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Signs of life from the mortgage frontlines

Barbara Desoer, Bank of America's mortgage chief and potential successor to CEO Ken Lewis, talks about cleaning up the Countrywide mess, credit card losses and more.

By Geoff Colvin, senior editor at large
Last Updated: November 13, 2008: 11:46 AM ET

"There are certainly some markets where we're starting to see more interested buyers," says Bank of America's Barbara Desoer.
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(Fortune Magazine) -- Talk about being where the action is: Ground zero for today's financial crisis is the business of home mortgages, and Bank of America's Barbara Desoer oversees the biggest collection held by any financial institution in the U.S.

Many of them came to the bank with Countrywide Financial, the nation's largest originator of mortgages and a major subprime lender, which Bank of America (BAC, Fortune 500) rescued from near collapse earlier this year by acquiring it for $4 billion.

Desoer's new assignment further broadens her experience - a valuable move for someone widely regarded as a potential successor to CEO Ken Lewis.

She joined the company in 1977 and has held a notably wide range of jobs, overseeing technology, credit cards, deposit accounts, quality, productivity, marketing, and other areas. Such diverse experience is important in a mammoth institution that, besides being No. 1 in mortgages, has relationships with half the households in America and, after its pending acquisition of Merrill Lynch (MER, Fortune 500), will be the country's top broker.

In her new role, Desoer, 56, recently moved from headquarters in Charlotte to Southern California, where Countrywide is based. She sat down recently with Fortune's Geoff Colvin to talk about the state of the consumer, when the housing market will bottom, how long the recession will last, and much else. Edited excerpts:

Consumer confidence recently hit the lowest level ever recorded. You have a major interest in consumer behavior. How bad is the state of the U.S. consumer?

U.S. consumers and their confidence are the crux of the issue, and the volume of what's happening and the rate of change are very disconcerting and distracting. The important thing that we're focused on is the "open for business" message. A lot is going on that's impacting confidence, but business is happening, and consumers need to realize that credit is still available.

The bank recently ran full-page newspaper ads making that point, but I've got to figure that the definition of a qualified borrower has changed. That's true - over the past year there have been changes. Credit is available under tighter underwriting standards than before, and, I believe, appropriately so. But last quarter, the first quarter that Countrywide and Bank of America operated as one company, we made 250,000 first mortgages, worth $51 billion of principal, plus $6 billion of home-equity loans.

The personal savings rate has been declining for many years and has been negative for much of the past three years, but in the most recent quarter it went up considerably. Are we going to see a long-term change in the trend? I hope so.

This theme has been emerging for some time. We introduced a product called Keep the Change - when you use your debit card, you can round up the amount and put the extra into a savings account. The popularity of that product has been and continues to be phenomenal. So people wanted to save, and they didn't quite know how to get started. We made it simple, in a way they could relate to and understand, and that took off.

But it cuts both ways for a big bank like yours - if people decide to be thriftier, they may be saving more but borrowing less, which affects your lending business, and they may be spending less, which affects your huge credit card operation. So what are you rooting for?

We're rooting for the U.S. economy to be strong again. With the diversification we have, we run the spectrum of segments and products. So doing well in deposits while loan growth isn't what it used to be is still a very profitable equation for our shareholders. We've been profitable every quarter through this cycle. People are still borrowing, just not at the same rate of growth as before.

Do you have a forecast for the U.S. economy?

We do, and the last three months have impacted that forecast, so now we are forecasting that the turnaround starts late in 2009. That's when we believe home prices will stabilize. We'll experience probably three quarters of negative growth and then start to come out of it late next year.

When home prices are going to bottom may be the key to the near-term future of the U.S. economy.

Yes, and there are some optimistic signals, with existing-home sales increasing two months in a row and the recent, somewhat surprising report that new-home sales have increased modestly as well. Whether that sustains or is a blip will be seen, but there are certainly some markets where we're starting to see more interested buyers than we have before.

The bank recently settled with the attorneys general of several states who had alleged deceptive and predatory practices at Countrywide before you bought it. The settlement included a reduction of up to $8.4 billion in payments from consumers. Does that put Bank of America out of the woods on this?

I can't speak to litigation that's in progress, but we're real pleased with the settlement that we've reached with 14 state attorneys general, and we're talking to 35 more. The purpose is to insure that more homeowners who want to stay in their homes, and who have some capacity to make mortgage payments, are able to do it. We've said that principal, interest, tax, and insurance payments combined can be up to 34% of the customer's cash flow - has to be affordable and sustainable at the same time that it's solving an issue. We'll reduce the interest rate to a level as low as 2.5% in some cases in order to make that happen.

Will you ever reduce the principal on some of those mortgages?

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