Wednesday, February 29, 2012

Fannie Mae Challenges Bank of America on Rift


By NICK TIMIRAOS
Fannie Mae challenged Bank of America Corp.'s assertion that the two decided by mutual consent in January not to renew their loan-purchase agreement in the middle of a battle over who should pick up the multibillion-dollar tab for bad mortgages.
Rather the mortgage-finance company said in interviews and filings Wednesday that it alone opted against renewing its contract with Bank of America because the bank was resisting demands to buy back defaulted mortgages. "We felt like we had to take that step," Susan McFarland, Fannie's chief financial officer, said in an interview.
The termination means that Bank of America will stop selling Fannie Mae most mortgages after years of being one of its biggest customers. Last week, Bank of America characterized the cancellation as mutual and said that it had pared ties to Fannie after the company changed its policies concerning certain buy-back demands.
Ms. McFarland also pushed back against that assertion. "We have not changed our position on buyback requests. From our vantage point, it's a change in their behavior," she said. Bank of America declined to comment.
Fannie Mae ramped up its dispute with Bank of America as it reported a $2.4 billion net loss for the fourth quarter, compared with from a year-earlier profit of $73 million. The company has reported losses in 17 of the last 18 quarters amid continuing deterioration in housing markets.
Bank of America briefly became Fannie's top client following its acquisition of Countrywide Financial Corp. in 2008. It accounted for 20% of all loans Fannie bought or backed in 2009, but that share had fallen below 10% by the third quarter last year, and below 3% in the fourth quarter, according to Inside Mortgage Finance.
In its federal filing, Fannie reported more than $5.4 billion in outstanding repurchase requests with Bank of America at the end of 2011, accounting for 52% of such requests. Moreover, some 18% of all repurchase requests to Bank of America hadn't been satisfied after 120 days, compared to 2% at J.P. Morgan Chase & Co ., Citigroup Inc. and Wells Fargo & Co .
Bank of America is an "exception," said Ms. McFarland, who joined Fannie as its finance chief last summer from Capital One Financial Corp. "They are the only one that is not honoring their contractual obligations even though the kinds of requests we're making of them are no different from those of our other counterparties."
Bank of America's annual contract with Fannie expired in October, and the two companies had operated under month-to-month agreements through January, according to a Fannie spokesman.
Ms. McFarland said that if BofA didn't honor Fannie's demands, "ultimately the taxpayer pays" because Fannie could be required to increase the amount of money it takes from the Treasury. She said both companies were working to find an "amicable agreement."
Fannie and Freddie don't make loans but instead buy them from banks and other lenders. Contracts governing those sales allow Fannie and Freddie to kick back mortgage loans found to be defective.
Those buybacks were seen as a minor nuisance when the mortgage market was running smoothly, but they have become a big drag on mortgage profitability over the past three years as Fannie and Freddie sift through huge piles of defaulted loans.
Banks have argued that Fannie and Freddie are being overzealous in forcing back loans that default due to reasons unrelated to underwriting, such as when a borrower loses his or her job.
Buybacks have become a major headache for Bank of America, in particular, thanks to its acquisition of Countrywide, whose role as Fannie's top client stretched back many years.
In January 2011, BofA paid $1.3 billion to settle all existing and future buy-back demands with Freddie Mac. It paid $1.3 billion to settle buyback demands with Fannie, but the agreement only covered buyback requests through Sept. 20, 2010.
Bank of America's row stems from policies concerning the treatment of loans that are covered by mortgage insurance, which is typically taken out to cover loans that have less than 20% in down payments. Mortgage insurance companies have rescinded coverage when they find instances of fraud or misrepresentation, and those rescissions may trigger buybacks from Fannie and Freddie.
Last summer, Fannie issued guidelines requiring banks to report insurance rescissions and clarified repurchase policies around those loans. BofA in several filings has said that Fannie changed its policy, but Fannie says that isn't the case.
The quarterly loss reported Wednesday forced Fannie to ask the U.S. Treasury for $4.6 billion, though that includes nearly $2.6 billion that it will pay the government in dividends. The taxpayer cost of Fannie's rescue now stands at more than $96 billion.
Fannie and its sibling, Freddie Mac, were taken over by the government 3½ years ago. The government has promised to inject unlimited sums through the end of this year, and nearly $300 billion after that, to keep them afloat.

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