“Fool me once, shame on you. Fool me twice,
shame on me.”
It looks like no one was fooled when the Wall
Street Journal’s (WSJ) Dan Fitzpatrick reported that Bank
of America (BAC) had sold the servicing rights to 400,000 loans
with an unpaid principal balance of $73 billion to Fannie Mae for
$500 million. There were numerous reports yesterday calling the
deal a “backdoor bailout.”
“The rights being picked up by Fannie Mae were originally
worth more than the purchase price, said a person familiar with
the deal. The bank decided to sell the portfolio at a loss because
its value is expected to deteriorate further, this person added.
The loans have a 13% delinquency rate, and more than half of the
loans are in troubled U.S. real-estate markets.
Fannie Mae doesn’t service any mortgages but can purchase
the servicing rights in order to transfer the day-to-day management
of those loans to a different company.
BAC is not selling the assets themselves only the rights to service
the mortgages and collect those fees. The WSJ’s Fitzpatrick
strongly hints that the portfolio is expected to deteriorate further
making collections tough.
That was enough to whiplash the stock on Wednesday. Bank of America
was down again almost 11 per cent yesterday after a drop on Monday
of more than 20 per cent, mitigated by a temporary rebound of 16
per cent on Tuesday.
“Abigail Field In Fortune: Fannie Mae is purchasing “the
servicing rights in order to transfer the day-to-day management
of those loans to a different company.” That’s another
huge sign that Fannie Mae is overpaying. If the rights were really
worth $500 million, wouldn’t a private company pay that for
them? Instead, it sounds like Fannie Mae is doing a bailout two-step,
one to BofA and one to whomever takes these rights off Fannie Mae’s
Another thing needs to become clear: where did Fannie Mae get the
money to do BofA the favor of buying these rights? Fannie Mae just
asked for another bailout of its own, seeking a new $5.1 billion
infusion last week.
The last time Fannie Mae got involved in shape-shifting servicing
rights to hide fraudulent activity was Taylor Bean Whitaker. That‘s
the mortgage originator, audited by PricewaterhouseCoopers, that
used Fannie Mae’s silence and their influence, according to
Bloomberg, to market servicing rights on bad loans to GMAC.
How do we know the most recent $73 billion portfolio might be full
of loser loans made via potentially fraudulent means? Fannie Mae
told us so when they sued Countrywide, the mortgage originator and
source of significant woe Bank of America bought in 2008.
“The New York Times Dealbook, January 3, 2011: Bank of America
announced Monday that it had paid more than $2.5 billion to buy
back troubled mortgages and resolve related claims from Fannie Mae
and Freddie Mac — deals that may prompt a wave of such settlements
by big banks.
The agreements center on home loans that Countrywide Financial
sold to Fannie and Freddie at the height of the mortgage bubble.
The government-controlled housing giants, which have suffered billions
of dollars in losses in recent years, have said that the lender
misrepresented the quality of the loans.
How much of the portfolio Fannie Mae just agreed to market –
the servicing rights, that is, or the right to collect fees for
collecting on the loans – consists of the loans Fannie Mae
and Freddie Mac put back to BAC earlier this year?
I don’t know for sure but I know two firms who probably do.
KPMG was auditor of Countrywide until it was bought by BAC in 2008.
KPMG was the one approving the internal controls over asset valuations
when the repurchased loans and the $73 million now that need to
be “serviced” were first originated. KPMG was also auditor
of Fannie Mae until 2005.
PricewaterhouseCoopers is auditor of Bank of America and also of
Freddie Mac. PricewaterhouseCoopers also audits the Federal Home
Loan Banks and AIG. These are two more organizations suing Bank
of America to repurchase loans first originated by Countrywide because
they allegedly have representation and warranty weaknesses.