…our nation turns its lonely eyes to you, ooo wooo woo… (with apologies to Simon and Garfunkel)…
Let me begin by saying I have been a Bank of America customer since 1973, so what follows comes from the heart and is meant most sincerely…
This past week saw the nation’s largest lender, Bank of America, come under heavy selling pressure on Wall Street, threatening the banking giant’s ability to stay afloat. Aside from B of A’s stock holders, most everyone else cheered. You see, everyone hates Bank of America. That may sound like a pretty strong statement, but ask anyone you know and they’ll say, “I hate B of A”, or some such comment.
Analysts repeatedly point to B of A’s acquisition of Countrywide as the reason for all their problems. The truth is, B of A is being run by a bunch of knuckleheads. CEO Brian Moynihan is “knucklehead in charge” and I can’t believe he hasn’t been ousted. I guess it’s a testament to the survivability of America’s CEO’s that a guy who has done everything wrong, can still keep his job – how many of us could say the same?
So why do I feel that way, and what would I do if I were in charge of B of A?
The first thing I would do is address B of A’s public image problem, by saying, “We have really struggled to get through the myriad of issues at Countrywide. We never really wanted to purchase them in the first place and only did so because we were asked by then Treasury Secretary Henry Paulsen to step forward in the wake of the Lehman failure and do what was needed to help stabilize the fragile financial markets.”
Being contrite goes a long way in our country when it comes to the court of public opinion.
The second thing I would do is begin a process of refinancing every loan they have to today’s low market rates. Rather than wait for all my borrowers to either refinance on their own with another lender, or worse, go into default either strategically or out of necessity, I would proactively get their rates down. Some might argue that this “altruistic approach” is bad business. After all, why not keep those higher rates of returns of 6%+ interest?
I have been advocating the importance of freeing up the consumer’s wasted disposable income by allowing borrowers to refinance with or without equity. Consider that the higher interest rate loans remain on the bank’s books solely because many borrowers simply don’t have the equity in the face of 25-50% declines in home values. And because borrowers are unable to refinance, they are stuck paying 30% more in interest than someone buying today. So either their home won’t appraise for the required 80% loan to value that banks require for refinance or worse, the home owner is completely underwater, owing much more than their home is worth. Whatever the reason, just think of what the impact of all that “extra” money a lower rate loan would have on our economy if every underwater consumer were spending it on goods and services? We’re talking millions maybe even billions here. Furthermore, Bank of America benefits its share holders by retaining more loans, improving the performance of those loans since more affordable payments means fewer defaults and in creating a customer loyalty base far greater than any amount of marketing could ever do. That’s a win-win-win if ever there was one.
On the business side of making new loans, I would bring back Countrywide. I know what you’re thinking, but I can tell you that Countrywide was an amazing company. Yes, they got sloppy and made some bad loans – maybe a lot of bad loans – but from a consumer’s perspective as well as a real estate broker’s, their operation was smooth and their mortgage reps, some of the best. This is what B of A thought they were buying when they purchased Countrywide – a quality home lending infrastructure and platform. They were also buying talent. But what happens when you stop paying your talent, put shackles around their ankles and make the work environment torturous? The talent quits and goes elsewhere. This is what happened at B of A. They bought Countrywide and all their problems, then tried to force feed B of A corporate culture to a much more loose but effective Countywide staff. They cut their mortgage rep commissions and subsequently lost the talent the bought. This left Bank of America with dreck (that’s Yiddish for rubbish or another word for human excrement).
Unfortunately for Bank of America shareholders, Brian Moynihan’s solution is the old “restructure and layoff” approach; nothing innovative or creative, just another harmful and destructive pacification of Wall Street. What’s so ridiculous here is that if you tried to get a B of A short sale approved, or worse attempted to get a loan modification, you would have to be behind on your payments because the bank has so many problem loans, they don’t have enough personnel to handle the volume and therefore prioritize based on default status. Thus only those behind in payments can even start a dialog. (B of A claims to have a proactive foreclosure avoidance structure in place but it is insincere and ineffective). So not only is our nation’s largest bank not lending as they should due to tight and restrictive standards, and not effectively addressing high interest rate loans and their subsequent defaults, they are contributing to the nation’s sense of economic insecurity by adding to the unemployment rolls.
At times like this I feel like I’m in Kafka novel, a Jean-Paul Sartre play or Albert Camus essay, where absurdity is found in the repeated behavior of a futile exercise; one in which there is no hope for a differing outcome. And as lost and downtrodden as that may sound, I do take some solace in the words of the famous philosopher Forrest Gump: “Stupid is as stupid does.” Brian are you listening?