Bank of America and the middle-man hedge

We often need to be reminded that we are officially in a recovery and have been for awhile. Operating in the mortgage space is a significant challenge and much criticism is directed at the big four in particular. The banks are often charged with exhibiting endemic incompetence in the goings-on of daily business. The banks themselves admit they need work in many areas, but say they are doing the best they can with what they have. And recent numbers suggest more uneven economic trending. Homebuilder confidence this week, etched up slightly, while architect billings are again on the down slide. Housing starts and mortgage applications are also plunging. Certainly the “jaw-tooth” recovery predictions are coming to fruition. But where are the indicators of growth? And at what point will the recovery stop looking like a recession? So, in looking for clear goals for the recovery, I came across an interesting strategy utilized by Bank of America in this unprecedented time of trouble. I call it the “middle-man hedge.” We are constantly reminded that it is, in fact, a recovery. This despite an unprecedented glut in housing, a shadow inventory worth at least 2.5 million properties and counting. And though unemployment remains at the highest level since World War II, Bank of America still expects gross domestic product growth of 2%, according to CEO Brian Moynihan, who gave forward-looking statements yesterday at BofA’s Banking and Financial Services Conference. I bring up that keynote address by Moynihan for a good reason. Speaking of the recent troubles with mortgage-backed securities, investors hiring a handful of attorneys to put together cases concerning the representations and warranties of those structured-finance products, Moynihan indicated he was willing to work toward a solution. This, even though, “the issue is with us for the next couple of years.” Really? Moynihan believes it will take Bank of America only two years to get through its part of the 2.5 million properties in the shadow inventory. But when it comes to reaching a consensus with investors? Not so fast. Talcott Franklin, one such reps and warranties attorney, tells me that banks (without specifically naming BofA) have yet to even respond to legal requests and lawsuits are looking more and more likely. “You talk to anyone on the investor side about trying to talk to these banks to come to a resolution, and they’re all saying the same thing,” he tells me in an exclusive interview in our December issue of HousingWire. “They say the banks aren’t interested in a settlement,” Franklin said. So, on the one hand, you get the impression Bank of America is prioritizing the need to work with borrowers at risk of imminent default. But are they? Yesterday, another BofA executive gave an important and telling speech. Barbara Desoer, president of Bank of America Home Loans, explained to the Senate Banking Committee that three-fourths of the company’s mortgage portfolio is securitized. Fannie Mae and Freddie Mac hold 60% of these loans, and considering the mortgages are tied up in the secondary market, BofA is constrained with its abilities to help borrowers. “Many investors limit Bank of America’s discretion to take certain actions,” Desoer said. “When working with delinquent customers, we aim to achieve an outcome that meets customer and investor interests, consistent with whatever contractual obligations we have to the investor.” It’s a remarkable balance for a bank navigating the uncharted waters of this recession/recovery. And the truth of the matter is, Bank of America must look after itself first and foremost. It’s the presentation of putting others first that is a particularly clever hedge for the middle man. Jacob Gaffney is the editor of HousingWire. Write to him.