Fannie Putting Dubious Loans Back to BofA, So BofA Will Stick Them to Freddie Instead
By Yves Smith of Naked Capitalism
Bloomberg has an article up “BofA Halts Routing New Mortgages to Fannie Mae,” doesn’t put the key issue, which is Bank of America’s continuing shoddy mortgage origination practices, in a sufficiently sharp spotlight.
The piece starts out in a direct-seeming manner:
Bank of America Corp., the second- biggest U.S. lender by assets, is stopping the sale of new home loans to government-owned Fannie Mae as a dispute over who should bear the costs for defective mortgages escalates.
The bank is cutting off Fannie Mae from loans starting this month, except for modifications and some refinancings, because of the U.S.-controlled company’s stance on repurchases, Bank of America said yesterday in a filing. The firms are in talks to end the disagreement, the bank said.
There is some revealing wording in the next paragraph: that the Charlotte bank is taking its marbles, um, mortgages away, refusing “to cooperate with what it deemed to a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.”
That turn of phrase suggests that Fannie had an existing policy it didn’t enforce much or at all, and now that it is in conservatorship, it is getting more tough minded in order to produce more income for taxpayers. But let’s skip down to the section that describes the bone of contention:
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.
Are these putbacks really about insurance? It looks to me that BofA is misrepresenting the actual bone of contention more than a little. It looks like someone at Fannie woke up and realized that any case of a guarantor voiding a policy was prima facie evidence that BofA had breached a rep and warranty about loan quality. Look at the examples: inflated appraisals and incomes. So is BofA trying to pretend that violating loan standards is OK, and they are going to characterize this problem as that of lack of mortgage insurance (which was separately also a requirement for Fannie to buy a loan with such a high LTV)?
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?
I hope Bloomberg or other outlets keep chipping away at this story, because so far we are getting only Bank of America’s version of the story and I suspect there is a lot more to it, and it it unlikely to reflect well on the Charlotte bank.
Update 5:00 AM: The perils of early AM drafting. Housing Wire filled in some details:
Specifically, Bank of America will no longer place non-Making Home Affordable Program (MHA) refinance first-lien residential mortgage products into Fannie mortgage-backed securities.
Making Home Affordable is the Obama administration’s initiative to help struggling homeowners get mortgage relief through a variety of programs…
The bank says the risk of repurchases on non-MHA mortgages is too great, and hedging repurchase risk is now too difficult…
At the heart of the decision is recent changes in mortgage insurance policies. The filing notes Fannie Mae policy where MI rescission must be resolved in a timely fashion. As of Dec. 31, 2011, 74% of the MI rescission notices received had not been resolved, and Fannie began exercising repurchases with Bank of America.
“We have informed FNMA that we do not believe that the new policy is valid under our relevant contracts with FNMA and that we do not intend to repurchase loans under the terms set forth in the new policy,” BofA states. “If we are required to abide by the terms of the new FNMA policy, our representations and warranties liability will likely increase.
This still is short of a full explanation. 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.
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