In a desperate move to survive, Bank of America is cutting 30,000 jobs to reduce costs and has ramped up its foreclosure processing to obtain capital tied up in delinquent mortgages.
Irvine Home Address … 30 CIENEGA Irvine, CA 92618
Resale Home Price …… $423,800
You've got me desperate.
I know You hear me,
Would You give me a sign
Reel me in before I've fallen in line.
You've put me on a path I don't understand
I'm standing on a ledge waving my hands
Fireflight — Desperate
Who is more desperate, the lenders who aren't getting repaid, or the debtors trying to hang on to their houses? The stories in the mainstream media focus on the sensational stories of loan owners, but it looks like BofA is even more desperate than those who owe the bank money.
Today's post examines two apparently unrelated news events and postulates they are from the same cause: Bank of America has a cash problem. For those waiting for lenders to foreclose on homes and release inventory in California and Nevada (that would be me), this is good news. If Bank of America becomes more concerned with survival than it is with managing inventory and prices in the housing market, they may foreclose and sell larger numbers of homes to generate much needed cash. More foreclosures and sales means more inventory and lower prices.
By NELSON D. SCHWARTZ
Published: September 12, 2011
Bank of America’s chief executive, Brian T. Moynihan, vowed on Monday to eliminate $5 billion in costs annually by 2014, including by cutting at least 30,000 jobs at the company.
In a widely anticipated speech at an investor conference in New York organized by Barclays, Mr. Moynihan outlined his plan to make Bank of America, the largest bank in the United States, more efficient and profitable — even if that meant sacrificing scale.
“We don’t have to be the biggest company out there,” he said. “We have to be the best.”
Five billion dollars a year is a huge amount to cut from payroll and operations. When those people were hired, the company must have felt a need for them. Money was invested in their training, and some valuable service must have been performed. You can't cut $5,000,000,000 in costs without sacrificing service. The only reason a company does this is because they have to, not because they want to.
While he did not specify how many jobs might be involved, the company announced shortly after his speech that 30,000 jobs were to be eliminated. The bank employs 288,000 people.
The job cuts are part of recommendations reviewed last Thursday and Friday by the company’s top management in Charlotte, N.C.
“The company expects that attrition and the elimination of appropriate unfilled roles will be a significant part of the anticipated decrease in jobs,” Bank of America said in a statement. …
Mr. Moynihan aims to cut at least $5 billion out of the bank’s $73 billion in annual expenses by shutting some of its 63 data centers, eliminating overlapping deposit systems and trimming layers of back-office staff that were accumulated during the acquisition binge undertaken by his predecessor Kenneth D. Lewis.
“It’s taking out work we don’t need to do any more, and getting it out of the company,” he said. “We’re a much simpler company than we were 24 months ago.” …
There about to be much smaller and simpler. Eliminating over 10% of a workforce is a huge cut. Perhaps the efficiencies of scale will permit them to eliminate many of the jobs for acquired companies.
During the question-and-answer part of the session, Mr. Moynihan was asked whether federal regulators had wanted the bank to raise more capital. Mr. Moynihan said they had not.
Or course he is going to say that. No official notifications may have taken place, but I wouldn't be surprised if private conversations have put BofA on notice.
A shareholder also asked about mounting losses at Countrywide Financial, the subprime lender. The losses are still plaguing Bank of America three years after it bought the company for $2.8 billion. Before the sale, Countrywide had nearly collapsed into bankruptcy when its financing dried up.
Mr. Moynihan answered that in dealing with Countrywide, the bank “looks at all our options on everything.”
When the shareholder followed up by asking Mr. Moynihan if he was saying that bankrupting Countrywide was a viable option, Mr. Moynihan again demurred. “There are options around all this stuff that we continue to work on,” he said.
Acquiring Countrywide has been a disaster for BofA. They did it primarily to obtain the servicing rights on the Countrywide portfolio. There is likely some back-room deal with the FDIC or the federal reserve to backstop at least part of the Countrywide losses, but the losses BofA must absorb are still weighing them down.
Angry investors who hold mortgage-backed securities are trying to force Bank of America and other large banks to buy back billions of dollars worth of mortgages that have defaulted. The investors argue that the home loans did not conform to the original underwriting standards or were originated with little evidence of adequate assets on the part of borrowers.
In other cases, investors including the federal government and the insurance giant A.I.G. want to recover tens of billions of dollars from the big banks for losses on securities they assembled from now-troubled subprime mortgages.
Then there is the investigation by state attorneys general into mortgage servicing abuses, which could cost the big banks more than $20 billion in a proposed settlement that so far they have been unable to complete. “The attorneys generals settlement is part of what can move us forward, but the settlement has to be reasonable for the company and reasonable for shareholders,” Mr. Moynihan said.
These lawsuits are a huge overhanging problem the banks face. If the settlement is too large, the banks will collapse. If a settlement cannot be reached, banks will die a death of a thousand attorneys. I'm all in favor or pushing banks to the edge of bankruptcy for their participation in the housing bubble, but we dare not push them over the edge unless we want financial turmoil.
Given the huge financial pressures Bank of America faces, the following headline shouldn't be a big surprise. I believe there is a direct cause and effect.
Published: Tuesday, 13 Sep 2011 | 12:29 PM ET
By: Diana Olick
CNBC Real Estate Reporter
Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months, well over 200 percent more month-to-month.
A notice of default is the first stage of the foreclosure process in non-judicial foreclosures states, that is, where foreclosures do not go before a judge.
The notice of default is usually sent when a borrower is 90 days or more overdue in payments, but that timeline has been extended significantly during this housing crisis, due to the so-called “robo-signing” processing scandal and the sheer volume of troubled loans.
Delays from Robo-signer only impacts judicial foreclosure states. Here in California, the delays have been purely due to lenders not wanting to take losses.
Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity, and his research points to Bank of America as the primary driver. I contacted a Bank of America spokesman, who responded: “It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month.”
Why would BofA double their rate of foreclosure processing now? The economy is not doing well. They have no reason to believe an abundance of buyers will be ready to buy these homes. For the last three years, they have consistently accumulated shadow inventory to avoid recognizing losses. So why now? It has to be a desperate need for cash.
The foreclosure numbers are down very slightly year-over-year, but only because August 2010 was one of the highest foreclosure months on record, and of course was just before the “robo-signing” scandal was uncovered. Delays in processing have artificially lowered the foreclosure numbers over the past year, so this new surge is likely addressing loans that have been long delinquent, but unaddressed.
In other words, the foreclosure pipeline is filling again.
In other words, the foreclosure pipeline is filling again with delinquent mortgage squatters in shadow inventory.
If this assessment is accurate, we may be entering a new phase in the cleanup. I have long maintained the problems with housing will not be resolved until the shadow inventory is cleared out through foreclosure. If BofA is going to begin this process in earnest, the other banks will be forced to take notice and react.
RealtyTrac, a widely followed foreclosure sale and data site, is also confirming a surge in overall notices of default in its August numbers, to be released later this week. They do not cite Bank of America specifically, which bought Countrywide Financial, taking on millions of troubled loans.
“We've been seeing REO [bank-owned property] sales, and processing of loans through foreclosure. This increase may simply be the lenders and servicers starting the next cycle. August traditionally is a high month for foreclosure actions, so part of the increase might be seasonal,” says RealtyTrac's Rick Sharga. “Could be any number of reasons – but with 3.5 million delinquent loans, this had to happen sooner or later.“
I think many at the banks truly believed they would not have to foreclose on the delinquent mortgage squatters. Many held out hope that loan modifications would succeed, and many others hoped borrowers would make more money and make their debts current through making up the missed payments. Denial is preferable to recognizing losses — at least for a while.
The question of course is, is this a one month catch-up purge or will it continue at high levels for a while? And if the latter, will other banks follow suit quickly? Because if other banks see Bank of America pushing more loans to foreclosure, which will inevitably means more properties heading out for sale, they may want to get in before that glut of properties pushes prices down even further.
That is a great description of the collapse of the banking cartel.
“This proves once again that “credit” as measured by legal defaults and foreclosures is not necessarily about borrowers missing payments, rather about what the servicers chose to do about it,” notes Hanson.
Yes, the relationship between delinquencies and foreclosures broke down in 2008, and the two figures have been moving independently ever since. The foreclosure statistics no longer mean much because if foreclosures drop, its not because lenders have run out of people to foreclose on.
The collapse of the banking cartel?
Cartel arrangements work because each member of the cartel withholds supply from the market so the collective can enjoy higher prices. Cartel arrangements fail when the members of the cartel cheat in order to sell more inventory at higher prices.
In truth, the lending cartel is likely more of a happenstance caused by the limited write-downs banks can take each quarter. If lenders are limiting their supply because they can't afford to release any more, their behavior will have the cartel effect without a direct collusion among the members. This is most likely what is really going on.
Regardless of the reasons the cartel has been working, it has been working. Prices in many markets have not deflated due to lenders either withholding supply or failing to foreclose on delinquent mortgage squatters. If one of the biggest players in the cartel, Bank of America, has now decided they are going to dramatically ramp up their foreclosure processing, the cartel is going to collapse.
The other members of the cartel will be forced to react to BofA's actions. The last banks to liquidate will be the ones who obtain the lowest prices.
What may happen to many of the most capital-constrained banks is they will maintain their denial until the FDIC finally shuts them down. Several banks will pull back processing loans because they cannot afford the write downs yet. The longer they wait, the more painful the losses, so they will wait and wait until they are forced to act.
Regardless of what happens to the banks, increasing foreclosure processing and subsequent resale will weigh on prices. Lenders may still meter out their REO in order to prevent MLS saturation, or they risk a repeat of Las Vegas in every housing market in the country.
Foreclosure and resale is a two-step process. BofA and other banks may ramp up their foreclosures, but they may decide not to sell the REO. Perhaps they will rent some out. In all likelihood, the banks desperate for cash will sell on the MLS to get whatever they can. With so many banks being desperate for cash, the possibility of a price-crushing stampede is very real. We have already seen the results of this in Las Vegas.
2008 was a bad time to buy
Blog readers won't be shocked, but 2008 was not a good time to buy. Apparently, the owner of today's featured property was not a blog reader. He purchased on 4/3/2008 for the bargain price of $536,000. He used a $482,050 first mortgage and a $53,950 down payment. His down payment is lost, and his credit is ruined because he bought at the wrong time and paid too much.
That was an expensive three and one half years….
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
Irvine House Address … 30 CIENEGA Irvine, CA 92618
Resale House Price …… $423,800
Sq. Ft.: 1617
Property Type: Residential, Condominium
Style: 3+ Levels, Mediterranean
Year Built: 2008
Community: Portola Springs
On Redfin: 230 days
Buyer cancelled -lucky you! Upgraded to the max! Like-new 3 story home in Portola Springs * Largest floorplan in tract has spacious great room w/ gorgeous dark wood floors * Large living area has fireplace & large media niche with added cabinet * Spacious dining area * Open gourmet kitchen has granite countertops & backsplash, extra-large island w/ bar seating, KitchenAid stainless steel appliances & sink, brushed nickel knobs * Lovely master bedroom w/ recessed lights, two walk-in closets & bath w/ tile countertop & large tub & separate shower w/ tile surrounds & decorative detail, double sinks * Secondary bedroom w/ French door, beautiful carpet * Bedroom & bath & laundry on first level * Features include dark wood cabinets, 2-tone paint, textured carpet, plantation shutters * 3 bedrooms, 3 baths, one on each level gives wonderful privacy & could be perfect for roommates * Enjoy association pool, tennis, bbqs, basketball * Best of all, children attend new Stonegate Elemenetary & award-winning Northwood High.
Proprietary IHB commentary and analysis
Resale Home Price …… $423,800
House Purchase Price … $536,000
House Purchase Date …. 4/3/2008
Net Gain (Loss) ………. ($137,628)
Percent Change ………. -25.7%
Annual Appreciation … -6.7%
Cost of Home Ownership
$423,800 ………. Asking Price
$14,833 ………. 3.5% Down FHA Financing
4.20% …………… Mortgage Interest Rate
$408,967 ………. 30-Year Mortgage
$133,696 ………. Income Requirement
$2,000 ………. Monthly Mortgage Payment
$367 ………. Property Tax (@1.04%)
$210 ………. Special Taxes and Levies (Mello Roos)
$88 ………. Homeowners Insurance (@ 0.25%)
$470 ………. Private Mortgage Insurance
$318 ………. Homeowners Association Fees
$3,454 ………. Monthly Cash Outlays
-$315 ………. Tax Savings (% of Interest and Property Tax)
-$569 ………. Equity Hidden in Payment (Amortization)
$22 ………. Lost Income to Down Payment (net of taxes)
$73 ………. Maintenance and Replacement Reserves
$2,666 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,238 ………. Furnishing and Move In @1%
$4,238 ………. Closing Costs @1%
$4,090 ………… Interest Points @1% of Loan
$14,833 ………. Down Payment
$27,399 ………. Total Cash Costs
$40,800 ………… Emergency Cash Reserves
$68,199 ………. Total Savings Needed