The market slump that vaporized $6 trillion of homeowners’ equity, and left one in four owing more on their mortgage than their house was worth, will continue through 2012. But this too shall pass.
That was the somewhat reassuring message from Barbara Desoer, president of Bank of America’s home loans unit, at the Commonwealth Club of California Thursday. “We have weathered, and we have overcome, cycles like this before,” she said.
House prices are expected to fall another 3 percent during 2011, and won’t post anything more than “modest gains” before the end of 2012, she said.
Desoer, who oversees an operation that accounts for one of every five mortgages originating in the United States, and collects payments on 7 million home loans, delivered her grim prognosis with a reassuring bedside manner. And Desoer’s message received a generally friendly reception from an audience that included dozens of people wearing name badges emblazoned with the familiar Bank of America logo.
The calm atmosphere of the talk contrasted with the turmoil that has roiled housing markets in the Bay Area, and throughout California and the nation, since 2007. In the Bay Area, the median house price has plummeted 56 percent from July 2007 to March 2009, and remains 43 percent below its peak, according to DataQuick, a San Diego-based market data firm. Statewide during the second quarter of 2011, lenders issued 56,600 notices of default to homeowners who were late on mortgage payments, and executed foreclosures of 42,500 houses. In the second quarter of 2005, when house prices were booming, only about 600 foreclosures took place.
Desoer said factors that contributed to the recent and lingering crisis included Americans’ strong desire to become homeowners, the widespread view of houses as investments and the ready availability of government financing. The pressure to compete with cheap government loans led private lenders to ease up on underwriting reviews of prospective borrowers, she said: “Corners were cut.”
Desoer, who has a master’s degree in business administration from the Haas School of Business at UC Berkeley and has worked for Bank of America since 1977, got a ringside seat to the turmoil after the bank’s 2008 purchase of Countrywide Financial. That high profile, super-aggressive mortgage lender was one of the chief corner-cutters, with a website that in early 2007 promoted exotic “PayOption” adjustable rate mortgages and a loan program that “streamlines the paperwork and documentation normally required in the loan process.”
Such “streamlining” took a toll. Mortgages that Bank of America acquired as part of the Countrywide deal now account for 81 percent of the 1.2 million loans that the bank services and categorizes as “seriously delinquent,” Desoer said.
The Countrywide deal has also entangled the bank in legal disputes. In June, Bank of America agreed to pay $8.5 billion to settle claims by institutional investors who had purchased securities-backed by mortgages originated by Countrywide between 2004 and 2008. Bank of America is also engaged in settlement talks with state and federal regulators that might reduce loan balances of some borrowers, the Wall Street Journal reported Wednesday. Desoer did not comment on that report, and a bank spokesman could not be reached immediately for comment.
Desoer’s did have a terse response to a question about whether, with the benefit of hindsight, she would still have supported Bank of America’s purchase of Countrywide: “No.”
Desoer defended Bank of America’s record of modifying mortgages to ease the burdens of struggling homeowners, saying it had completed 910,000 permanent modifications. But Desoer also reaffirmed the bank’s position that it would only modify loans in cases where homeowners had sufficient resources to keep current under the new terms.
In answer to written questions from the audience, Desoer said she believed that, as the nation remodeled its housing finance system and redefined its overall goals, there was “a possibility” that the mortgage-interest deduction for homeowners might be scaled back. But Desoer declined to comment on the future of the property tax break enjoyed by long-term homeowners since Californians passed Proposition 13 in 1978. “Thanks for asking,” she said.
Speaking after a trading day in which the Dow Jones Industrial Average fell 5 percent and Bank of America’s share price fell 7 percent, Desoer volunteered that the bank remained financially strong and had repaid all of the loans it received under the controversial Troubled Asset Relief Program enacted in 2008, at the height of the financial crisis. “Nine of 10 Americans still believe in the dream of home ownership,” Desoer said, adding that the bank’s “goal is to support that dream.”