Managing U.S. Mortgages Makes Desoer Besieged at Bank of America

Every Friday afternoon, Barbara Desoer, president of Bank of America Corp.’s home loan unit, sits down alone to listen to another 20 telephone recordings.

As the California sun streams into the gleaming, white- brick former headquarters of Countrywide Financial Corp., she absorbs tales of fury and despair, Bloomberg Markets magazine reports in its December issue.

Desoer, 57, says it’s important that she hear the voices of some of the 100,000 people who call the bank’s mortgage service representatives every day, many struggling to keep up with their loans. She’s also examining her own work.

“I want to understand, are we as effective as we claim to be?” she said in an August interview.

That question was answered, in some measure, in late September, when Desoer slammed the brakes on her bank’s foreclosure process after accusations that Bank of America -- along with competitors Ally Financial Inc. and JPMorgan Chase & Co. -- had been signing and submitting to judges thousands of foreclosure affidavits without verifying whether they were accurate.

Those documents were required to take away people’s homes.

Desoer -- who says her best quality is common sense -- on Oct. 1 suspended foreclosures for borrowers in the 23 states where they are processed through the courts. She later expanded the freeze to all 50 states, then reversed course on Oct. 18, announcing the bank would proceed with foreclosures in the 23 “judicial” states.

Toughest Job

The foreclosure controversy makes Desoer’s job, already one of the toughest in banking, that much harder. She heads a 50,000-employee unit -- 17 percent of Bank of America’s 286,000- person workforce -- that handles one in every five U.S. mortgages. More than 75 percent of the loans were inherited from Countrywide, the bank and mortgage company that former CEO Kenneth D. Lewis bought in July 2008 for $2.5 billion.

On Oct. 15, Angelo Mozilo, Countrywide’s co-founder, agreed to pay $67.5 million to settle a U.S. Securities and Exchange Commission lawsuit alleging that he misled investors. The penalty is the largest-ever for a senior executive of a publicly traded company. Mozilo neither admitted nor denied wrongdoing.

Lewis asked Desoer, who had worked for Bank of America since 1977, to handle the melding of Countrywide into Bank of America. Helping to manage takeovers was a job she’d done before for Lewis when he’d bought credit card giant MBNA Corp. in 2006 and Chicago’s LaSalle Bank NA in 2007.

CEO Candidate

Desoer’s position makes her one of the most powerful women in finance. She was a top candidate to replace Lewis as CEO when he resigned in December 2009; she lost out to the younger Brian Moynihan, 51.

“I was honored to be in the selection pool,” she says. “I felt I had earned the right to be in that pool.”

From almost the moment she stepped into her job as head of Bank of America Home Loans and Insurance, Desoer has been besieged. Delinquencies on the Countrywide loans were already rising fast when Lewis bought the portfolio in 2008. Two months later, Lehman Brothers Holdings Inc. went bankrupt, the government was forced to bail out Fannie Mae and Freddie Mac, and credit markets seized up. The economy began to deteriorate, the Federal Reserve cut rates sharply and home refinancings surged.

In January 2009, Lewis bought Merrill Lynch & Co., around the same time taking $45 billion from the Troubled Asset Relief Program to help keep the bank afloat.

‘Unbelievable Changes’

Desoer found herself steering into a cyclone.

“If you had said, ‘Barbara, take that flip chart and write down the biggest, most unbelievable changes you could imagine,’ I would never have come up with a list as extreme as what came our way,” she says. “It was a war zone.”

One of her first jobs was to oversee lawyers coping with investigations by 11 state attorneys general into whether Countrywide had misled customers with the weakest credit histories by selling them interest-only, adjustable-rate mortgages that became unaffordable when their rates reset.

In October 2008, the bank settled lawsuits by California, Connecticut, Florida and Illinois, agreeing to cut the interest rates on thousands of loans and lower the amount that borrowers owed by $8.4 billion.

Bank of America neither admitted nor denied wrongdoing.

Delinquencies and defaults kept rising through the recession of 2009 and into this year. Today, of the 14 million Bank of America mortgage customers, 1.3 million are in some form of delinquency, including 195,000 who haven’t made a payment in more than 2 years. The troubles prompted the bank to triple its loan workout staff to 18,000 in the 18 months ended in October.

Housing Millstone

“Nobody in the history of mortgage banking has had to deal with what Desoer has,” says Joe Anderson, a former Countrywide senior managing director who ran the firm’s biggest division before leaving the company in 2006. “She’s dealing with variables that no one ever has before.”

The foreclosure freeze was one more sign that the housing crisis still hangs like a millstone around the neck of U.S. banking. Homes that banks seized through foreclosure accounted for 24 percent of all home sales in the country during the second quarter, according to a Sept. 30 report by RealtyTrac, an Irvine, California-based research firm.

They made up a greater share in the states hardest hit by the housing crisis, accounting for 56 percent of purchases in Nevada, 47 percent in Arizona and 43 percent in California. Some 45 percent of Bank of America’s nonperforming loans are in California and Florida.

Shares Plunge

Investors are nervous. In the week ended on Oct. 15, Bank of America’s stock dropped 9 percent. During that same week, attorneys general in all 50 states said they would launch a joint investigation of the foreclosure breakdown, and Senator Christopher Dodd, head of the Senate Banking Committee, announced he would hold hearings beginning on Nov. 16.

The attorneys general are organizing meetings with major lenders to discuss foreclosure issues, Colorado Attorney General John Suthers said Oct. 26.

Largely due to troubles in the home loan unit, Bank of America’s stock was down 25 percent for the 12 months ended on Oct. 27 and 76 percent over three years.

The volume of the outcry over the alleged mishandling of foreclosures was amplified by the fact that it came just before Nov. 2 U.S. elections.

“It’s a perfect political football because you have a ready, available villain who you can make a bad guy, you have victims by the thousands and you have opportunities for big political gains,” says Rick Sharga, senior vice president at RealtyTrac. “The timing of this could not be worse -- in the middle of a hot political season.”

‘Good Processes’

Moynihan and Desoer both say that no homeowner was evicted unfairly.

“We believe that our assessment shows the basis for past foreclosure decisions is accurate,” Desoer says. “We have good processes and good controls.” In early October, Desoer said the bank was nevertheless examining documents in 102,000 foreclosure cases.

On Oct. 18, Desoer said the bank was restarting the process in the 23 states where evictions go through the courts because the bank had found nothing wrong. A week later, the bank found errors in as many as two dozen of the first several hundred pending foreclosures that are to be resubmitted, including misspelled names and incorrect digits in address numbers, spokesman Dan Frahm says. None of the mistakes were serious enough to forestall home seizures, he says.

$10.4 Billion Writedown

A day later, the bank reported a $7.3 billion loss for the third quarter, aggravated by a $10.4 billion writedown in the value of its credit card business due to stricter regulations and a new fee on debit cards. That compared with a loss of $1 billion a year earlier. The home loan division had a net loss of $3.95 billion in the first three quarters of this year.

The losses aren’t over. Desoer and Bank of America’s lawyers are gearing up for demands from investors that it repurchase tens of billions of dollars worth of loans issued by Countrywide and packaged into securities. Investors usually have the right to sell loans back to banks if they can prove they were misled as to their quality.

Fannie Mae, Freddie Mac, mortgage insurers and other investors had made $12.9 billion in claims on BofA as of Sept. 30. Those demands may eventually exceed $35 billion, says Christopher Gamaitoni, vice president at Compass Point Research and Trading LLC in Washington. During the five quarters ended on Sept. 30, the bank had approved repurchase of loans with a face value of $4.9 billion, it announced on Oct. 20.

New Bailout?

The cost of servicing troubled loans, maintaining foreclosed property, loan buybacks and the legal costs arising from repurchase demands may force Bank of America to seek another government bailout, says Christopher Whalen, managing director at Institutional Risk Analytics, a Torrance, California-based research firm.

“These cash-flow issues could push BofA back into the arms of the government,” Whalen says. “No one wants to hear this, but it’s true.”

The bank repaid the $45 billion it borrowed from TARP in December 2009, and Desoer insists it won’t need any new bailout.

As the losses mount, so do complaints from borrowers -- some of them in Desoer’s weekly listening sessions -- who say that Bank of America abuses the foreclosure process.

Mary Dyer says she negotiated with the bank for more than two years in an effort to block foreclosure on her family’s home in Virginia Beach, Virginia. She had paid $348,000 for the house in 2005. By 2008, the value was less than that of the mortgage.

No Short-Sale

Dyer, a homemaker, and her husband, a Department of Defense employee, struggled to keep up with their $2,200 monthly payments, emptying their government thrift savings plan in the process.

The Dyers say they got four “short-sale” offers, in which the buyer would have acquired the home for less than the $300,000 balance on their mortgage. In August 2009, the house was sold at auction for $252,000 -- though the Dyers had presented the bank with short-sale offers exceeding $280,000, says Karen Halpin, an agent with William E. Wood & Associates in Virginia Beach, who represented the Dyers.

“Bank of America should not be allowed to get away with this,” Dyer says. “My credit has been destroyed; we’ve lost retirement savings; my home was foreclosed.”

Screwed Up Systems

Halpin says inadequate communication is the biggest frustration.

“People in different departments don’t talk to each other,” she says. “Their systems are so screwed up, and they can’t handle what they are doing.”

Bank of America declined to comment specifically on the Dyer case. Short sales are often complicated because borrowers need to demonstrate hardship to qualify, while changes in real- estate prices and high volumes of cases can cause frustration for some customers, spokesman Dan Frahm says.

Juggling the demands of angry customers and investors was not part of Barbara Desoer’s career plan when she graduated from Mount Holyoke College in South Hadley, Massachusetts, with a degree in mathematics in 1974. Her goal was to become an actuary, and she went to work for Pacific Insurance Co. in California. She helped underwrite products for Fairmont Hotels and other mid-size companies.

“I loved the business, but I was dealing with the agent and never got to meet the management,” she says. “That big C of character I could never assess directly.”

Berkeley Graduate

After she earned a Master of Business Administration from the University of California, Berkeley, she joined San Francisco-based BankAmerica. This daughter of a General Motors Co. auto plant manager liked being a banker, she says, and the interaction it allowed with corporate chieftains.

“You had to get to the right people and convince them you had ideas,” she says. “You also had access to the CEOs and could assess their character. It’s a sixth sense.”

By 1996, Desoer had risen to chief executive officer of BankAmerica’s California retail bank. When Charlotte-based NationsBank Corp. bought BankAmerica in 1998 -- taking its name as its own -- CEO Hugh McColl Jr. named Desoer head of Northern California banking and, 18 months later, head of marketing, prompting a move to North Carolina.

In July 2001, Lewis, the bank’s new CEO, promoted her to head of consumer products, including credit cards and mortgages. In 2005, she moved up to chief of operations, overseeing a $6 billion budget.

Last Woman Standing

Marc Oken, a former chief financial officer at the bank, notes that Desoer is the only executive left from the old BankAmerica, reflecting both her loyalty and her survivor instinct.

“The NationsBank people were a tough crowd,” says Oken, who worked for the bank from 1989 to 2005. “But Barbara was not somebody you could push around. She was always organized, and she showed outstanding judgment.”

Today, Desoer works out of the former Countrywide headquarters, a three-story building in Calabasas, California, with long balconies overlooking wooded walking trails populated by wild deer. The collection of Hudson River School paintings that Mozilo left behind -- serene scenes of rocks and hills in upstate New York -- still hang throughout the building, which is a 15-minute drive from the beaches of Malibu.

Desoer doesn’t have much time to enjoy the scenery. She spends her days in meetings aimed at pushing back the flood of nonperforming loans and the rising demands from investors that the bank buy back their securitized loans.

Repurchase Claims

“We will vigorously contest such claims and defend the interests of Bank of America shareholders,” Chief Financial Officer Charles Noski said in a conference call with investors discussing third-quarter earnings.

Most of the risky loans were issued by Countrywide, which boasted an aggressive, sales-oriented style that Desoer has abandoned, says David Lykken, whose Austin, Texas-based firm worked as a consultant to Countrywide for more than a decade.

“The Countrywide culture was to beat Wall Street, to go after every competitor, and if there wasn’t an enemy, then you would create one,” Lykken says. “It was fun in a dysfunctional way. Barbara is now telling her people that they’ve got all the risk they want and they have all the market share they want. They don’t want to grow the business.”

Desoer says it’s “absolutely untrue” that she isn’t interested in growth. She says the bank has increased the number of “jumbo” mortgages it issues -- loans that exceed the limit of $417,000 on most loans set by Fannie Mae and Freddie Mac.

A Goal Unmet

More broadly, Desoer says her priority is to ensure that her home loan unit lives up to Moynihan’s oft-repeated goal of becoming the most trusted brand in financial services.

It’s not working yet. In August, researcher JD Power & Associates ranked banks according to the customer service provided by their mortgage units. Bank of America was No. 15 out of 19.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Lisa Kassenaar in New York at lkassenaar@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill in New York at mserrill@bloomberg.net.

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