Bank of America, seeking to punish those who want to hold them accountable, will stop selling new mortgages to Fannie Mae, something that Fannie is supposed to be hurt by, I guess. Notice the lack of the words “Freddie Mac” in that last sentence I wrote.
The latest move represents a major escalation in a protracted legal battle over how many defaulted mortgages Bank of America will have to buy back from Fannie because the original loans had not conformed to proper underwriting standards, market experts said [...]
Bank of America was Fannie’s third-largest provider last year, according to Inside Mortgage Finance. The bank originated $156.1 billion in mortgages last year, of which $37.7 billion were sold to Fannie, the trade publication said.
Bank of America insisted its customers would not be hurt by the decision, and said it can make up for the loss of Fannie as a backer by turning to Freddie Mac or Ginnie Mae, other government-sponsored mortgage buyers; the private sector; and by deploying its huge balance sheet.
“This decision will not affect the credit available to our customers, and we will rely on other sources of liquidity to continue to ensure we are lending to our customers and supporting the housing market recovery,” said Lawrence Di Rita, a spokesman for Bank of America. He added that the bank would continue to participate in assisting homeowners, including through the federal government’s loan modification program.
Let’s do some backstory here. One of FHFA [Federal Housing Finance Agency] chair Ed DeMarco’s good qualities is that he has stepped up forced repurchases of bad loans that the banks misrepresent – either with a lack of documentation or poor underwriting standards – when selling to the GSEs [government sponsored enterprises]. DeMarco actually reached a deal back in January 2011 with BofA to receive $2.5 billion as compensation for bad loans, but there was a rider in the deal that allowed Fannie to sue for further claims. In addition, FHFA has sued seventeen banks, including BofA, in an ongoing repurchase case.
According to BofA, this is based on a new rule that Fannie has decided to enforce:
Bank of America told investors in August that Fannie Mae’s policy on insurance rejections may result in higher repurchase costs. Fannie Mae typically requires a borrower to buy mortgage insurance if the loan exceeds 80 percent of the home’s value. The coverage guards against losses when borrowers default and foreclosure fails to recoup costs.
Mortgage guarantors, including MGIC Investment Corp., Radian Group Inc. and American International Group Inc.’s United Guaranty, have been voiding policies for errors including inflated appraisals or borrower incomes.
The larger point here, as Yves Smith highlights, is that BofA’s loan originations are still pretty bad, hence the mortgage insurance issue. It’s not so much about Fannie enforcing a mortgage insurance policy as it is BofA failing a bunch of mortgage insurers on origination issues. That’s why they have an ongoing problem with Fannie over repurchases. If I’m Fannie Mae I’m pretty happy my counterpart, Freddie Mac, will have to be the one to deal with BofA’s crap loans now. But since they have the same overseer, it’s completely puzzling why FHFA would allow that to happen:
Of course, the other question is where is the FHFA? If Fannie thinks this is bad enough that it is staring BofA down to the point that the bank has cut loan sales from 21% of Fannie’s volume in 2009 to 3% in 4th quarter 2011, why should Freddie pick up the volume? [...]
BofA is trying to blame Fannie, when in fact it appears the mortgage insurers have changed policies while nothing may have changed at Fannie. Is it just easier to blame the GSEs as one of the least loved brands in America? And the other bit that is open to question is the actions of the mortgage insurers. Even though they are not exactly an upstanding bunch, if BofA really is presenting loans to be insured with bogus appraisals, even scummy guys can be in the right now and again.
I think the other takeaway is that the mortgage industry remains a total mess, years and years after the housing bubble. This is why you don’t let offenders go without accountability.