Bank of America

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[BAC  Loading...      ()   ]CEO came to the heart of foreclosure country, to the hometown of Countrywide

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[CFC  Loading...      ()   ], to address the mortgage mess.

He is speaking to a packed house at a Town Hall Los Angeles luncheon, and I will update later with video clips and Q&A. But here are highlights from an advanced copy of the speech.

Lewis says BofA wants to help struggling homeowners stay in there homes, but admits he can't help everyone.

"The first step is to review how we got here," the CEO says in prepared remarks. "There were a lot of factors that played a role. Think of it as a 'perfect financial storm.'"

He says that while the standard mortgage in the '70s was 25 years, 25 percent down, that all changed with new types of loans.

"Then, earlier in this decade, the Federal Reserve drove interest rates to near record lows to ensure against deflation. Investors all over the world looked for better yields without … they thought … taking more risk. Wall Street obliged by bundling mortgage loans, many of them subprime, into packages that were eagerly bought by these investors. In effect, we created a housing boom that was not based on economic fundamentals."

Lewis says the housing boom and bust then mimicked others bubbles, a cycle of greed and fear. The greatest symptom of greed, he says, was the jump in second home investments--from 3.5 percent of all purchases in 2000 to 28 percent in 2005. Plus, "Homeowners cashed out more than two-and-a-half trillion dollars of home equity from 1999 to 2006."

And then the bottom fell out.

So what to do now?

"It’s a great myth that bankers are motivated to foreclose on distressed home loans," Lewis says. "Foreclosure almost always means a loss for the bank or the investor...If borrowers can afford to pay market rates and want to stay in their homes, we can – and do – work with them to make that happen, even when it means modifying the terms of a loan they can no longer afford....But there are limits to what we can do."

He says many homeowners are just walking away.

"At Bank of America, we reach out to homeowners an average of 17 times between a first missed payment and any eventual foreclosure sale in attempts to assess the situation and negotiate a solution. In the month of May alone, Countrywide made nearly 10 million outbound calls, attempting to reach borrowers to offer assistance. But when outreach fails, it’s sometimes because homeowners believe that walking away is their best option."

And then there are homeowners who will never be able to afford the mortgage they managed to qualify for.

"Here, I have to be realistic and say that there is often little chance we can help them stay in their homes," Lewis says.

Still, he hopes to give these families a "dignified process" for vacating.

He says banks need to tighten lending standards and get rid of exotic mortgages. However, "Banks should not--cannot--just stop taking risk. It’s the business we’re in, and what we’re paid to do. We have to be smart enough to take the right risks, and get paid appropriately for the risks we take."

As for the future of the mortgage industry, "it will be smaller than it is today," Lewis says.

There will be consolidation, and his acquisition of Countrywide is proof of that.

"I believe the integrated, 'universal bank' model will continue to gain market share and strength," says the CEO, "as more players come to appreciate the benefits of revenue diversity. This is precisely why Bank of America acquired Countrywide."

Why buy Countrywide?

"Despite challenges in the mortgage markets, we believe that the U.S. housing sector will be strong again, and that we’ll benefit from leading in this critical product category," he says.

Ok, but why Countrywide?

"After considerable analysis and due diligence, we also believe that the business we’ve acquired is a very good one, with a great franchise and large customer base… the best technology platform in the business… and many extremely talented people."

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