August 4, 2011
San Francisco, CA
…introduction given by Dr. Jed Kolko, California Public Policy Institute…
Thank you, Dr. Kolko for that introduction.
And, thank you to the Commonwealth Club of California for hosting our discussion tonight on our nation’s economic recovery and the critical role housing plays in that journey.
Recently, I was struck by this Time magazine cover story that read — “High Anxiety — Banks and insurance firms are tottering beneath huge portfolios of bad real estate mortgages.”
But this cover story wasn’t recent.
It was from October 1990 — more than 20 years ago — and a reminder that we have weathered and overcome difficult cycles before.
I firmly believe we will overcome this cycle as well.
I believe this because I know our industry and my company, Bank of America, are committed to improving the way we do business to strengthen our financial system for the future.
We have learned many lessons during the recent crisis.
And, we’ve taken them to heart.
We’re committed to being a part of the solution.
And I want to share with you what Bank of America is doing to make sure that happens.
My comments will focus on those efforts and center around three key themes:
First, the economy will recover and Bank of America takes seriously our responsibility to support that recovery.
Second, consumers needs have changed and we have changed to meet those needs and drive solutions that promote transparency and fairness.
And, finally, Bank of America is leading a housing market transformation built on responsible lending and sustainable homeownership.
Role of Bank of America Helping to Drive Economic and Housing Recovery
Let’s start with the economy.
As you all know, the current economic picture remains mixed.
Though our economy is growing, it is doing so more slowly than we would like.
And, while the recession officially ended two years ago, the repercussions of the deepest downturn since the Great Depression are still being felt in our communities.
And we need only look at today’s market performance to know that volatility remains.
Many Americans have a sizeable portion of their wealth tied up in their home.
And from the peak of the cycle in late 2006, the recession has wiped out more than $6 trillion in housing wealth.
It has also led to a situation where one of every four homeowners has outstanding home debt more than the current value of their home.
And we know that those homeowners are concentrated in markets that experienced rapid increases in home prices.
That decline in wealth, coupled with sustained high unemployment, continues to impact consumer spending, the greater economy, and families struggling to stay in their homes.
Despite these adversities, I have observed and experienced through our customers … the resilience of Americans.
I’m often asked when will the housing market return to normal?
It won’t happen overnight.
By our analysis, it will take several more years to clear the excess supply in the market.
And that view is heavily dependent on the healing of the economy at large.
And, it’s a very localized story.
In a normal market, typical inventory runs at about 5 months of supply.
Currently, there is about 9 months of supply and 17 months of inventory if you include the backlog of foreclosures and seriously delinquent mortgages.
Within those supply numbers, there is a great deal of variability across states due to foreclosure practices.
For example, average foreclosure timelines in California are about 150 days compared to Florida, a state where foreclosures run through a court process, where the average timeline is 450 days.
But there is good news.
Delinquencies are declining.
And, as the economy continues to improve, housing demand will improve as well.
In terms of home prices, our view is consistent with most external assessments.
We expect a 3% decline in prices this year.
But, for perspective that’s compared to the 33% decline we’ve seen since the peak. Again, it’s a local story.
And, starting in the second half of next year we expect prices to increase about 1%.
Some markets like San Francisco and L.A. are already seeing price appreciation.
On the whole, we believe the worst has passed.
But it will take time for the housing market to fully rebound.
Changing to Meet Consumer Needs
In the midst of these ongoing economic challenges, our company has taken a hard look at how we can best fulfill our responsibilities to customers.
Through the crisis and recovery, we have seen our customer’s needs evolve and we are evolving with them.
We’ve looked hard at how best to help customers manage their finances and provide protections from unexpected hardship.
And we’ve taken action in response to what customers have told us they need.
We are making real progress and helping contribute to the recovery, and will continue to evolve.
First, we are lending actively and are committed to expanding credit.
In the midst of the crisis, Bank of America launched a 10-year goal to lend and invest $1.5 trillion for community development — which equals about $660 million in lending per day.
Since 2009, we’ve extended $1.7 trillion in credit to drive economic recovery — more than $800 billion of which was for home loans.
At the height of the housing bubble, the residential mortgage market in 2003 reached nearly $4 Trillion — this year we anticipate a market about a quarter of that size — or $1 Trillion.
Regardless of the size of housing market, Bank of America remains committed to providing customers with the loans they need and can afford.
We’ve stayed there with products for our customers. We stayed there for our jumbo loan clients — a critical product for customers in higher cost markets like here in San Francisco — by leveraging the strength of our balance sheet. We stayed there for our commercial customers with our warehouse lending products.
And we strive to continually innovate to serve our customers.
We have also strengthened our balance sheet significantly over the past several years.
For example, there has been discussion lately about whether banks have enough capital given the pending implications of Basel III capital requirements.
As a result of our balance sheet efforts, we maintained our Tier 1 common equity capital above 8% even in a quarter when we reported a loss due to work to get legacy asset issues behind us.
We have also repaid all TARP money.
I point this out because as we talk with customers and stakeholders around the country, it is clear that many believe banks still have TARP money. That is not the case.
Almost all banks, including Bank of America, paid back their TARP money in full and with interest.
We owe our thanks to the American taxpayer for helping the financial industry through a rough patch.
Thankfully, in return, the TARP bank program turned a profit for taxpayers.
The funds returned exceed the original $245 billion investment by $10 billion.
And, Treasury estimates that the total profit for the government will ultimately reach $20 billion.
Finally, we have worked to provide greater transparency and fairness to consumers.
To this end, we eliminated overdraft fees on debit card purchases.
Unlike many of our competitors, we voluntarily froze interest rates on existing credit card balances well in advance of the Card Act taking effect.
We also created industry-leading Clarity Commitments for most of our products, leading with mortgage and credit card.
These are simple, one-page summaries that spell out in plain English the terms and benefits of the product, so customers have the transparency they need to make informed choices and know exactly what their costs are at the time they originate their loan, and the potential costs in the future.
Housing Market Transformation Built on Responsible Lending and Sustainable Homeownership
It’s within the context of the bank’s larger efforts that I’d like to focus on how we are supporting the housing recovery.
We’ve restructured our home loans business around the core principle of responsible, sustainable homeownership.
To achieve this we are focusing our efforts on three key areas:
making credit available and helping customers make informed home purchase and refinance decisions;
providing assistance to help customers and communities impacted by the housing crisis; and
engaging in broader reform efforts to reshape the housing industry.
First, I want to discuss our commitment to making credit available and helping to create successful homeowners.
It’s important to recognize that the housing crisis has not weakened the hopes of Americans that they will someday own a home.
In fact, according to a recent New York Times poll, nearly 9 in 10 Americans say homeownership is still an important part of the American dream.
Our own data suggests that home buyers are more realistic about their responsibility to prepare for the purchase of a home, save for a down payment and the timeframe for doing so.
Our goal is to support that dream.
We’ve made changes to strengthen our Home Loans business and lead the industry in a commitment to sustainable homeownership.
In practical terms that means ensuring customers fully understand the terms of their loan.
It means making sure they can afford their loan over the long term.
And it means providing them with personalized support to help them deal with any challenges they may face over the entire length of the loan.
We’ve created the Clarity Commitment — a simple, one-page summary of mortgage terms and closing costs.
To date, nearly two million customers have received this statement with their loan documents.
Feedback has been tremendous, and our Clarity Commitment is being seen as a model for broader industry programs.
We’ve launched an online, interactive Home Loan Guide.
It provides customers with a personalized simulation of the home loan process so they can better understand their options before they get a loan.
We’ve also made changes in line with Bank of America’s overall customer-driven strategy to do more business with the consumers and institutions we serve.
We exited businesses like lender-placed insurance and wholesale lending — to focus our resources on direct to consumer lending.
This will allow us to meet more of our existing customers needs, and our desire is to provide a superior experience for them.
Next … providing solutions to distressed homeowners has been a priority.
As an industry, we’ve completed about 4 million mortgage modifications since 2008 to help customers remain in their homes.
At Bank of America alone we’ve completed 910,000 — nearly one in four.
As the housing crisis unfolded, we acquired Countrywide in 2008, providing the support millions of Countrywide customers needed.
With that acquisition, our servicing portfolio tripled to nearly 14 million loans — the largest in the industry.
Not only did the Countrywide acquisition increase the size of our mortgage business, it significantly negatively impacted the nature and quality of our loan portfolio.
Bank of America would have been a role model in the mortgage industry, given the decisions we made during the housing boom.
In the years leading up to the crisis, Bank of America did not originate sub-prime mortgages, nor offer exotic loan products.
Today, the vast majority of our customers are current, and of the 1.2 million customers in our portfolio who are 60 days delinquent — 81% are Countrywide loans.
In order to provide customers the support they need, the industry has undertaken a massive retooling of operations to help delinquent customers … no one more than Bank of America.
Think about this — when we acquired Countrywide we had less than 5,000 people dedicated to assisting distressed borrowers — we now have about 35,000.
The entire servicing model has also now been redesigned to become more relationship focused.
Servicing in the past was very transaction based.
If you needed to make a payment, you call payments…have trouble with escrow, call escrow.
This model worked for more than 30 years but was not equipped to handle the spike in customers needing help to make their mortgage more affordable, given declines in customer’s income due to the economic downturn.
We have changed that model from one based on transaction to one based on relationship.
Similar to the mortgage originations model, now every customer has a case manager to help them understand their options and choose the one that is right for them and their circumstances.
To supplement our telephone capabilities, we’ve invested in aggressive outreach efforts, providing customers the opportunity to meet face- to-face with our loan specialists.
We’re expanding our network of customer assistance centers to more than 40, so that we can serve more of our customers in the communities where they live.
And, we’re on track to hold nearly 400 outreach events this year in hard hit communities around the country including another just two weeks from today in South San Francisco.
You’re all invited to attend that event if you would like a deeper understanding of our operations.
The resources we’ve invested toward this issue both at Bank of America and industry-wide are substantial. But there is a stark, and unfortunate, reality in these economic times … many people hardest hit by unemployment, underemployment and other circumstances will be unable to keep their homes.
As Michael Barr, former assistant Treasury secretary put it, “most foreclosures are now caused by economic factors like unemployment rather than subprime loans, and I don’t think any housing specific answer is likely to make a significant difference right now. The larger macro issues are more important.”
We recognize this.
And while we’re doing everything we can for customers who can reasonably afford payments on their mortgages over the long term, we firmly believe we are at a point where economic recovery depends, in part, on servicers moving forward with resolutions — including foreclosures — for people who cannot afford any reasonable level of mortgage payment on their homes.
Finally, we’re engaged in broader reform efforts to improve the overall housing market.
One of the keys to this is improving credit quality.
We’ve made a lot of changes with this goal in mind.
If you take Bank of America as an example, we have significantly improved credit quality.
New loans are very successfully performing within our standards and have been for the last two years.
For example, of the more than 17,000 jumbo loans — or loans over $400,000 — we’ve provided since 2009 — less than 50 have ever become 90 days delinquent.
As the housing reform debate continues, it’s important to consider the steps already taken by lenders.
Like the changes many banks have made, reforms need to focus on long-term solutions and finding a better balance to ensure that creditworthy borrowers can still access credit and the dream of owning a home.
Significant reforms and regulatory change are on the horizon …from the future of the Government Sponsored Enterprises, like Fannie Mae and Freddie Mac to Basel III capital rules and national servicing standards. Our priority throughout all this change is a simple one: to ensure that credit remains available for responsible, creditworthy borrowers.
We must provide long-term market stability, encourage the return of private capital to the market, and reduce any systemic risk to the American taxpayer.
One issue of particular importance right now is the debate around risk retention requirements.
The desire to minimize risk through “skin in the game” and other requirements is obviously well-intentioned. But it’s very important to keep in mind the possible unintended consequences that could come with it, including a disproportionate impact of changes on low- and moderate-income borrowers.
Given the tighter underwriting guidelines and enhanced controls put in place in the wake of the financial crisis, current origination already achieves the high credit quality controls that risk retention is designed to promote.
Reform is intended and should maintain those standards across the industry — an industry that has changed and will continue to evolve.
In conclusion, the state of financial services and housing in particular is not the gloomy one of the Time cover story headline I shared with you at the beginning … but it is still volatile and uncertain, as evidenced by today’s market performance.
While we still have a journey ahead, progress is evident as we have helped 910,000 distressed homeowners with a modification, promoted responsible lending by making more than $800 billion in home loans available, and provided greater transparency to consumers, through more than 2 million clarity commitments.
I’ve spent the past three years listening to customers who just bought a home, or who are trying to keep a home, or who have been overwhelmed by loss of jobs or income that makes it impossible for them to stay in their home. For me, and the men and women I work with each day, these issues are not abstract.
They are deeply personal.
We understand the emotional connection of Americans to their home. And we recognize the tragedy of this recession underlying the numbers and the data is the personal loss that people and communities have experienced.
Restoring some of that loss, increasing our commitment to our customers, and helping more customers experience the dream of owning a home they can afford — is what we’re committed to doing.
And it is what we will continue to champion.
Customers will continue to trust — appropriately so — the Bank of America brand.
No one should question the commitment of our associates to help our customers — and you shouldn’t question the efforts of homeowners to be resilient and find a path through their loss or reduction in job income.
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