their homes. So just having an advocate on the outside that speaks for them has helped them understand there is a way to save their home, and there is a way for us to intervene to help them in many different financial aspects to keep their home.
And one thing that the new program is going to help is to put that same consistent approach that our staff has in working with veterans, helping them to keep their home, to give it to servicers and say, here is a program that we know works and that we have been very successful in, and we'd like you to follow this same path with the veterans. We'd like you to intervene earlier with the veterans when there is default, because the earlier in the default process that a servicer intervenes, or that VA intervenes, the less amount of debt that the veteran has incurred, then it's earlier to resolve that debt.
If you wait five or six months and they're five or six payments behind on their mortgage it's much harder to resolve that amount of a delinquency. So the new program is really going to help a lot more veterans keep their homes even though we expect the overall delinquency rate to stay low. It's going to help more of those that are delinquent keep their home because attacking the problem of the delinquency is going to happen much earlier in the process rather than later
Mr. Morales: That's fantastic, just a wonderful service for our veterans. How is the VA loan electronic reporting interface enhancing program delivery? We will ask Mike Frueh, assistant director of Loan Guaranty Services at the U.S. Department of Veterans Affairs, to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Mike Frueh, assistant director of Loan Guaranty Services at the U.S. Department of Veterans Affairs. Also joining us in our conversation, from IBM, is Maria Paz-Barrientos.
Mike, could you tell us a little bit more about the VA Loan Electronic Reporting Interface? I believe you referred to that in our last segment as VALERI. What exactly does this system do? And what enhancements to program delivery will be brought about by the continued implementation of this system?
Mr. Frueh: Well, VALERI is simply a tool. It's a tool that allows us to implement all the new regulations and the new policies and the new procedures that our business process reengineering and our redesign of our program suggested. First and foremost, VALERI is an oversight tool. Right now there's millions of VA-guaranteed loans and millions of veteran borrowers out there who have a loan with their particular lender and we don't know a whole lot about those loans after they're originated.
VALERI is a reporting tool that allows us to know about every single VA-guaranteed veteran loan that's in the industry because every month servicers are going to report to us the status of every loan. So right now the process is that servicers will report to us after a certain amount of time has elapsed since a veteran has gone into default, if there is a delinquency on a VA loan. And that time frame could be about 100 to 115 days.
With VALERI we'll know every month whether a loan is a day delinquent, a month delinquent, or a year delinquent. And that allows us to focus our efforts on those situations that require the most help. So it's an exception-based workflow processing tool that will gather data from the servicing industry, assign work nationwide to loan technicians that work for VA that are there to help veterans keep their homes, and allow the technicians to focus in on the most problematic cases.
In the most cases we're hoping that the standardization of our rules, the delegation of authority to the servicers to interact with the veterans, and the other changes or regulations that allow servicers to fix loans and resolve delinquencies on their own will work on their own.
But with VALERI we'll be able to look at the ones that aren't working, and we'll step in, and we'll intercede in the same way that we do today in a non-VALERI environment. But this should allow us to be more efficient. It's also the only way that we can assign work nationwide. We need a tool that's going to allow technicians to know what are the state rules in Alaska. If you are used to working on cases in Florida you're not going to know 51 different states' and localities' different mortgage rules that apply during the process of delinquency and perhaps foreclosure.
But having a system like VALERI allows those rules to be embedded in a very nice and very easy to understand workflow engine and rules-based engine that looks at cases and says, these ones are falling outside of the rules, you need to look at this and advise the servicer and contact the veteran. Whereas the bulk of the work should fall within the rules and should fall without exception so that the technicians will have the time to focus their energies only on the cases that they need to focus on.
Ms. Paz-Barrientos: Mike, turning a little bit to the actual implementation, I understand that VALERI is being implemented on a phased approach. How is the transition going? And what is VA doing to ease the transition for its employees and loan servicers and service its users?
Mr. Frueh: That's a good question, Maria. When we decided to switch over to this new oversight tool, to VALERI, and implement all of our redesign efforts in one big regulation package, our initial idea was we'll go big splash. We want to do everything at once because although it's going to be painful and it will be hard, at least we'll get it all done at once and we can work out the kinks over the next couple of months.
But what we realized in the last year before transition is that it's too big. There's too many servicers. There's 730 or so servicers who service VA-guaranteed home loans. And there's hundreds and hundreds of pages of regulations, and 2 million loans that are being serviced. It was just too big of a change to put down at once.
So what we decided to do was to analyze the types of servicers and to phase it in based on how difficult we thought the servicers were going to be, based on how many loans that they have and how many different systems that they need to change to interact with our new regs, and to interact with VALERI.
So what we did is we broke it into nine individual segments that are going to transition basically in 1-month periods. So we started February 20th of this year and we're very excited that the largest VA home loan servicer, Wells Fargo, agreed to go on first. So we got our largest amount of VA-guaranteed loans transitioned to VALERI with a very willing and very helpful servicer who worked with us for months beforehand.
This kind of goes back to our public-private partnership and we absolutely tried to partner with the servicers beforehand to make sure this was a success. Since it was the first transition, it had the most questions, and we certainly wanted to make sure that it went over well. Since then we've transitioned the second largest servicer of VA home loans, Countrywide.
So now I'd like to say we have 45 percent of our loans transitioned into VALERI, which is a great chunk. We're almost halfway there. But we have only two servicers transitioned and we have 720 or 730 more to go. So there's certainly a big challenge ahead in transitioning.
To make the transition successful, we've implemented a comprehensive training program for both our technicians and for the servicers' technicians. And this was a big help towards getting the transition successfully done in the past and certainly in the future.
IBM was a big help in creating this, a nationally based comprehensive training. It's a standard set of training internally for VA technicians that they take in each of the segments as we go live with the servicers. We have a certain proportion of our staff nationwide that join webinar and they join a conference call at the same time. So every single staff member gets the same exact training prior to going live. The training was developed over the course of the past year, again, with a lot of help from IBM.
And it's beautiful. It's the best web-based training I've ever seen with a lot of computer-based training modules that are given over the Internet for the staff to use and will be re-creatable. Anyone that gets hired in VA over the next several years can take the same exact training when they come onboard. So before they start using VALERI they'll all have the same tools and the same understanding under their belt, so they can start helping veterans keep their homes.
The same training with a different focus is available for servicers. So again, it's nationally based, it's re-creatable. It's delivered through webinars and through teleconferences. So all of the staff and all of the servicers can get the same training. And outside of the training that we deliver, the computer-based training modules are still available so that new staff at servicers, and staff that haven't yet been trained but are going to grow organically with the program as more people come onboard, they'll receive the same training with the same benefits and the same understanding of what it is that we want.
It's all geared around the initial goal of the program, which is standardization. We want to make sure everyone has the same tools and the same understanding at their disposal to meet the needs of the veterans who have VA-guaranteed loans.
Ms. Paz-Barrientos: Now, transitioning to over 700 servicers seems like a huge effort. So from an implementation governance standpoint, can you tell us more about VA's dedicated team assigned to manage this implementation effort, track its progress, and ensure its success? And could you tell us more about your efforts in this area?
Mr. Frueh: Well, from the beginning we've identified a very key group of senior leadership in the VA field organization, which are the regional loan centers that actually administer the benefit to veterans as opposed to us in central office that create the policies and procedures for them. And we created what we call the core group or like a SWAT team. And they came in and they were very instrumental over the past several years in designing the key elements of the redesign as well as in delivering the training to the staff and to the servicer community, and making sure that all of our nine key objectives from the initial redesign were implemented in a way that best benefit veterans and best benefit VA, as well as keeping in mind the benefit to the industry.
So that core group of senior leadership is key for oversight and for design. We also had a very strong project management office in our central office to maintain oversight of requirements as they came in, changes to requirements as they've come over the past and certainly as they will come in the future as we implement. And to make sure that the system development life cycle is followed as best as we could to make sure that we have control over the process, so there's no surprises as we went along.
Right now we currently have the stakeholder involvement that we had from the beginning, from the servicers, from the lenders, and from various constituents within VA. But the key thing is the involvement of the servicers and the lenders. And as I mentioned before, we have a position in central office that we staff with a person whose sole duty is to be a liaison with the servicing community to make sure that we're listening to their needs, they are listening to our needs, and certainly following our requirements, and that there's a means or an avenue of communication going forward.
We created a help desk. The help desk is staffed twelve hours a day, five days a week for VA staff and servicers to call with questions on the new environment, certainly to resolve issues and to forward issues with the system to the system developers.
We've got a lot of contractor support to help us with issue log, with making sure that we can track all of the enhancements that we want to put in our program, ideas for making it even better for veterans and for the government workers going forward.
And we just started a brand new what I call a SWAT team, which is a group of four very key people from our field offices, managed by one person in central office, to look ahead. They're not going to deal with the fires that come up in day-to-day operations and they're not dealing with crises. They're looking ahead to see what do we need to anticipate in terms of what's going on with the mortgage market now, what elements have we not looked at with VALERI and with our system redesign that we should start thinking about now and start developing an answer for, so at the time they become relevant, we'll be ready to take it on.
Mr. Morales: So Mike, this obviously is a significant effort, right? I mean you started by describing this, I believe you said 304-page regulation package. You talk about 700 servicers, you talk about, you know, nationwide training.
Could you tell us a little bit more about some of the challenges of going through this level of change? And what are some of the key lessons that you feel you've learned? And what might you share with someone in another Federal agency about change?
Mr. Frueh: You know, I've been with VA for six years now. And virtually every single day of my career at VA has been dealing with this redesign and with this project. And it's been a wonderful process to be involved in, to see how something grows from an idea and gets implemented. And one of the key lessons I've seen from this is that setting a vision early on is important and not losing sight of that vision.
You really need to have a focus for where you're going, so A, when you get there you know that you've arrived and B, you've got a benchmark to compare your level of success with.
And we were very good at the beginning in identifying all of the stakeholders that we needed to get buy-in so that as we achieve different milestones throughout the development of this project those people that were most germane, like finance, like general counsel, like the inspector general, the servicers in the industry, the field staff that are using the system, and basically administering this benefit that we're changing for veterans, they are there to know, I had some say in this. You know, this is something that I did. I believe in it and I am going to make sure it works.
Because there's always people that come and go throughout an organization. There's people retiring, there's different people that, you know -- for example, Finance. Finance had a key stake in this because we're making large payments to servicers based on claims that they file. And the people that we dealt with in Finance were, you know, several people that were in the project. But the finance department is enormous. So if you get someone in Finance that buys into this and they believe in the program and they have a stake in it and they say I helped design it and I want to see that succeed, they're going to be a champion for you in their organization.
So when other people come to them with a comment and say why did they do this, this doesn't make sense, they can say, oh, this is the benefit that we're getting and this is why we really need to do everything we can to help them succeed.
Because in a project that takes five or six years like this, the clear vision at the beginning has really helped us make sure that everyone that bought into that vision is championing that in their group. So the growth of that vision has really grown far beyond the key people that were involved in the beginning.
Mr. Morales: So it's really about painting the picture of what the future state is going to be for folks and allowing them time to participate in sort of designing that future for the organization?
Mr. Frueh: Oh, absolutely. And when you get people like the industry involved and they say, hey, we've got this commercial best practice and this is what we'd like to see. And I think in government there's this vision that commercial practices are these amazing, you know, Holy Grail of how things should be done. So you get people to paint a lot of pictures. And people that have been doing something the same way for a long time take a step back and say, wow, that's a really nice picture. Once they buy into the picture it's really nice because they can say why do we things the way we do? What's the benefit other than the fact that we have an overarching mission of helping veterans?
So we're not necessarily driven a 100 percent like the corporate commercial vision of what the future should be. But a lot of what we do really is in alignment with what they have. So you can see the alignment between the commercial ventures' vision of the future and what our benefit program vision is. You can see that there's definitely a lot more connections than disconnections.
Mr. Morales: Absolutely. What does the future hold for the VA's Loan Guaranty program? We will ask Mike Frueh, assistant director of Loan Guaranty Services at the U.S. Department of Veterans Affairs to share with us when the conversation about management continues on The Business of Government Hour.
Mr. Morales: Welcome back to the final segment of The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Mike Frueh, assistant director, Loan Guaranty Services at the U.S. Department of Veterans Affairs. Also joining us in our conversation from IBM is Maria Paz-Barrientos.
Mike, as a follow-up from our last segment, current estimates forecast that the current foreclosure crisis is threatening, you know, about a million homeowners here in the U.S. Can you talk a little bit more about how veterans are faring in today's housing environment and some of the steps that VA is taking to specifically help those folks?
Mr. Frueh: Sure. In the current mortgage industry about the only good news that's coming out lately is that the bad news isn't necessarily as bad as everyone thinks. It seems to be bleak across the board, from small servicing shops to large servicing shops, from one side of the country to the other. The one thing that we are very happy about at VA is that the VA Home Loan Guaranty Program, that the average loan taken out by a veteran has not experienced any up-tick in delinquencies in the last several years.
You know, we're currently at about 3.5 to 4 percent delinquency and it's been that way for several years now. And even though the credit market has been getting worse for virtually every other loan program, from prime programs which are the very best programs in the commercial sector, to subprime which is the very worse -- and they're experiencing about 18 or 19 percent delinquency -- we've been very steady. And we've been very consistent and the volume of foreclosures are the volume of delinquencies that are coming across our work.
And part of that I think is a direct testament to the underwriting that we require to originate a VA-guaranteed loan. We've been very consistent in what we ask lenders to do to verify that a veteran borrower would be able to make payments in the future on the loan that they are taking. The other thing that we've done is we have a department that's been in the program for ages whose sole focus, and this is my department, is on keeping veterans in their homes if they experience a delinquency. And the focus of this is geared around interceding between the veteran borrower and their servicer when the veteran experiences a default.
So if a veteran gets a notice from their servicer that you're behind in your payment, you have certain avenues that you can take to resolve this delinquency. What the industry has seen and a lot of surveys and studies have found is that a lot of borrowers don't know that they really can save their loan. They just throw up their hands, and say, there's no possible way I'm going to keep my home. I know I've lost my job, I'm getting a new one. I'm three payments behind. There's no way to resolve that. I can't come up with that money. So they just don't respond to the servicer.
And what we found as basically a vested interested third party, as a veterans' advocate, we can contact the veteran and explain to them that there are avenues to save their house. And that we're there to help them contact their servicer and arrange ways to save their house which are through things like repayment plans, or loan modifications, or forbearance where if we explain to the servicer that the veteran has changed their circumstances and they do have a new job, or whatever episode of default occurred or whatever caused that episode of default has now ended, and that the veteran is going to be able to make payments in the future, we found that we're able to save a lot more homes.
In fact, last year -- we measure our performance based on foreclosure avoidance or homes that we've saved. And our foreclosure avoidance ratio was about 53 percent last year. Which means that in all the cases of defaults reported to VA we were able to intervene and help 53 percent of those veterans who were going to go to foreclosure. We helped them save their loan and now they're current. And we're very, very happy about that statistic because we worked very hard to save their loans.
There's other avenues that we can do to help. And I think the most severe, if we fully believe in the veteran's ability to make a payment and the servicer has given up on the veteran and says, you know, we've tried, and tried, and tried and we don't think there's a financially viable way to keep the veteran in their home, we can refund the loan from the servicer. And we'll take it on our books and we'll service that loan. And we'll work with the veteran to make sure that they can keep their house. And in those cases we have a 75 percent success rate, where after a year 75 percent of those loans which were absolutely guaranteed to go to foreclosure at the servicers, 75 percent are 100 percent current. So that means that our faith in that veteran borrower was well founded and that they are current with their loan and we experienced no loss on those loans.
Mr. Morales: Great. So Mike, transitioning to the future now, can you tell us a little bit more about what's next for the loan administration and VALERI program? What are some of the other major opportunities and challenges that you see facing the program over the next few years? And how do you think the program will evolve to meet some of these challenges?
Mr. Frueh: Well, I think, in keeping with our loan guarantee theme of standardizing processes, delegating authority to servicers and lenders, and automating everything that we can, we're seeing a big need for technology to oversee the entire process. Because once you delegate authority to a servicer, for example, in our program to intervene more quickly and to give them an arsenal of tools that they can use to help veterans keep their home, you need to make sure that they're doing their job in the way you want them to.
Because again, they are a commercial entity. They have a different focus than we do, as a benefit program. We're here to help veterans and to deliver a benefit for veterans which might not necessarily be a financially sound decision for a commercial entity.
So we need to always make sure that our focus of benefit is overlaid over the commercial entity's enterprise. And technology is a very key aspect of that. And one thing, I think, we're going to see that technology grow in and the oversight grow-in is on the production side. You know, there's always been a talk about an electronic mortgage where you can go in, I want to buy a house, talk to a realtor, go look at houses, find the house you want, find the price you want, negotiate the price with the seller. And then do all of the activity to purchase that house online or electronically.
And today that really hasn't taken off. It's been a very, very paper-based process. And that there has been talk about making that process electronic. And I think we're going to see a lot more of that happen in the future. And to manage that from a government oversight perspective we're going to have to be able to hold electronic documents. You know, for a loan administration and part of this redesign as a paperless environment, we already have the ability to store electronic documents and view them. And we're going to need that for the whole process of loan guarantee from beginning to end.
We've already automated the initial process of obtaining the certificate of eligibility. And I think our current stats are that about 70 to 75 percent of veteran borrowers are able to obtain their certificate of eligibility within a day electronically through their lender. Their lender goes to a VA website and the VA website has all the information that allows them to print a certificate of eligibility for that particular veteran.
That's going to be spread out to the actual veteran community over the next year where you can go in yourself, print your certificate of eligibility so when you go out looking for a home you'll actually have something to give the lender right away. And that should expedite the process.
We want that expedition in technology to apply for the process from beginning to end. And I think that's what we're going to see over the next couple of years as the process of underwriting has gotten smoother and the timelines for underwriting has gone from several months of loan package preparation to the back office underwriter's desk at an originator's operations, back to the loan processor, and then eventually to the borrower, that 2-month process is now down to less than a month. I think we're going to see that shrink to a much shorter process. And the government will be able to have oversight of that process and obtain the necessary documentation they need to succeed.
Mr. Morales: So Mike, what advice might you give to a person who perhaps is out there as to whether or not they should enter a career in public service? What would you tell them?
Mr. Frueh: I think what I like to talk about is, you know, how do you feel at the end of the day? Like when you put your head on the pillow at night do you feel like you've helped people throughout your day, if that's an important thing to you? Or do you feel like you've done something that makes you feel better as a person? When you start work I think everyone has an idea of what they want to do. You know, I think there's a lot to pass to get to where you want to go. But a lot of people have that general idea.
And I'd say look at where you want to go. You know, where did you think you would be five years ago, today, and are you where you thought you would be? And if you are not, what decisions would you make differently in the past? And what decisions can you make today to get to there? Our vision at VA of a workforce committed to supplying benefits to veterans is one that appeals to a certain type of person. And I think it appeals to a broad range of people. But that's not necessarily the vision that everyone has.
So if people examine what it is that is core about their personality and what their abilities are and do they want to challenge themselves in a certain direction that they haven't yet or have they challenged themselves in a direction that they didn't want to and they'd like to refocus, I'd say now is always a good time. You know, there's never a bad time to reexamine where you are and think about where do you want to be.
There's a lot of tools and there's a lot of opportunities in the U.S. Government, and in other types of jobs that can help you get to where you want to be. And VA was a perfect fit for me and I think it's been a wonderful fit for a lot of people there.
Mr. Morales: Well, that's wonderful advice. And certainly a wonderful story. Thank you. Unfortunately we have reached the end of our time. I want to thank you for fitting us into your busy schedule.
But more importantly, Maria and I would like to thank you for your dedicated service to our country, but more importantly for your dedicated service to our veterans.
Mr. Frueh: Well, thank you very much. I appreciate the time to come today to talk about VA. And I'd like to encourage the listeners today to visit our website. If you're interested in working for VA, if you have a VA-guaranteed home loan, and you're experiencing an episode of default and you'd like to contact someone at VA or if you're just interested in the program at all and what we do, please go to www.homeloans.va.gov and you can find anything you want about the program. And as I said, we've got staff around the nation that are willing to help.
Mr. Morales: Great, thank you.
This has been The Business of Government Hour, featuring a conversation with Mike Frueh, assistant director, Loan Guaranty Services at the U.S. Department of Veterans Affairs.
My co-host has been Maria Paz-Barrientos, partner in IBM's financial management practice.
As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who may not be able to hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.
For The Business of Government Hour, I'm Albert Morales. Thank you for listening.