The banking gears of housing – Bank of America sells mortgage servicing rights on large loan pool to Fannie Mae. 400,000 loans shifted to Fannie Mae with $73 billion in unpaid principal.
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Things just seem to get more perplexing with the housing market. Back in August the Wall Street Journal discussed a deal between Fannie Mae and Bank of America. The deal is odd even for the current banking system we have in place. It was reported that Fannie Mae purchased the servicing rights to 400,000 loans for the grand total of $500 million. Why would this be an issue you may ask? Well first, Fannie Mae being a GSE does not specifically service mortgages so buying a pool of loans with unpaid principal of $73 billion seems out of place. It also makes you wonder why a bank that has faced some troubles during the financial crisis would unload so many loans back to the government. This concern clearly does not go unnoticed and a Representative from the housing battered state of California sent a letter to the Federal Housing Finance Agency (FHFA) asking for more details on the deal.
The letter from Representative Darrell Issa
Source: Oversight Committee
In the letter, it is noted that the bank decided to sell the portfolio for a loss because the value of the loans were expected to deteriorate even further:
“The loans have a 13% delinquency rate, and more than half of the loans are in troubled U.S. real estate markets.”
Is this another form of bailout going on here? Why would the bank sell such a large loan portfolio back to Fannie Mae which is now under conservatorship? The pool of mortgages are already showing an unusually high default rate. The housing market is unlikely to bounce back soon and to the contrary, is already showing signs of a further correction ahead.
Bank of America has taken a beating since the recession began in 2007:
The stock price is down over 80 percent in the last five years. Given the troubles with the bank, largely from bad loans, the letter states that it is:
“…unclear why the FHFA allowed Fannie to proceed with the transaction.”
It is likely we will have details emerging in the months ahead but unlikely to make any significant change for those in the market currently. Some will target the government as being the problem and others will aim at the banks. At this point, the banks and the government are one. So a deal like this although shocking probably to most of you, is really something common in this financial bailout pattern.
It was also noted that last month’s surge in foreclosure activity largely came from Bank of America:
“(CNBC) It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month.”
The shift of a large loan portfolio to Fannie Mae and the current urgency to sell mortgages is definitely a new twist. The housing market remains in a mired state of problems with over 6 million mortgages now sitting in some stage of foreclosure limbo. During the earlier days of the crisis Bank of America purchased troubled mortgage lender Countrywide Financial. The bank seems to be leaving many doors open at this point:
“(Economic Times) NEW YORK: Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte , North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private.
A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said. The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA.”
Does any of this sound like the housing market is getting any healthier? It is very likely we are going to have a troubled housing market deep into 2020. Ask yourself this, why would a bank be so willing to unload 400,000 loans for $500 million with servicing rights when the principal due is $73 billion? In terms of assets Bank of America is the largest bank in the U.S. and many other banks are likely to have similar issues given the problems in the housing market.