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BofA CEO Moynihan on Home Ownership

By    |   Monday, 17 Dec 2012 02:40 PM

Bank of America CEO Brian Moynihan spoke recently to an audience at the Brookings Institution on the future of home ownership. In a sense, it is truly the Bank of America because it was one of the largest recipients of government rescue funding during the 2008-09 financial crisis and because half of all Americans are customers. Moynihan took over as CEO in 2010 after the bank’s controversial acquisitions of Countrywide Financial ($8 billion bailout) and Merrill Lynch ($97 billion loan-loss backstop). Moynihan was introduced as a lawyer by trade, even though in a speech before the National Press Club, when asked about the robosigning of mortgage documents by leading banks, he denied that he was a lawyer, and even though he was the bank’s general counsel during the 2008-09 crisis.

On this occasion he was introduced as one who is so immersed in the details of complex products that he serves as his own risk manager.

Moynihan said that “Confidence never comes from knowing all the answers, but from being open to all the questions.” Questions he raised included the prospects for population growth and its impact on home ownership; lending standards and how they will ensure home ownership is accessible and sustainable for borrowers; the role of a strong affordable rental program; and the balance of the roles of the government and private sector.

He asserted that confidence in the housing system can be built by focusing on these questions, and he proclaimed that BofA is committed to being a part of this dialog, “having gotten through one of the toughest times in the company’s and the country’s housing history.”

Moynihan then proceeded to make some observations about the state of the housing recovery and other issues:

Housing recovery. There are signs of real, sustained recovery, and delinquencies are declining. In fact, 1.5 million homeowners have received modifications and other forms of relief from BofA, many under the national mortgage-servicing settlement. However, re-default rates are still high due to persistent high unemployment. Moreover, 40 percent of foreclosed properties are vacant. The bank is donating several thousand properties to needy families, including military families.

Policy resets based on challenging assumptions. Having a safe place to live does not necessarily require a mortgage, and home ownership should not be viewed as a vehicle for speculation, especially with capital guaranteed by the government. Work force mobility should also be considered, because it is necessary to respond to high unemployment and underwater home values, and a 30-year mortgage is not the best product to provide this. The nation’s growth rate has fallen below 3 percent, the probability of unemployment has increased and household formation has declined. Therefore, the purchase cycle can be expected to be longer. Even a responsible home purchase carries risk due to the effects of illness and unemployment.

Resets by lenders. It is said that banks should lend more, but the crisis occurred because they lent too much to unqualified borrowers. BofA had exited subprime lending, but got back into it through its acquisition of Countrywide. There can be no margin for error in underwriting. In addition, home ownership should not be pursued at all costs, and the down payment amount needs to be increased, although not necessarily to 20 percent.

Resets related to government. This discussion is dominated by the stated need to wind down Fannie Mae and Freddie Mac. The reasons for government involvement in housing finance are to expand liquidity and to make home ownership more accessible than it otherwise might be. Now the government dominates the mortgage finance market. Three policies need to be reset: 1) the Federal Housing Authority needs to be returned to serving low- and moderate-income buyers; 2) the role of the government-sponsored enterprises has to be reduced to facilitate the return of private capital; and 3) uncertainty regarding rules must be reduced in order to attract private capital. These changes can only come with improved home prices and guarantees of liquidity for certain investors, and they need to be made in a holistic way.

Moynihan concluded with a call for the country to move forward from past recriminations and put the lessons learned from the crisis to good use, re-examine old paradigms and reset the American Dream of home ownership.

An observer might question whether Moynihan has gone far enough in questioning discredited assumptions. Perhaps the reset process still has some consequences and recriminations left in it, and perhaps it is past time for regulators to question whether a CEO should be allowed to serve as his own risk manager. One could also question whether confidence should be enshrined as the highest value to guide whatever changes are forthcoming in financial regulation and housing policy.

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Robert-Feinberg
Bank of America CEO Brian Moynihan spoke recently to an audience at the Brookings Institution on the future of home ownership.
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Monday, 17 Dec 2012 02:40 PM
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