Bank of America is under heavy fire from every direction right now.  States are suing them over inappropriate foreclosure procedures and over fraudulent loans Countrywide made, which they inherited when the bought the now defunct lender.  They have mounting nonperforming assets and they are stepping up their foreclosure filings in an effort to finally rid themselves of the problem, and their stock price is in the toilet, so they are hearing an earful from wary institutional investors, and that really makes them unhappy.  Warren Buffet gave B of A CEO Brian Moynihan his vote of confidence last month when he loaned B of A, by virtue of a preferred stock purchase, $5 billion, but even that hasn’t helped the nation’s 2nd largest bank to get over any humps; (they were the nation’s largest until JPM Chase passed them this week).  I suppose you could make the argument that the $5B kept B of A solvent, but I’m not sure that sounds any better.

The problem with Moynihan and B of A, is that are not forward thinking.  They have not been looking for solutions, but rather looking for ways to hold onto what they thought they had.  But let’s face it; the horse is out of the barn and trying to hold the door closed after the fact is pointless, futile and a failed policy.  What the giant bank needs to do, is rather than think like a bank, think like a borrower.

So what exactly does that mean and how does it change anything?  Underwater and distressed borrowers want solutions just as badly as banks do.  Starting with the obvious, borrowers who bought high, want principle reduction.  Ethically the people who’ve played by the rules (one of today’s politicians favorite labels), say it would be unfair if banks bail out some people but not all, and critics say such favoritism will lead to more people throwing in the towel and we’ll face an  avalanche of distressed properties.  Newsflash: we already do.  Moreover, as I always tell my kids when they say, “But that’s not fair”, sorry guys, no one ever said life was fair.

Consider Las Vegas.  Property values are down as much as 50-75% in some areas.  There aren’t enough jobs and the future is pretty bleak.  Suppose rather than foreclose, I say.  Suppose lenders cut the principle on these loans to market value, reduced the rate to market rate and even stretched out the payments to 40 years?  Yes, this sounds like a loan mod; but suppose B of A did this, what would happen?  First the borrower stays in the home.  Second, the bank doesn’t get the property back and all the responsibilities that come along with managing Real Estate Owned (REO).  Third B of A takes a huge haircut on this asset today rather than deal kicking the can down the road (another popular politico saying).  Reality is reality however and whether they take back the property via foreclosure and write the loss off, or cut the loan amount and write off the loss, they are writing off the loss.

I recently had a client approach me about a short sale.  We met several times in advance to discuss options.  The 1st loan was held by Litton Financial, the 2nd was with B of A.  The property had lost about 35-40% of its value from the time the loans were taken out, so the B of A 2nd was completely wiped out in reality and the Litton loan about 15% above the market value of the property.  After considering all options, and facing a mom who needed care, while simultaneously experiencing a 30% drop in pay, the homeowner decided to stop making payments.  At my recommendation he started the process of modifying his loan, but we all knew good and well, that this was a stall tactic until we proceeded with the eventual short sale.  After a couple of months, and virtually no progress on the loan mod front, Litton sold the loan to Ocwen Loan Servicing.  Naturally my client presumed the worse – he’d have to start the loan mod process all over.  However, an incredible thing happened next. within two weeks of being notified that his loan had been sold, Ocwen made my client the following loan modification offer:  They knocked off $90,000 off the principle balance to bring the loan amount about equal to the real market value (think 100% financing); they offered to maintain the duration of 25 years left on his loan, so he wasn’t starting over; they allowed the unpaid arrearages to be paid at the end of the 25 years in a balloon payment and they reduced his 7% interest rate to 2%… 2%!  All this was done by the loan servicer’s initiation, not the borrower’s. The bank thought like a borrower, not a bank.

So what do you suppose happened to my short sale listing?  By George, the homeowner is going to keep his home; the lender now has a performing asset and Litton who sold the note to Ocwen at a substantial discount, took their haircut, wrote off the loss and now doesn’t have the distressed property to deal with.  Sadly Bank of America is left with a valueless 2nd and hasn’t agreed to settle with the owner, despite the owner’s offer to do so… so they get nothing today for their share holders but a hope and a prayer that someday the home will appreciate enough to make the nonperforming asset have value once again; not exactly forward thinking, they’re still thinking like a bank.