Bank of America Corp. (BAC) told Fannie Mae it refuses to cooperate with the U.S. mortgage firm’s new stance on loan buybacks, setting the lender up for a potential surge in claims and penalties.
The bank is disputing Fannie Mae’s demand that lenders repurchase mortgages or cover any losses themselves if an insurer drops coverage, Bank of America said this month in a regulatory filing. The lender, ranked second by assets among U.S. banks, said it “does not intend to repurchase loans” under what it deems to be new rules, and the refusal may trigger penalties or other sanctions.
At stake is Bank of America’s ability to contain costs from faulty mortgages, which have reached about $40 billion for refunds, lawsuits and foreclosures. The company set aside $278 million for loan buybacks in the third quarter, the least since Chief Executive Officer Brian T. Moynihan took over almost two years ago. Those expenses may rebound if Fannie Mae’s rules stand, the bank said.
Fannie Mae didn’t enforce this policy before because “it was a different economic time,” said David Felt, a former deputy general counsel at the Federal Housing Finance Agency, the regulator for Fannie Mae. Defaults were fewer and the firm didn’t want to harm relations with lenders by being too picky, he said. “They’d overlook the small things. Well, they’re no longer small things, and they’re no longer the old Fannie Mae.”
Taxpayer Costs
Fannie Mae, along with Freddie Mac, buys mortgages from lenders and packages them into securities for sale to investors. Both firms are controlled by the government after being seized during the 2008 financial crisis to stave off collapse, and their overseers are pressing banks for refunds on bad loans to cut the cost of the bailout to taxpayers.
According to Fannie Mae, lenders were always contractually required to ensure that mortgage insurance was maintained. A guide dated June 30 requires lenders to alert the Washington- based mortgage financing firm of coverage withdrawals within a month of the event and gives them 90 days to appeal a repurchase demand. After June 2012, banks have just one month for appeals.
“Our contracts are clear that when a mortgage insurance company rescinds the required mortgage insurance, the loan is subject to repurchase by the lender,” said Amy Bonitatibus, a spokeswoman for Fannie Mae.
Insurance Contracts
Bank of America has said that Fannie Mae’s stance isn’t valid according to “relevant contracts.” Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, declined to elaborate.
Under their charters, Fannie Mae and Freddie Mac typically must have borrowers buy mortgage insurance if their loans exceed 80 percent of a home’s value. The coverage guards against losses when borrowers default and foreclosure fails to recoup costs.
Mortgage guarantors such as 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.
Bank of America told investors in August that Fannie Mae’s policy on insurance rejections may result in higher repurchase costs. The bank’s 57 percent decline in New York trading this year is due in part to concern about the bank’s ability to contain those expenses. The company attempted to limit losses that followed its 2008 takeover of subprime lender Countrywide Financial Corp. through a $3 billion settlement with Fannie Mae and Freddie Mac announced in January.
Conflicting Pressures
Analysts have said the rising tally may compel Bank of America to raise money by issuing stock to meet tougher capital standards. Rating firms including Standard & Poor’s said the prospect of higher mortgage costs is contributing to pressure for a possible downgrade of the bank’s credit.
Fannie Mae faces its own squeeze, with the firm reporting a $5.1 billion third-quarter loss and asking for another $7.8 billion in federal aid. Fannie Mae and Freddie Mac have cost taxpayers more than $150 billion so far.
“Fannie is being much more aggressive now because they are in conservatorship and they’re trying to recoup taxpayer dollars,” said Thomas Lawler, a former Fannie Mae economist who is now a Virginia-based housing consultant.
Under Fannie Mae’s policy, lenders have to repurchase loans after a mortgage insurance rejection even if the denial is legally contested. Having 90 days or less to appeal a repurchase request gives Bank of America little time to successfully do so, Lawler said.
Cost Projections
After Bank of America’s January announcement of its settlement with Fannie Mae and Freddie Mac, Moynihan said he was “pleased to put the GSEs behind us,” referring to Fannie Mae and Freddie Mac by the acronym for government-sponsored enterprises. The company later said that money set aside for repurchases was sufficient unless the “behavior” of the two GSEs changed.
Bank of America now says that because the mortgage firms are becoming more aggressive, “it is not possible to reasonably estimate a possible loss or range of possible loss” beyond what the firm has set aside for GSE repurchases.
The five biggest home lenders have absorbed more than $66 billion of costs tied to repurchases, litigation, foreclosure problems and other errors on faulty mortgages since 2007, with Bank of America paying the most. Investors who buy the loans are entitled to ask for refunds or compensation if they find missing or inaccurate data on home values or the borrower’s income.
Countrywide Fallout
Moynihan is cleaning up fallout inherited from Countrywide, which was acquired by his predecessor, Kenneth D. Lewis. Lax underwriting in years before the takeover led to soaring defaults on mortgages and claims from investors who lost money after buying or insuring Countrywide loans. The losses have led some analysts to speculate that Bank of America could put Countrywide into bankruptcy to control the expenses.
Last month, Moynihan, 52, told employees the firm isn’t likely to do so because of settlements including an $8.5 billion deal with a group of institutional investors that is awaiting court approval.
“We’ll continue to study it, we’ll continue to look at it,” Moynihan said of a potential Countrywide bankruptcy. “The judgment of the board and management has been that we have a settlement on private-label litigation that’s far superior to the alternative right now.”
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net
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