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Did Fannie Mae Bail Out Bank of America?


Fannie Mae agreed to buy the mortgage servicing rights of a portfolio of loans from BofA, but the purchase price is unknown because absolutely no one is talking.

Given Bank of America's recent struggles-its stock has fallen 55 percent from the beginning of 2011 to its lowest point last month-it has had a not-so-clandestine need for capital and confidence. Warren Buffett's $5 billion capital injection to this end was a much-discussed event in August. The Treasury Department's $500 million-plus capital injection via Fannie Mae two weeks before the Oracle of Omaha got back in the bank saving game was not.

The secrecy is a problem, particular given the absurdity of Fannie Mae-which itself needed a $5.1 billion bailout just two months ago-bringing more liabilities onto its balance sheet.

Mortgage servicing rights can be particularly challenging to assign a value, particularly during volatile interest rate environments. And without a liquid secondary market for MSRs, each portfolio must be valued independently. But since the characteristics of the loan pool that Fannie Mae purchased are unknown to the public, it is impossible to assign a value to the mortgage servicing rights, and to know whether $500 million is a fair price.

However, there are a few things we do know that would suggest the taxpayers are yet again getting a raw deal.

Earlier this year Bank of America was forced to buy back $2.5 billion in misrepresented toxic mortgages from Fannie Mae. Who knows how many of those might be underlying the servicing rights just sold to taxpayer supported Fannie Mae?

Even though Bank of America estimates the pool of loans has a 13 percent delinquency rate, many outside analysts believe the default rate on the mortgages that underlie the MSRs could be as much as double that. One financial institution that reviewed a portfolio of Bank of America MSRs, which looked suspiciously similar to what Fannie Mae purchased, estimated the loans had a delinquency rate of 25 percent.

Of course, it is possible that this is just bad housing policy and a lack of transparency. But even if it turns out that the portfolio's risks are low, and the MSRs turn a nice profit for Fannie Mae, there remains a question: Why are the taxpayers outbidding the private sector for mortgage servicing rights? If this truly is a profitable asset, then a healthy bank could benefit both its shareholder and the economy by using the cash flow to increase loans to businesses and individuals. Is that not what the White House wants?

Adding to the confusion of this bizarre story, FHFA recently filed lawsuit against Bank of America and 16 other banks for mortgage-related fraud. Why bail out a bank only to turn around and sue it? Imagine the scandalous possibility of Bank of America settling for $500 million in this new legal drama.

Given all the condemnation of bailing out banks, you would think the Democrats, who blame the financial crisis on Wall Street, would be outraged over the idea that another big financial institution receiving a cash infusion. We should at least see the Republicans and Tea Party wanting to get to the bottom of this suspicious purchase. And it is especially urgent with a streamlined refinance program in the wings that might only be stopped with evidence that it will hurt the taxpayers more than help them. With Congress back from their August recess, hopefully someone will stand up to discover exactly what Fannie Mae purchased, and whether Bank of America got yet another backdoor bailout.

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No positions in stocks mentioned.

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