Back in August, we noted with some suspicion that Fannie Mae had purchased $73 billion of mortgage servicing rights from Bank of America, but without disclosing details on the transaction. It smelled like a bailout.
A month has gone by and there is still no more clarity, so we are calling for some action. In a Minyanville piece this morning, we write:
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.
From there we go on to detail some of the new information we have attained, particularly on the possibility of losses for the GSEs, and we conclude:
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.
There still is no certainty that this is a bailout. In fact, Fannie Mae could be purchasing these MSRs to put them in the hands of a servicer that will do a better job of loss mitigation on the underlying mortgages owned by Fannie and that may be the business decision behind this.
But we don't know because of the lack of transparency. And that is the real story here. We need more disclosure from FHFA, Fannie, and Bank of America. We're covering the GSE losses and bailed out Bank of America multiple times already, taxpayers have a right to know what is going on here.