Fannie Mae didn’t give Bank of America Corp. (BAC:US) special consideration in agreeing to pay more than $500 million to transfer servicing of 384,000 mortgages to firms more likely to prevent foreclosures, a U.S. auditor said.
Still, the taxpayer-owned company (FNMA:US) paid more than legally required to Bank of America and 12 other lenders when it spent $1.5 billion for servicing rights on 1.1 million loans from 2008 to 2011, the Federal Housing Finance Agency’s inspector general said in a report released today.
The transfers were part of a Fannie Mae initiative to cut losses on mortgages at greatest risk of default. The specialty servicers hired to handle the loans, including Ocwen Financial Corp. (OCN:US) and Nationstar Mortgage LLC (NSM:US), typically do more outreach to distressed borrowers and have a better track record of keeping loans current.
“The amount Fannie Mae paid was consistent with the amounts it had paid to other servicers from which it had purchased mortgage-servicing rights under the program,” the inspector general’s office said in the report.
Bank of America ultimately got $421 million in the 2011 deal because some of the loans were paid off or refinanced by the time it was completed.
The transaction drew attention because it came after Fannie Mae had received $1.3 billion from Bank of America to settle claims over defaulted mortgages. Members of the U.S. House of Representatives including Republican Darrell Issa and Democrat Maxine Waters, both of California, sought the audit to ensure Fannie Mae wasn’t funneling taxpayer aid to the bank.
Fannie Mae, based in Washington, and smaller rival Freddie Mac of McLean, Virginia, have been operating under U.S. conservatorship since they were seized by regulators amid soaring losses in September 2008.
The audit found Fannie Mae paid lenders more than required in most transactions because it wanted to negotiate a smooth transfer. Holders of the servicing rights could have tried to sell them elsewhere if Fannie Mae offered the minimum price.
In the Bank of America transaction, Fannie Mae sought to buy servicing rights on a portfolio of loans with a delinquency rate of 11 percent and an unpaid principal balance of $73.6 billion. Fannie Mae (FNMA:US) estimated that it would lose $10.9 billion on the portfolio if the bank continued to service those loans and would cut that loss by $1.7 billion to $2.7 billion if the portfolio were handled by a specialty servicer.
The inspector general criticized Fannie Mae’s method of computing the value of the loans and suggested that the FHFA should step up its scrutiny of the servicing transfer program.
Jon Greenlee, FHFA’s deputy director of enterprise regulation, said the program was intended to help borrowers stay in their homes, not just to save money.
“The reason servicing transfer transactions such as the one at issue are expected to save money is that the new servicer is better equipped to work with troubled borrowers,” Greenlee wrote in a response included in the audit report.
The FHFA inspector general released a second audit today concluding that the agency should strengthen efforts to ensure Fannie Mae and Freddie Mac are better prepared for the failure of the banks that sell and service loans.
The government-sponsored enterprises have lost $6.1 billion from failures of four such lenders since 2008. The audit was triggered in part by Freddie Mac’s $1.8 billion claim against bankrupt Taylor, Bean & Whitaker Mortgage Corp., the inspector general reported.
The inspector general’s audits should be viewed as a window into the regulation of Fannie Mae and Freddie Mac, and not as a sign that any major change in operations is imminent, Isaac Boltansky, a Washington-based policy analyst for Compass Point Research & Trading LLC, said in a note to clients.
“The prospect for meaningful GSE reform is all but zero in 2013,” Boltansky wrote. “For this reason, administrative communications between the FHFA and the FHFA-OIG serve as important mile markers for the implementation of the FHFA’s regulatory framework over the GSEs.”
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