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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I was in the mortgage business years ago and the MI companies generally underwrote the loans they insured. As much as I believe BAC is liable to buy back the crap they sold FNMA, I believe the MI companies, unless BAC sent them a false duplicate loan package should have to insure them.
The premiums on MI are outrageous as it is and it is clear that when things go haywire they can’t pay and when things are normal they rarely ever pay. I think they call that running a racket and it sounds like the banking business as well.
>>The premiums on MI are outrageous
Yep. One of the reasons 20% down is the only prudent choice.
And this is just mortgage insurance we are discussing. Add to this title insurance and and we’ve got some serious haywire.
It is worse than you think – the MIs delegated underwriting to all the originators during the bubble, and would only sample audit the underwriting.
Easy money, for awhile. Now they don’t want to pay.
Now more than ever the model is broken. BofA is the new GSE. It captures 60% of the profit of new mortgages at origination even if it wasn’t the actual under-writer but merely delivered it. Investors take the interest rate risk, Tax payers take the credit risk, and worse yet they don’t stand behind reps and warranties on what the mortgage is supposed to be.
Per the WSJ, for those who don’t always understand all the innuendo (me), if BAC doesn’t need Fannie to buy their mortgages, then Fannie has no leverage to force putbacks. And indeed there has been an unenforced policy that mortgage insurance be maintained or the loan is subject to putback. Meaner yet, the 90 day appeal period will be cut to 30 days in June.
There were rumors back a couple months ago or so being reported that Fannie wanted to cut off BAC because of servicing complaints. DeMarco introduced a plan this week to CONgress to start reducing the number of loans Frannie is writing and start replacing them with privately funded MBS. I’m having a hard time figuring out where BAC thinks they can play hardball. Seems from where I’m sitting that DeMarco has the heavy firepower. Please, DeMarco, can’t you tell them they can punish Freddie, too?
There is no privately funded MBS market right now, and investors tell me there won’t be for at least 10 year ex VERY VERY serious reforms, which no one expects to happen.
There can be a private mortgage market for a significant portion of housing finance if bargaining power is taken from the banks and fairly restored to borrowers and investors.
The banks, as both originators and securitizeres, have used unfair tactics to dominate and control the market for years. When the GSEs would only go so far in aiding the banks, they built the toxic private MBS market by creating horrendous loan products on the retail side, retaining the profits and selling the risk to unwitting institutional investors with the help of the rating agencies.
Pimco’s resignation from the ASF yesterday was a small step in the buy side becoming a true market participant instead of the sell side’s dumping ground for predatory loan products. Hopefully Dodd-Frank and the CFPB will restore some bargaining power and rights to consumers if not undermined by the Dark Forces within the Obama Administration.
The GSEs have strict reps and warranties enforcement because they offer better pricing and service because they do not do independent due diligence on the loans they purchase. BOA has had the benefit of the bargain but now claims that it should not have to adhere to the plain terms of the agreements because it is somehow “unfair”. It is simply another example of how warped the banks thinking has become. Contract terms and laws apply to them only when beneficial and convenient – otherwise to be ignored.
DeMarco cannot allow the banks to play one GSE against another. He should shut BOA off from further business until BOA is willing to abide by the terms of the agreements they enter into with the GSEs. Once the banks understand that they are participants in a competitive market and cannot dictate terms (especially post-contract) a private market will naturally and quickly arise that gives both consumers and investors the bargaining power they deserve.
Force Bank of America to restructure. Next weekend. If a mortgage originating dept is considered socially redeeming then make it comply with all the necessary regulations. If it is not, then shut it down. Let all the smaller banks pick up the slack and do it by the book with GSE cooperation. The only problem then will be hopelessly clouded titles.
What DeMarco should do is force Fannie and Freddie to stop propping up the mortage insurance industry. The industry is a mess. Of the 7 MIs entering the housing crash, 3 are out of business and paying claims at 50-60 cents on the dollar (a fact that costs you and me, the taxpayer). What is egregious is 2 of those failures only happened last summer, 3 years into the crisis. In the interim, Frannie was accepting new insurance from those 2, putting the taxpayer at undue risk. 2 more are likely to fail within the next year, and they are still submitting newly insured loans to Frannie. In fact DeMarco proposed Frannie could increase their use of mortgage insurance. Insane.
This strategy Fannie is following is just another way of propping up the MI industry. By forcing buybacks on disputed rescissions, they are hoping originators will just drop their disputes with the MIs, allowing the MIs to avoid paying losses (on off-balance sheet liabilities, no less).
BofA is not the only lender disputing this practice. See Fannie’s last 10-Q for details.
The real issue is mortgage insurance. It’s a sham, the firms are not well capitalized, take in fees and then only cancel the policy after the mortgage gets into trouble, long after the loan is originated and sold. Chris Whalen has written about this, the M.I. companies don’t even reserve against future liabilities in a manner consistent with a true insurance company such as health insurance or life insurance, instead they only start reserving when the loan goes south, and then they look for reasons to void the policy.
It amazes me how Fannie , Freddie or private investors buy any loans backed by M.I. when the firms offering those protections look to avoid stand behind the product and don’t truly have the means of paying off the claim. Demarco should ring the bell on this fiasco which only serves the interest of banks who can deliver non-prime loans to Fannie & Freddie dumping the credit risk on the tax-payer.
The real issue IS the mortgage insurance. Yves has this issue wrong.
The issue is, a GSE loan can be in violation of reps and warrants simply because it doesn’t have mortgage insurance (if the original LTV was over 80).
The problem is, rescinding coverage is the only way these mortgage insurers can remain solvent. By rescinding coverage on a loan in default, the insurer can take that liability totally off their books, whether or not there is any grounds at all for rescinding.
BofA is saying that in many cases, there are no grounds for rescinding, but to get the MIs to pay, they have to litigate.
Fannie, in trying to protect the mortgage insurers (an issue that is worthy of a story in itself), is forcing lenders to buy back loans, even with the rescission is in dispute.
BTW, it isn’t just BofA that is disputing Fannie’s stance, and they are hardly the only lender that is suing a mortgage insurer. There have been many lawsuits over improper rescissions.
No, The banks are protecting the mortgage insurers. Having m.i. enables the banks to source dubious loans to Fannie & Freddie. Banks such as BOFA know the insurers rescind at the first sign of trouble. The solution is to either end the use of M.I., hold the banks responsible should the insurance be rescinded or not allow the providers of insurance to rescind after the first 90 days. The insurers can’t collect fees and then walk when the loan goes south.
What an unbelievable mess. Nobody wants to take responsibility for their contractual obligations. Banks going after mortgage insurers, Fannie going after banks, and regulators in the pocket of the highest bidder.
Remember that PMI group filed for bankruptcy after Arizona barred them from the state. I would expect some more mortgage insurer bankruptcies in the coming years. Radian may be next:
http://seekingalpha.com/article/307639-radian-why-i-m-selling
“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,” “If we are required to abide by the terms of the new FNMA policy, our representations and warranties liability will likely increase”
Maybe we should stop shoving crap down the pipe?
No, that never occurs to them.
Yves,
A caller into Thom Hartmann’s show mentioned that she had a BofA mortgage and was qualified for whatever the new program was, but upon calling BofA about this, found that they has sold her mortgage just weeks earlier. She also said that the new mortgage owner wasn’t bound by the agreement. (She said she was a real estate agent, so probably knows her stuff.) It may of course be coincidental, but also might indicate that for whatever reason, BofA has decided to start dumping such mortgages. Thought you might be interested.
Obliterate BOA, not sure what the issue is. If the Gubb’mint won’t do it, then no one should conduct any business whatsoever, unless you’re serving summons to management.
“Bank of American Corp. reiterated that “reasonably possible” losses from litigation may reach $3.6 billion in addition to funds the firm has already accrued.
The figure, excluding matters in which potential losses are too difficult to calculate, was disclosed in the Charlotte, North Carolina-based firm’s annual filing today.”
Stealing homes isn’t too difficult is it Bank of ‘Murica?
Yes without a doubt, BOA must go, for us to be able to move forward
on a related point
looks like everyone is lawyering up
http://lansner.ocregister.com/2012/02/23/mortgage-suit-costs-oc-firm-32-million/158970/
From the ‘so why then didn’t you do more than wimp out’ department: Shaun Donovan!
“But when HUD initiated a large-scale review of the Federal Housing Administration’s largest servicers in the summer of 2010, we found much more than bank employees signing thousands of foreclosure documents that they never verified or even bothered to read.”
http://money.cnn.com/2012/02/24/real_estate/donovan_mortgage_settlement/
and since the twins are spinning like tops…
“Speaking before an audience of about 400 students and professors at Columbia University, where he received both undergraduate and law school degrees, Holder said the Justice Department has taken “bold, unprecedented steps” toward combatting financial crime.”
http://newsandinsight.thomsonreuters.com/New_York/News/2012/02_-_February/U_S__attorney_general_defends_financial_crime_record/
“So, let me assure you: whenever and wherever we do uncover evidence of criminal wrongdoing, we will not hesitate to bring prosecutions.”
http://www.justice.gov/iso/opa/ag/speeches/2012/ag-speech-120223.html
bottom line is that NO investor would ever touch the risk of a BOA underwriten mtg. loan, and certainly not BOA themselves, lol
Here’s my take on what BofA’s saying to DeMarco and what DeMarco should say back: http://abigailcfield.com/?p=1007
The “…dark forces of the Obama administration: Geithner, Summers, Rubin (in the background) et al….the “B” Team….the “A” Team was pushed aside prior to innauguration: Reich, Volcker, Tyson, and others who advocated “tough love” for the financial institutions, including BofA….
Until “tough love” is activated we will remain in a deep, dark financial pit.
With two corrupt political parties in charge and those party’s leaders who remain genuflected to Wall Street and fear money support shortages in elections, the common folk have nothing left but to take to the streets.
Dave Dayen is on a supreme tear regarding Shaun Donovan and the OCC Reviews.
Start here
http://news.firedoglake.com/2012/02/24/donovan-the-foreclosure-fraud-settlement-is-strong-because-of-the-occ-settlement/
Go here
http://news.firedoglake.com/2012/02/24/sham-occ-reviews-found-to-be-a-sham/
And Mr. Mandleman has a piece of audio you have to hear. OCC Reviews are a sham.
http://mandelman.ml-implode.com/2012/02/insider-says-wells-fargos-independent-foreclosure-review-for-occ-is-a-sham/
Yves famous quote is everywhere!
Quelle Surprise!
Wells Fargo quietly (or no one noticed) wants to do something rather similar to Bank Of America…
Wells Fargo to expand GSE-free mortgage lending
http://www.housingwire.com/article/wells-fargo-expand-gse-free-mortgage-lending
“A Wells spokeswoman said the non-agency loans could potentially securitized in private-label bonds in the future, but there are no plans to “at this point.” The bank did not project how many new loans the new division plans to write.”
What people are missing here is the fact that the GSE Business Model is fatally flawed. That means DEAD!
Fannie/Freddie, bac, investors all played the fatally flawed business Model way to long. It eventually had to implode. It was designed so that in such an event, the taxpayers would have to pick up the tab.
Whenever business people knowingly participate in a business model that is fatally flawed………it is then merely a theft by deception scheme (ask Bernie Madoff)with the taxpayers being the victims.