Bailouts

Lawmaker Labels BofA-GSE Repurchase Settlement a "Backdoor Bailout"

Posted on Monday, January 10, 2011

The widely publicized agreement reached between Bank of America and the nation’s two largest mortgage companies to resolve claims that BofA’s Countrywide soldthem poorly underwritten loans was well received by the markets. But at least one lawmaker, Rep. Maxine Waters (D-California), is raising a red flag, going so far as to describe the settlement as a “backdoor bailout.”
The North Carolina-based bank announced Monday morning that it had paid Fannie Mae $1.34 billion to cover outstanding requests from the GSE to buy back 12,045 loans with an unpaid principal balance of $3.9 billion, and that it had handed over $1.28 billion to Freddie Mac for the repurchase of 780,000 loans with a total unpaid principal balance of $127 billion.
Bank of America’s stock price saw its biggest gain in more than seven months that day as it jumped 6.4 percent, and it has been rising steadily ever since.
Analysts applauded the settlement for providing “clarity regarding [BofA’s] ultimate rep and warranty losses on GSE exposures,” as Fitch Ratings put it, noting that with the signing of the agreements, it appears the bank’s losses from GSE buyback claims will fall within the “mild loss scenario.”
The popular take within the media is that BofA’s move will become the blueprint for other mortgage lenders to reach settlements with Fannie and Freddie over loan repurchases in a sharing of losses. But Rep. Waters says the
fact that Bank of America’s stock surged after the deal was announced only fuels her suspicion that the settlement was “merely a slap on the wrist that sets a bad example for other negotiations in the future.”
“I’m concerned that the settlement between Fannie Mae, Freddie Mac, and Bank of America over misrepresentations in the mortgages BofA originated may amount to a backdoor bailout that props up the bank at the expense of taxpayers,” Waters said.
[Note: Although Waters asserts that the agreement covered mortgages BofA originated, the settlement actually addresses loans that were originated by Countrywide before it was acquired by Bank of America in 2008.]
“Given the strong repurchase rights built into Fannie Mae and Freddie Mac’s contracts with banks, and the recent court setback for Bank of America in similar litigation with a private insurer, I’m fearful that this settlement may have been both premature and a giveaway,” Waters continued.
She also noted in her statement that the questions raised by fraudulent servicing practices were not addressed in these settlements.
“I hope that Fannie Mae and Freddie Mac, along with their conservator, are more aggressive in pursuing banks for the fraud I documented in my subcommittee during the last Congress,” Waters said, referring to the recent congressional hearings held to address consumer complaints of servicers’ unresponsiveness and the industry’s robo-signing debacle.
Executives at both Fannie and Freddie stand by their settlement decision with BofA.
Michael J. Williams, president and CEO of Fannie Mae, described the deal as “significant” and a “fair and responsible resolution.”
Charles E. Haldeman, Jr., Freddie Mac’s CEO, said Bank of America has long been one of Freddie Mac’s “largest and most important business partners,” and he believes the agreement reached “is in all parties’ best interests.”
DS News, By: Carrie Bay


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