Farewell Countrywide: How The Bank of America Merger Will Keep Wells Fargo As The Mortgage Origination Leader

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

WARNING!  Long commentary about the Bank of America/ Countrywide merger ahead:

Bank of America Press Release from July 1, 2008 (italicized) with my commentary:

CHARLOTTE, N.C., July 1 /PRNewswire/ — Bank of America Corporation today completed its purchase of Countrywide Financial Corp. to create the nation’s leading mortgage originator and servicer.

Bank of America will focus on responsible home lending, serving as a reliable source of mortgages for the American consumer. Bank of America also will assist new and existing customers with selecting the right product to meet their needs.

Bank of America fires a proactive shot with this statement to exempt its originators from proposed national registration and licensing.  I think they’ll get the exemption.  I predicted that the merger/rescue of CFC would be brokered by Ben Bernanke and that BAC would call in its chit, one day.  Expect BAC to lead the borrower suitability trend.  By setting itself up as the “leader” they can effectively eliminate competition by crying that the “innovative mortgage products” just aren’t suitable for Ma and Pa.  This paternalistic approach will work for the next 2-3 years and BAC will have an unfair competitive advantage by fiat….but, they’ll blow it.

“Mortgages are one of the three main cornerstone consumer financial products along with deposits and credit cards,” said Bank of America Chairman and Chief Executive Officer Kenneth D. Lewis. “This purchase significantly increases Bank of America’s market share in consumer real estate, and as our companies combine, we believe Bank of America will benefit from excellent systems and a broad distribution network that will offer more ways to meet our customers’ credit needs.”

BA management are bankers, not mortgage bankers.  It helps that mortgage bankers are a profession akin to drug dealers and pimps today.    Public perception will be that the mortgage bankers blew up the economy and that the bankers can save it.  Wells Fargo (a mortgage banking firm DISGUISED as a bank) will quietly steal MORE market share in the retail and wholesale mortgage origination market.

As previously announced in April, Bank of America plans to offer the following types of first-lien mortgages: conforming loans underwritten to standard guidelines of government-sponsored enterprises and the government, including FHA and VA loans and other loans designed for low-and moderate- income borrowers; non-conforming loans with terms expected to produce no greater risk of default than conforming loans; interest-only fixed-rate and adjustable-rate mortgages (ARMs) that are subject to a 10-year minimum interest-only period, which lessens the possibility of short-term payment shock, and fixed-period ARMs that provide borrowers low initial rates with the security of fixed payments, subject to protections against steep increases in payment amounts.

Good bank!  Lay off all of the credit risk on the GSEs.  Payment shock from ARMs aren’t the real reason for the defaults.  Abuse of stated income products are.

Bank of America reiterated it will continue its long-established policy of not originating subprime mortgages. As announced previously, Bank of America will discontinue certain nontraditional mortgages – including option-ARM loans. It also will significantly curtail some other nontraditional mortgages, such as certain low-documentation loans and will implement enhanced borrower protections over time as part of the transition process.

Enhanced borrower protections?  Holy Big Brother Batman!   How about just calling it what it is?  BAC doesn’t want to offer ARM products because it protects the BANK, not the borrower.

Countrywide’s existing customers eventually will gain access to a broad set of consumer financial products such as credit cards and deposit services.

Traditional mortgage customers now have more access to high interest unsecured debt.  BA unit, MBNA was the largest issuer of credit cards in the nation.  Laying off the credit risk to Wall Street will be the next move.  The investment bankers will be flying to Charlotte faster than teenagers scramble at a raided keg party.  This market will meltdown from defaults but the public outrage will be minimal; foreclosed homes are bigger news than increased personal bankruptcy filings.

“Now we begin to combine the two companies and prepare to introduce our new name and way of operating,” said Barbara Desoer, president of the combined mortgage, home equity and insurance businesses. “We have the opportunity to renew America’s confidence in homeownership with unmatched capabilities to deliver the products homebuyers need and understand and give customers a simple process and service experience they’ve come to expect.”

Spin.  Sounds like a baseball interview but it works.

The company reiterated its combined national consumer mortgage division will be based in Calabasas, Calif. The combined company will begin originating mortgage and home equity products under the Bank of America brand by mid-2009.

The company anticipates substantial cost savings from combining the two companies. Cost reductions will come from a range of sources, including the elimination of positions announced last week, and the reduction of overlapping technology, vendor and marketing expenses. In addition, the company is expected to benefit by leveraging its broad product set to deepen relationships with existing Countrywide customers.

Goodbye wholesale and correspondent.  Here is some interesting conjecture out of the CFC employees; wholesale loans are outperforming retail loans for 2008.  This means that the brokers are doing a better job than the CFC retail originators, this year, in quantity and quality of loan production.  That won’t matter because this is a servicing customer grab.  Expect a HUGE emphasis on “loan retention” rather than origination.  What this means brokers, is that you won’t want to order a payoff for a CFC or BAC loan until you’ve ordered loan documents.

Here’s some advice for BAC; invest in that customer retention department.  Strongly encourage every homeowner to use the Bank of America Preferred Real Estate Broker Network and to encourage customer’s REALTORS to become BAC qualified.

Side note, from that website:  “The Bank of America Preferred Real Estate Broker Network^® offers enlightenment and a place of sanctuary for confused seekers of real estate.”

Under the terms of the agreement, shareholders of Countrywide received .1822 of a share of Bank of America stock in exchange for each share of Countrywide.

As previously announced in April, Bank of America will pursue a new goal to lend and invest $1.5 trillion for community development over the next 10 years beginning in 2009. The goal will focus on affordable housing, economic development and consumer and small business lending and replace existing community development goals of both companies.

Expect this to be an effort at small builders for captured mortgage loans via GSE conduits.  If BA can lend money to an entrepreneur who targets affordable housing, BA can protect its investment with the takeout loans provided by USDA, FHA, and VA.  The risk to the bank?  Selecting the right developers to back.  Watch them integrate SBA loans into the equation (for those developers)  to lay off more credit risk to the government.

Bank of America also previously announced a $35 million neighborhood preservation and foreclosure prevention package by both companies focusing on grants and low-cost loans to help local and national nonprofit organizations engaged in foreclosure prevention, and to purchase vacant single-family homes for neighborhood preservation. The combined company will modify or workout about $40 billion in troubled mortgage loans in the next two years and these efforts will keep an estimated 265,000 customers in their homes. The combined loss mitigation staffs will be maintained at the level of more than 3,900 for at least one year.

Bank of America will aggressively try to keep “bubble borrowers” in homes.  Expect deals to be cut to borrowers who are heavily “underwater” so that they don’t default.  The irony will be that while the bank won’t lend over 80% on a mid-rise condo for a smaller new loan, they’ll extend favorable financing to an existing borrower on a loan that exceeds market value by 20%.  It’s loan sharking 101 ( read the comments) and it VERY effective.

Bank of America is one of the world’s largest financial institutions, serving individual consumers, small and middle market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk-management products and services. The company provides unmatched convenience in the United States, serving more than 59 million consumer and small business relationships with more than 6,100 retail banking offices, nearly 18,500 ATMs and award-winning online banking with nearly 25 million active users. Bank of America is the No. 1 overall Small Business Administration (SBA) lender in the United States and the No. 1 SBA lender to minority-owned small businesses. The company serves clients in more than 150 countries and has relationships with 99 percent of the U.S. Fortune 500 companies and 83 percent of the Fortune Global 500. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange.

Here’s the deal:

1- BAC bought CFC for its customer base.  They’ll cherry-pick the best borrowers and try to make long-term customers out of them by cross-selling them financial products.  Expect BAC to focus its efforts on Mid-Western households (CFC strength, BAC weakness).  They’ll have little to no interest in “bubble borrowers” on the coasts; those people will be in financial ruin for ten years.

2- Wholesale mortgage banking (dealing with brokers) will be gone by mid-2009 or dramatically different.  Mortgage brokers who want to work with BAC will be well-capitalized firms willing to indemnify BAC against borrower payment default for the first six months so that BAC can pair off the credit risk it assumes when it makes a loan. (Mark my words, the CFC brokerage agreements will be defunct and new 2009 BAC brokerage agreements will have this provision, with a minimum net worth of $500,000 for brokerages).

3- The “affordable housing” mandate will be government-backed, ridiculously hard to get, and wholly structured as a loss leader for PR spin.  BAC always has and always will want to focus on consumers to whom they can sell a suite of financial products.

What would I be doing if I were a wholesale lending employee in California or Florida? I’d be polishing up my resume and thinking about buying a stagecoach.  Wells Fargo will quietly kick everybody’s ass, in this space, next year.

What would I be doing if I were a mortgage broker? Learn guvvies quickly…OR…join Wells Fargo if you like commissioned outside sales…OR…join the BAC customer retention department if you like to sit in the office.

What would I be doing if I were a REALTOR? Think about trading your NAR card for a BAC one.  If they do this right, they’ll control the real estate transaction before you ever see it.