Why is no one in Congress up in arms over the possibility of a half-a-billion-dollar bailout of Bank of America last month?
Early in August, Fannie Mae (read: taxpayers) agreed to buy the mortgage servicing rights (MSRs) of a portfolio of 400,000 loans with an unpaid principal balance of $73 billion from Bank of America. In exchange for these rights to collect payments from homeowners in this portfolio, Bank of America reportedly received "more than $500 million."
Strangely, the actual purchase price is unknown. So, too, are the contents of the mortgage portfolio, because neither Fannie Mae, its regulator the Federal Housing Finance Agency, nor the selling bank itself is talking.
Whatever the quality of the MSRs, though, Fannie Mae stands to lose a bundle if President Obama's national refinance program, proposed officially in his jobs speech last week, is pushed forward by the White House and Treasury. Anything that causes borrowers to refinance or prepay mortgages causes the value of MSRs to decline. A revamp of the Home Affordable Refinance Program-which has so far been a total failure-to streamline reducing interest rates would significantly reduce the value of the recently purchased MSRs overtime and possibly lead to serious losses beyond just delinquencies.
Of course, discussion of a more streamlined refinance program has been on the table for months now. Fannie Mae and its regulator, the Federal Housing Finance Agency, knew about this possibility and went ahead with the deal anyway. Considering the lack of transparency and the possibility for millions in losses for Fannie (i.e., taxpayers) on this deal, the transaction is more than a little suspicious.
At least five or six private financial institutions were given access by Bank of America to analyze the mortgage portfolio and perform due diligence before potentially bidding on the MSRs. However, Bank of America didn't wait for even a single competing bid. Perhaps Bank of America decided that Fannie Mae's offer was far above anything it could get from the private sector. Or even worse, perhaps Bank of America knew the delinquency risks in the portfolio were so high that no private actor would want to consider acquiring such a toxic asset.
If either of these cases turned out to be true, the Fannie Mae offer amounts to nothing less than a bailout. And if the government did overpay for the MSRs, the only possible reason is that the Treasury wanted to infuse Bank of America with cash to keep it stable.
Given Bank of America's recent struggles-its stock has fallen 55 percent from the beginning of 2011 to its lowest point last month-it has had a not-so-clandestine need for capital and confidence. Warren Buffett's $5 billion capital injection to this end was a much-discussed event in August. The Treasury Department's $500 million-plus capital injection via Fannie Mae two weeks before the Oracle of Omaha got back in the bank saving game was not.
The secrecy is a problem, particular given the absurdity of Fannie Mae-which itself needed a $5.1 billion bailout just two months ago-bringing more liabilities onto its balance sheet.
Mortgage servicing rights can be particularly challenging to assign a value, particularly during volatile interest rate environments. And without a liquid secondary market for MSRs, each portfolio must be valued independently. But since the characteristics of the loan pool that Fannie Mae purchased are unknown to the public, it is impossible to assign a value to the mortgage servicing rights, and to know whether $500 million is a fair price.
However, there are a few things we do know that would suggest the taxpayers are yet again getting a raw deal.
Earlier this year Bank of America was forced to buy back $2.5 billion in misrepresented toxic mortgages from Fannie Mae. Who knows how many of those might be underlying the servicing rights just sold to taxpayer supported Fannie Mae?
Even though Bank of America estimates the pool of loans has a 13 percent delinquency rate, many outside analysts believe the default rate on the mortgages that underlie the MSRs could be as much as double that. One financial institution that reviewed a portfolio of Bank of America MSRs, which looked suspiciously similar to what Fannie Mae purchased, estimated the loans had a delinquency rate of 25 percent.
Of course, it is possible that this is just bad housing policy and a lack of transparency. But even if it turns out that the portfolio's risks are low, and the MSRs turn a nice profit for Fannie Mae, there remains a question: Why are the taxpayers outbidding the private sector for mortgage servicing rights? If this truly is a profitable asset, then a healthy bank could benefit both its shareholder and the economy by using the cash flow to increase loans to businesses and individuals. Is that not what the White House wants?
Adding to the confusion of this bizarre story, FHFA recently filed lawsuit against Bank of America and 16 other banks for mortgage-related fraud. Why bail out a bank only to turn around and sue it? Imagine the scandalous possibility of Bank of America settling for $500 million in this new legal drama.
Given all the condemnation of bailing out banks, you would think the Democrats, who blame the financial crisis on Wall Street, would be outraged over the idea that another big financial institution receiving a cash infusion. We should at least see the Republicans and Tea Party wanting to get to the bottom of this suspicious purchase. And it is especially urgent with a streamlined refinance program in the wings that might only be stopped with evidence that it will hurt the taxpayers more than help them. With Congress back from their August recess, hopefully someone will stand up to discover exactly what Fannie Mae purchased, and whether Bank of America got yet another backdoor bailout.
This commentary was originally published in Minyanville, on September 13, 2011.