'Besieged' Mortgage Bankers Have Only Themselves to Blame

Bloomberg is running a compassionate profile of Barbara Desoer, the president of Bank of America's (BAC) home loan unit, and both the headline and the article call her "besieged." Now, I don't want to pick on Desoer, because the point I want to make isn't specifically about her. But the profile, and the BofA mortgage operations described in it, provide a good context for showing why it's not the bankers at the top, like Desoer, who deserve public sympathy.

Unlike the millions of homeowners struggling to keep their homes, top bankers have the power to transform the situation any time they choose. Witness their ability to halt foreclosures overnight.

What makes Desoer so "besieged"? The core problem appears to be the lousy lending practices at Countrywide, the huge mortgage company that BofA bought during the housing boom. Those practices led to an investigation by 11 attorneys general (and an $8.4 billion settlement with four of them) related to Countrywide's practice of misleading borrowers with the weakest credit into taking the riskiest loans. Investors in mortgage-backed securities now seeking to force BofA to buy back toxic securities have also focused on Countrywide's loans.

Going Up the Mortgage Food Chain

But perhaps the biggest task swamping Desoer is servicing the 14 million mortgages in BofA's portfolio -- and overseeing efforts to modify or foreclose on the 1.3 million that are delinquent. Although Bloomberg's profile doesn't specify the percentage of those loans traceable to Countrywide, it's surely a significant number.

Any feeling of being "besieged" due to Countrywide's lending is traceable to two sources: Angelo Mozillo, the Countrywide co-founder whose company made all those bad loans, and Ken Lewis, the BofA CEO who decided to buy Countrywide and its rotten portfolio. And this kind of beseigement -- being stuck with large portfolios of delinquent and defaulted loans and all the attendant consequences -- isn't unique to BofA.

As the housing bubble inflated, banks abandoned basic underwriting principles. For example, they loaned against a home's full value, instead of requiring the once-standard 20% down. They loaned to borrowers without asking for proof of income or assets (so-called stated income loans), never mind requiring a thorough credit-risk assessment. Indeed, the banks couldn't get enough of these loans. So the big players snapped up subprime lenders: Merrill Lynch (and thus ultimately BofA) bought Wilshire Credit and Home Loan Services; Bear Sterns (and thus ultimately JPMorgan Chase [JPM]) bought EMC Mortgage; Wells Fargo (WFC) bought Wachovia; and on and on.

Not Exactly Income "Verification"

I spoke with Peter Herbert, who was a loan officer during the housing boom's key years of 2002 through 2008. He told me about the "underwriting" involved in those stated-income loans. For example, he was told it was OK to go to salary.com, put in a potential borrower's job, location and experience, and take the income the website generated at the 75th percentile, meaning the income greater than three-quarters of other people with that job and experience. That happened even when the borrower could prove he had a lower income. It was OK, because Herbert could then sell that loan to investment banks willing to package it into a mortgage-backed security.

Should we all feel bad when the consequences of years of horrific, greed-driven lending decisions overwhelm the bankers who made them, or like Desoer, take jobs trying to manage the consequences of such loans other people made?

So what might Desoer and other top bankers do to feel a bit less besieged? Well, they could start by employing enough people to competently cope with the delinquency fallout from all the crazy loans they made. And yes, borrowers agreed to the loans -- although in the worst cases they signed documents with blanks in them and the mortgage broker filled in fraudulent information the borrower was unaware of. Nonetheless, prior to banks' ability, via securitization, to shift the risks of a bad mortgage from their balance sheet to others, none of these loans would have been made no matter how much a borrower begged. Witness, for example, the strict lending standards banks have reimposed since the mortgage meltdown got started.

Too Big to Fail, Too Small to Succeed

Desoer makes an effort to feel the homeowners' pain, starting off her weekends by listening to 20 of the roughly 500,000 calls from homeowners that BofA received that week, many of them "struggling to keep up with their loans." The profile isn't clear about who fields those calls. However, it does note that the loan workout staff numbers 18,000, while the number of delinquent loans is 1.3 million. That works out to 72 delinquent mortgages each, and even if they didn't field a single one of the 100,000 calls a day, that's still a huge amount of work.

Mortgage employees at BofA and elsewhere must be overloaded given the abundant stories of modification program failure, including banks' losing the documentation submitted by homeowners; given modification departments failing to communicate with foreclosure departments, so that homeowners complying with trial modifications get foreclosed anyway; given foreclosure departments flouting the rule of law by using robo-signed and otherwise false documents in foreclosure proceedings; and given that occasionally, homeowners still get wrongfully foreclosed on, such as when they bought the house with cash.

Desoer told Bloomberg that "her best quality is common sense." If that's true, I urge her to reexamine her staffing levels.

So, if top bankers don't deserve our sympathy for being 'besieged' by the bad loans they made, who does? How about the large chunk of homeowners struggling with their mortgages not because they fundamentally took on loans they shouldn't have, but because the recession has hurt their income?

Or how about the homeowners who, seeing the handwriting on the wall, tried to head off deeper trouble? Many of those folks call mortgage servicers and say, "I'm not in default yet, but if things don't change I will be. Can we do a modification?" And the bank says: "Sorry, we can't talk to you until you're three months in default." (Securitization agreements often require a default before modification.) And then once the homeowner is in default, instead of a modification, she gets foreclosed. How about some sympathy for those folks?