Realty Check

Fannie Mae Bailing Out Bank of America? Not So Much

Lester Lefkowitz | Stone | Getty Images

Late yesterday the chairman of the House Oversight and Government Reform Committee, Darrell Issa, sent out a press release titled, "Is Fannie Mae's Purchase of Troubled B of A Portfolio a Back-Door Bailout?"

The answer is: No…but let me go back a bit.

Issa's release begins: "Fannie Mae, the government sponsored enterprise bailed out with billions in taxpayer dollars has agreed to buy a portfolio of high risk, deteriorating value loans from Bank of America." Issa goes on to announce his investigation into the matter and request "a full explanation" from Fannie Mae's conservator, the Federal Housing Finance Agency (FHFA) and its acting director Ed DeMarco.

Now here's where it gets tricky.

Issa's release continues: "In a letter sent to DeMarco today, Issa said Fannie Mae’s purchase of mortgage servicing rights from Bank of America is worrisome because as a government-backed enterprise Fannie Mae does not traditionally service mortgages. He also pointed out that the transaction likely shifted to Fannie Mae a significant amount of risk previously held by B of A."

It is correct that Fannie Mae does not service mortgages; it is incorrect that the purchase of these servicing rights would shift risk to Fannie Mae. Fannie Mae isn't buying the loans, they're buying the servicing rights. The loans are securitized in mortgage-backed securities (MBS), and Fannie Mae already guarantees the loans. Yes, these are high-risk loans, and yes Fannie Mae is already on the hook for them, regardless of who is servicing them. These loans are not on B of A's books, B of A just owned the servicing rights.

It still begs the question:

Why would Fannie Mae spend half a billion dollars for the servicing rights to 400,000 really risky loans that Issa's release claims have a 13 percent delinquency rate?

My source says it's because Fannie Mae resold the servicing rights to a specialty servicer or servicers, much like the one we visited during our day in Dallas this week, Nationstar, in order to improve the servicing. As I reported on Wednesday specialty servicerswhich deal largely in high-risk loans have a much better chance at mitigating losses on these loans, losses which Fannie Mae and the taxpayers will inevitably incur. This is not uncommon, although we don't know how much they sold the rights for.

To say that this is a B of A bailout doesn't make any sense. Issa's release says in one paragraph that Fannie bought the portfolio of loans and in another that they bought the servicing rights. The latter is correct, according to my source, and so the headline doesn't hold water.

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