Last week, government-backed mortgage entities Fannie Mae and Freddie Mac fined Bank of America $3 billion for selling faulty mortgages that either have, or will default into, huge losses. Now critics are calling the deal a backdoor bailout because the sum is much lower than the losses for which the bank could be held liable.
In a letter to Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), Democratic Reps. Maxine Waters of California, Brad Miller of North Carolina, Keith Ellison of Minnesota and Stephen Lynch of Massachusetts questioned the terms of the settlement.
“We request detailed information on how FHFA determined that the combined $3.3 billion settlement represent the best possibly recovery of funds available to taxpayers,” the letter said. The Bank of America press release does, however, list the fine as “approximately $3 billion.”
In a previous statement, Waters said, “I’m concerned that the settlement between Fannie Mae, Freddie Mac and Bank of America over misrepresentations in the mortgages of BofA originated may amount to a backdoor bailout that props up the bank at the expense of the taxpayers … I’m fearful that this settlement may have been both premature and a giveaway.”
At issue is billions of dollars in mortgages sold to Fannie and Freddie by Bank of America. According to the Washington Post, the mortgage pool is worth about $530 billion. Fannie and Freddie have accused the bank of selling mortgages that appeared to fit within their desired risk profile and underwriting guidelines, but did not. That’s a form of fraud. But because Fannie and Freddie had guaranteed the loans, the government entities were going to sustain the losses even if Bank of America was to blame.
Why did Fannie and Freddie essentially let Bank of America off the hook? And what it means for taxpayers?
“The problem is that Freddie Mac has $127 billion in mortgages from Bank of America,” said Anthony Randazzo, director of Economic Research at the Reason Foundation. “But Bank of America is only paying $1.2 billion.” Fannie Mae owns about $3.1 billion in the bank’s faulty loans, Randazzo added, but the bank is only paying 49 cents on the dollar to cover those losses.
“That means taxpayers are going to have to take all those losses,” Randazzo told The Daily Caller. “[With Fannie], the taxpayers took about a 50 percent hit.”
The roots of the deal go back to 2008, when Bank of America acquired Countrywide Financial at the height of the financial collapse. At the time, Countrywide was close to bankruptcy and the FBI was investigating it for fraudulent practices.
While the merger made Bank of America the largest and most powerful mortgage lender in the United States, it also meant the bank took on Countrywide’s risky portfolio. Two years later, those mortgages are now in default and worthless.
Instead of forcing the bank to repurchase the risky loans, thereby transferring the hundreds of billions of dollars in losses back to Bank of America, Fannie and Freddie said a $3 billion fine would suffice – with $1.28 billion going to Freddie and $1.52 billion going to Fannie.
“You have to remember that when Bank of America took over Countrywide that made the government very happy,” said Alex Pollock, a fellow at the American Enterprise Institute and former chief executive of the Federal Home Loan Bank of Chicago. “That was solving the problem of the day. I’m sure that various regulators told Bank of America it was wonderful.”
“I guess in retrospect Bank of America would have been better letting Countrywide fail,” he added. “It’s easy to be smarter looking backward of course.”
If Bank of America had been forced to repurchase the loans, the losses absorbed by the bank would have had massive negative effects market wide. Not only would stock prices fall, but because Bank of America is so large, anything it does would send ripple effects throughout the market. Thus, if the bank goes under, so does the rest of the market.
“Fannie and Freddie are run by the government right now,” Randazzo told TheDC, “and the Treasury Department is afraid that if the banks take too big of hits, they will go under. From the bailout through this action, everything they’ve done is try to save the banks.”
According to Pollock, it’s doubtful any questioning on the Hill will lead to any sort of real investigation or answers concerning Bank of America’s deal. He did say, however, that there is “no doubt the taxpayers are on the hook for losses.”