“Where does it end?”
Guess who now owns even more of Bank of America’s disastrous mortgage portfolio? You do, America. Because Fannie Mae is not a government sponsored entity, you own Fannie and because Fannie just bought the servicing rights to a substantial amount of bad loans from Bank of America, you just gave a sneaky backdoor bailout to BoA.
“Where does it end?” asks Fortune Magazine’s Abigail Field. Fannie Mae bought the loans for more than $500 million, despite BoA getting more bailout funds from the government (as part of TARP) than any other bank. According to the Wall Street Journal, an undisclosed number of loans were purchased by Fannie, but prior to the sneaky bailout, “seven million loans [were] still causing the most problems.”
BoA has had a tough year with failing loans, federal, state and homeowner lawsuits, and stock that that has taken a 40% nosedive in 2011 alone, putting them in the position to need to raise capital. Enter your tax dollars, but not in the traditional form of TARP funds.
Field noted, “the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to “deteriorate further,” the goal of the intervention can only be to fix Bank of America’s capital structure, which is easier for the government to do if it overpays for the rights.”
Buying up defaulted loans is normal, but in this case? Not so much.
The purchase of defaulted loans is not an uncommon practice, and can be lucrative if “cheaply produced foreclosure paperwork isn’t questioned, and if the foreclosures have equity and can be resold easily with lots of junk fees,” Field says, “but the mortgage servicing rights Fannie Mae bought are stinkers: they have a 13% delinquency rate, which means lots of foreclosures and loan modifications.”
Fortune Magazine reports that Fannie Mae is purchasing “the servicing rights in order to transfer the day-to-day management of those loans to a different company” which they deem a signal that Fannie is overpaying and if the rights were worth what they paid, a private company would have just bought directly from BoA, but instead, Fannie gave them a bailout.
The purchase is confusing as Fannie Mae just sought a bailout of their on in the form of $5.1 billion just last week. This feels a lot like a political move to pick winners and losers in the private sector, and there are more questions than there are answers about what appears to be Fannie bailing out Bank of America.