banking

BofA squeezes mortgage pipeline to Fannie as clash escalates

Posted 2/24/12

NEW YORK - 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.

CEO Brian T. Moynihan is seeking to limit additional costs from faulty loans after the 2008 takeover of Countrywide Financial Corp. helped saddle the Charlotte, N.C.-based bank with about $42 billion in expenses. In November, the lender said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.

“Bank of America may be saying, ‘It’s too risky to do business with Fannie’ because of what it considers to be a stricter loan-recourse policy,” said David Felt, a former deputy general counsel at the Federal Housing Finance Agency, Fannie Mae’s regulator. “I don’t know if Fannie really cares; it’s the largest mortgage purchaser in the world, and if Bank of America turns to Freddie Mac instead, that’s like a different subsidiary of the same company.”

Bank of America will sell new loans to Freddie Mac, the other U.S.-controlled mortgage-finance firm, and Ginnie Mae, a company that packages loans backed by the Federal Housing Administration, said a person with direct knowledge of the lender’s plans. The lender also may keep some loans on the balance sheet, said the person, who spoke on condition of anonymity because the plans aren’t public.

‘Housing-Market Recovery’

“This decision will not affect the credit available to our customers,” Jerry Dubrowski, a spokesman for the bank, said in an e-mailed statement. “We will rely on other sources of liquidity to continue to ensure we are lending to our customers and supporting the housing-market recovery.”

Bank of America scaled back as it grappled with defective mortgages after selling about $1.1 trillion in loans to Fannie Mae and Freddie Mac from 2004 to 2008.

The lender accounted for about 21 percent of loans sold to Fannie Mae in 2009, making Bank of America the biggest seller of mortgages to the U.S.-controlled firm at the time, according to Inside Mortgage Finance. Last year, it accounted for 11 percent of Fannie Mae’s volume and that figure dwindled to 3 percent in the fourth quarter.

‘Dampening the Impact’

Bank of America may be seeking to gain leverage over Fannie Mae in disputes over who will absorb the costs of failed mortgages that were improperly originated, said Bert Ely, an independent bank consultant based in Alexandria, Virginia. Outstanding claims from bond buyers and insurers jumped 22 percent in three months to a record $14.3 billion as of Dec. 31, the lender said last month.

“With respect to Fannie, there’s a disagreement as to exactly what should come back, and to the extent that there’s a disagreement,” there may be an increase in the value of disputed loans, Chief Financial Officer Bruce R. Thompson said during a January conference call. “At this point, we believe our position is correct and we’ve accrued for what we owe.”

The bank’s decision may cause prices of Freddie Mac- guaranteed securities to weaken compared with Fannie Mae debt by shifting the supply of new bonds, Mahesh Swaminathan, a Credit Suisse Group AG analyst, wrote in a note yesterday. The bank’s origination volumes recently have been “low, dampening the impact,” he said.

Mortgage Insurance

Andrew Wilson, a spokesman for Washington-based Fannie Mae, said the company had no comment on the bank’s decision.

Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities for sale to investors. Both firms were seized by the government in 2008 to stave off collapse, and the FHFA is pressing banks for refunds on bad loans to cut the cost of the taxpayer bailout.

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.

Stock Rebounds

Bank of America’s stock fell last year amid investor concern that the mounting cost of faulty home lending would crimp profit. The firm, after posting the worst performance in the Dow Jones Industrial Average last year, leads the 30-company benchmark in 2012 with a 44 percent gain through yesterday.

Moynihan, 52, is cleaning up fallout inherited from Countrywide, which was acquired by his predecessor, Kenneth D. Lewis. Lax underwriting in the years before the takeover led to soaring defaults on mortgages and claims from investors who lost money after buying or insuring Countrywide loans.

Separately, Bank of America will freeze pension-plan benefits starting June 30 and continue funding defined contribution plans such as 401(k)s, according to the filing. The firm said it will increase contributions to some of the plans.

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