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Cautious BofA heeds history

November 13, 2014
by admin

Bank of America doesn’t plan to loosen its mortgage standards, says its CEO.

Brian Moynihan said Wednesday at an investor conference that the bank won’t reduce its minimum required down payments. Fannie Mae and Freddie Mac, the mortgage-financing titans that are still being overseen by federal regulators, plan to allow down payments as low as 3 percent, down from the current minimum of 5 percent.

Leading, not following

Moynihan vowed that Bank of America won’t take part. “I don’t think there’s a big incentive for us to start to try to create more mortgage availability where the customers are susceptible to default,” Moynihan said, according to Reuters.

I don’t say this often: Hooray for Bank of America and Brian Moynihan. It takes leadership to heed the lessons of history when everyone else wants to ignore or misinterpret those lessons.

NCNB and the not-so-jolly rancher

When I read that quote from Moynihan, I flashed back to a distant memory: an interview I conducted with a rancher in Texas in 1989 or 1990. An out-of-state bank called NCNB was aggressively opening branches all over Texas, but the bank’s loan officers were notoriously tight with money. “NCNB stands for No Cash for Nobody,” the rancher bitterly told me.

NCNB bought B of A

When I recalled that conversation this week, I idly wondered whatever happened to NCNB, and I started googling. It turns out that NCNB bought Bank of America and took its name. It’s complicated, but it boils down to this: Bank of America is the second-largest bank in the country, and it got there partly because NCNB and its acquisitions gobbled up failed and failing institutions. One of those acquisitions was of Countrywide Financial, which got into financial trouble for its reckless lending during the housing bubble.

Caution in its genes

It’s no surprise that, having grown because of other banks’ mistakes, Bank of America has been cautious in its consumer and small-business lending, going back at least to that conversation with the rancher who complained about NCNB. Caution seems to be in the company’s DNA.

Bank of America was a prominent player for a while in the subprime mortgage business. But the bank pulled the plug abruptly way back in August 2001. “The profitability of the subprime real estate lending business is not commensurate with the associated risk,” the company said. So it got out of the subprime biz — even as its big-bank competitors rushed in and inflated the housing bubble.

Then and now

I don’t intend this to be a paean to Bank of America. But it’s important to remember the wise decision that the bank made in August 2001 in light of the decision it’s making now.

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