To the naked eye, it looks as if Bank of America is shrinking its Home Loans division. In mid-September, rumors emerged that its retreat from warehouse lending is imminent, and perhaps absolute, as part of a multiphased austerity program laser focused on mortgage lending.
That's just the rumor. The fact is that the Bank of America drumbeat away from mortgage has been steady for the last year, ever since its October 2010 split with wholesale lending.
This summer, an Aug. 31 Bank of America corporate memo confirmed rumors that the country's largest mortgage banking entity "has made the decision to exit the correspondent lending division."
The announcement was released neither proactively nor confessed under torture but forced by the rapid spread of news among correspondent lenders. It included a warning that in the absence of a "suitable deal," the correspondent division is to be shut down in the near term.
Exiting correspondent lending, according to its statement, is "consistent with other decisions in the home loans business-our exit from the wholesale lending and reverse mortgage businesses" and "...strengthening our focus on serving the needs of the bank's 58 million households and supporting growth across the franchise."
While this news excited industry tweeters, bloggers and other self-anointed soothsayers, their Chicken Little responses missed the mark for a simple reason: They lacked context.
In other words, the week before Labor Day few remembered, and fewer still connected, the speech that Brian Moynihan delivered to the National Association of Attorneys General Presidential Initiative on April 12, 2011 in Charlotte, N.C.
His address was dubbed "A Shared Vision for Retail Banking in America," and even though there's no way of knowing for certain the Moynihan/attorneys general dynamic in April, one might assume it was already on tenterhooks. Regardless, here's part of what the CEO of Bank of America said to the attorneys general that day:
"Depending on the size and depth of the relationship they want with us, customers have the clarity, choice and control over costs and benefits of doing business Bank of America.
"These products charge fees, but fees that are clear, fair and are avoidable if other value is exchanged with the customer through balances...the primary relationship...or fees by transactions. These products are well received by customers and customer advocates alike."
Remember that last part because it provides context for the next handful of points.
To the casual observer, it might look as if Bank of America has been in a slow train wreck since its, let's just say "externally motivated," decision to acquire Countrywide nearly four years ago in early 2008.
Nothing has gone particularly well for them since, but if you look closer here you'll see that the train wreck could actually be a well orchestrated, probably publicly backed, double back flip.
It doesn't take superhuman powers of imagination to see how its current "capitulations" to economic events will position Bank of America with even greater industry dominance, while the small players wither for lack of access to liquidity.
Moynihan wrote in a statement to the entire Bank of America organization in September when its stock price was in a freefall:
"We are aggressively taking action to put the legacy mortgage issues behind the company-even at great short-term cost-and to help get the U.S. economy on a stronger footing."
Here's what independent mortgage bankers need to read between the lines:
Bank of America is a diversified financial institution whose fundamental business is sound and promises to do well in the future.
However, it has determined that the best way to return its mortgage banking operation to long-term viability, risk minimization, profitability and popularity is to contract it long enough to:
• Settle its (sizeable) scores with investors and regulators.
• Benefit from a federal program to reduce foreclosures and oversupply.
• Winnow out the independent mortgage banker model.
• Create banking options that lure 58 million households to get their mortgage loan where they make deposits, hold investment accounts and can centrally manage multiple kinds of payments.
In other words, Bank of America Home Loans is doing just what any business would do if given the chance: it is hunkering down while the storm spends itself, biding its time calculating a strategic return to a more profitable, less risky mortgage lending and investment model.
The fourth point above is one that should give independent mortgage bankers serious pause. Ask yourself, "If 58 million households were already customers of my wide selection of products, could I come up with a way to get and grow their business for another similar product?"
Of course you could, especially if your mortgage lending experts got together with your DDA executives and your investment division to create a mortgage loan that not only keeps customers from wandering, but one that creates long-term profits to counter the "short-term cost" referenced above, and meets regulatory guidelines (regardless of how misguided).
According to media reports, Moynihan said at the recent Barclays financial service conference, "All the businesses we have make money except for mortgages," adding, that "we need to keep working on" the bank's mortgage operations.
It is redundant to point out that Bank of America is the single most powerful financial institution in the U.S., having attained its leadership in the mortgage economy strategically and with minimal exposure to the subprime sewer until it agreed to take on Countrywide's Aegean stables.
The more cogent and useful point is that regardless of the apparent Bank of America retreat from specific mortgage lending activities-which we may soon discover includes abandoning its servicer credentials-that is not really what is going on.
What is happening is that a very smart, inherently strategic and flawlessly eloquent Bank of America is planting an idea in the mind of the mortgage industry and in the mind of the public a la "inception."
That idea is that Bank of America is growing smaller so that it can be more profitable. Think again. Look around the context of their announcements. No, the truth is that Bank of America, and every other big bank mortgage lender, is working to bend the current environment so that there is far less competition and in fact far less choice when our market is again sound.
The problem with that, of course, is that a less competitive and diverse mortgage marketplace is by its nature unsound. Consumers lose the option of choice and small business dwindles.
Mary Kladde is the president of Titan Lenders Corp. in Denver.
