Bank of America Chief Executive Ken Lewis stopped by The Times this week to discuss with editors and reporters his company's approach to the housing crisis and its takeover of troubled mortgage lender Countrywide Financial Corp. Here are some highlights.
Acquiring Countrywide Financial
Jon Healey, L.A. Times: Talk about absorbing Countrywide. In the past month or so, I think three state attorneys general have indicated they want a piece of you. How's that going to affect the closure of this transaction and how does that ultimately cloud the future?
Ken Lewis: Well, the transaction has closed it closed on July 1 so that's done. And secondly, when we did our due diligence, we expected some states doing what they have done. And there's always another side to every story, and we to the extent that there are other sides we plan to tell them. It's interesting that as we look back at Countrywide, for most of their existence, they have been put on the positive pedestal, in the sense that they were providers of homeownership....
It seems as we look at it retrospectively, they kind of went into a shell and didn't say much about what they were doing right and didn't push back. And we couldn't say much because we didn't own them. But to the extent there are other stories other than just bad ones, we plan to tell the other side of the story well. And so, we don't think in every instance that Countrywide was the bad guy. And to the extent that is the case, you'll hear about that going forward .
Healey: What sorts of things is Countrywide being blamed for they didn't actually do? Because there's sort of a perception on the market that it was one of the companies in the lead on playing fast and loose with risk and trying to push buyers recklessly into loans they weren't qualified for and that they really didn't understand.
Lewis: Yeah, we would have to just look at every that's one of the things that we'll do in these lawsuits. We'll look at each individual case and determine whether we think that is the case or not. But encouragement to tell a lie doesn't justify telling a lie, and so we'll see with those instances. It's hard to talk about these things in a broad sense other than the way I just talked about them because you've got to get into the individual circumstances, look at the documentation and hear the other side from the person that's being accused of pushing somebody into a bad loan.
So we just don't think that every single case that it was Countrywide doing the bad stuff, so to speak.
Healey: When you go about integrating Countrywide into its new home, are there practices, strategies, business models that you feel simply have to change there, that it isn't consistent with the Bank of American approach?
Lewis: Yes, there are quite a few. First of all, we stopped making subprime loans in 2001. We didn't think it was good for our company ... so that has ceased and will continue to cease. We didn't do Alt-A [loans] and pick-a-payment loans as well, and those were discontinued. And so the products will be the much more the traditional sort of products there will be no [negative amortization] loans, for instance and so it will be different. We think because of our position in marketplace, that we can redefine the world's banking market into a much more conservative lending body .
Bad loans and the declining housing market
Healey: What's driving the sharp increase in defaults on home equity and the differential between home equity and credit cards?
Lewis: Well, I think there's probably a correlation, just the economy deteriorating like it has, and so if you're not playing your credit card loan, then you're probably at some point not paying your home equity loan. And the difference in the severity issue is the fact that the declines in home prices cause there to be no value for the lending institution to go after.
Healey: So is there a correlation between the propensity to default on a home equity loan and whether the house is under water?
Lewis: Yeah, because people are walking away from both now.
Peter Y. Hong, L.A. Times: Are auto loans following, or are people continuing with the car payment?
Lewis: There's slight deterioration, but nothing like home equity and credit cards.
E. Scott Reckard, L.A. Times: How do you collect on a home equity loan, assuming they want to stay in the house?
Lewis: Well, if they're walking, obviously you don't, and you take a 100% loss, which historically is really unusual. But it's mainly outreach and calling and seeing if they'll come in, seeing if you can restructure something. But it's a conversation.
Reckard: And regionally, are you seeing this across your regions? Is it worse in any particular region? Worse in the west and the south?
Lewis: Yeah.... Take the locations that have the big price declines and then you know, so it's California, Nevada, Arizona and Florida, with Florida and California being the ones that really matter because they're just so big.
Hong: Are you able to predict very well the repossession rates, so that, say, are you at a point now where there's sort of an update on, where you know enough about where the market's going and the behaviors so that ... you're fairly confident that you'll know what your REO inventory will be like, say, six months or a year out from now?
Lewis: We make projections but I can't tell you that we feel like we've got our hands around it at this point.... But an interesting fact which I've never heard this ratio before Countrywide is modifying two and half loans for every foreclosure....
Hong: Can you share at all what your projections are?
Lewis: We think nationwide, that we've got another 15% of housing declines, and we think it will probably go into at least the first quarter of next year.
Hong: And then the sort of hot spots? California, Nevada, Florida, Arizona?
Lewis: Add about 5%.
Hong: Add five, and the same timing?
Healey: You said that Countrywide was modifying two and half loans for every foreclosure. Is there something that regulators or the government could do state governments or national government could do that would enable you to do more modifications or do as many modifications as you want to do that you're not capable of doing now?
Lewis: I think the ability to do them if you can afford to take the discount on the loan and then sell it to [the U.S. Federal Housing Administration] is a positive step, and that's in the law, the [U.S. Sen. Christopher Dodd an Rep. Barney Frank] bill. So I think that's positive; how many banks will use that, I'm not sure because you do have to take a discount and take the loss on the loan, and the government gets the upside, not the lending institution....
We think, and so far the evidence would say that we will be able to help a majority of the homeowners who have an issue. There would be three types. One, homeowners who can afford to have to have some kind of repayment schedule, therefore a modification. Then another group that would be the ones who just walk away, and you don't have a snowball's chance in hell of doing well on that. And then finally, ones who have been affected by a life event, a loss of job or whatever, and there's not a lot we could do there. What we can do is make the process dignified.... We would give 60 days for a family to leave the home; if they could do it quicker, we'd give them a $2,000 incentive to do that .
Between the time we see the first payment, or default on the first payment or non-payment, on average there are 17 conversations with the customer before there's a foreclosure. And that's a Bank of America statistic.
Hong: So they are responding when you reach out.
Lewis: Well, they don't always. There's another statistic: that Countrywide made 10 million outbound calls... We're working much more with the community groups in lower-income areas to find ways to communicate. I suspect that the ones that won't return a phone call are the ones that are walk-aways, but I don't know that....
John Corrigan, L.A. Times: What could the federal government do that it's not doing to ease us out of this crisis?
Lewis: I must say that I think that the federal government can and should do certain things, and we would favor the Frank-Dodd bill. But I also think the end of this comes with more pain and time, and only so much can be done. We have to work through this naturally and painfully.
Healey: One of the arguments for the federal government to do something is because of how the pain metastasizes through the economy. And there are, what, six legislating days for Congress this year? The clock is running out, and it's becoming increasingly likely that Congress isn't going to do a thing. How bad does it get in terms of the whole economy from your vantage point? Is this a correction that stays within the housing industry and related industries, or do we go into an extended recession?
Lewis: Our view would be let's say that the Dodd-Frank bill would help, but that wouldn't change the circumstances such that you would have a whole different view of the economy. And so our view of this it feels like a recession for probably another 12 months would not be affected whether there's legislation or not.... So I guess the answer would be, no, we don't see it getting dire because of a lack of legislation.