Bank of America (BofA) recently announced it has paid over $2.5 billion to buy back a portion of the misrepresented mortgages previously sold to Fannie Mae and Freddie Mac by Countrywide Financial, which was acquired by BofA in 2008.
Fannie Mae and Freddie Mac currently own two-thirds of all new U.S. mortgages. The entities still have more than $10 billion of outstanding requests for banks such as BofA, Wells Fargo, Citigroup and Washington Mutual (now owned by JPMorgan Chase) to buy back non-performing mortgages.
The banking industry as a whole is estimated to spend $20 billion to $150 billion to buy back loans from Fannie and Freddie.
first tuesday take: While the U.S. Treasury (via its ownership of Fannie and Freddie) is looking out for the taxpayers’ dollars by forcing lenders to buy back bad loans, it is the state Attorneys General (AGs) that are forcing the lenders to reel on the other side of the equation: the reduction of the principal on these bad loans to appropriate home values so homeowners are returned to solvency.
Thus, between the U.S. Treasury enforcing buy back arrangements and AGs demanding cramdown settlements, mortgage lenders are feeling the pressure to take responsibility for the questionable underwriting of these non-performing mortgages. Ultimately, any money they are making from the Fed’s 0% discount rate is now being funneled right back to the government to pay for the misrepresented loans and for losses on the discounting and principal reduction on those loans.
At this point, lender solvency relies entirely on the Fed’s lending policy. Looks like everyone will be looking to settle or forgive debt just to stay in Big Brother’s good graces. [For more information regarding the Fed’s discount rate, see the October 2010 first tuesday article, Deflation’s push on the real estate recovery.]
Re: “BofA reaches $2.8 billion deal with Fannie Mae, Freddie Mac” by Mercury News