But that’s exactly what happened about 10 days ago, when Bank of America, in a new filing with the Securities and Exchange Commission, quietly revealed to the world that it would no longer sell new purchase money loans to Fannie.
A purchase money loan is used to buy a home as opposed to a refinancing.
So was this weird? Maybe. Then again, the US mortgage market has been operating in the twilight zone since September 2008 when Uncle Sam and the US Treasury Department seized control of Fannie and its sister company Freddie Mac, declaring them more or less bankrupt and placing them under government control.
Bank of America feels that enough is enough and that Fannie is not negotiating in good faith on buy-backs
Under government control Fannie and Freddie’s role in the mortgage market grew stronger as they became an even greater source of liquidity amid falling home values and failed lenders.
Without Fannie and Freddie to buy their originations, the US housing market would be in dire straits. Together, they buy 70% of all newly-originated mortgages.
Bank of America was once the nation’s largest originator thanks to its August 2008 purchase of Countrywide Financial Corporation.
Even though Fannie is a ward of the government, over the past three years it has been threatening lenders that sold now-delinquent loans to it during the industry’s go-go years of 2005 to 2008.
In a nutshell Fannie wants damages on all these bad loans or the lender must buy them back. Just how big might this tab be? Try this on for size – 10% of the $9trillion in outstanding US residential loans are in some form of delinquency, which comes to $900bn.
Fannie and Freddie bought half that amount at least. That’s $450bn of trouble, 55% of which belongs to Fannie. Who was the biggest seller of loans to Fannie during the go-go years? Countrywide, now the property of Bank of America.
To make a long story short, Fannie has been slamming the bank with buy-back requests for three years now and Bank of America has compensated the government-sponsored enterprise to some degree, but at last check it had $14bn of unresolved repurchase requests – about half of it tied to Fannie.
Bank of America feels that firstly it has already compensated Fannie and that secondly, all those rubbish loans were funded by Countrywide.
The bank feels that enough is enough and that Fannie isn’t negotiating in good faith on the issue. So what did it do? It basically told Fannie this – “OK, you want to fight us over the repurchase of delinquent loans that are four and five years old – loans that Countrywide and not Bank of America funded? Fine. We’re not going to sell you any newly originated loans.”
Bank of America, of course, has been steadily cutting back its presence in residential lending and today ranks fourth nationwide in originations.
Still, based on its current run rate it will wind up funding at least $70bn of new mortgages this year, half of which in normal times would be sold to Fannie.
Where might these loans wind up? At Fannie’s revival, Freddie or Bank of America might do what was once considered unthinkable – keep 30-year fixed rate loans on its books, or at least some of them.
Even though Fannie is funded by taxpayers – that is, until it turns a profit which may happen later this year – losing Bank of America business will hurt its bottom line.
Based on current numbers – and despite the bank’s intentional cutbacks in mortgage finance – Bank of America is probably Fannie’s second or third largest customer accounting for 7% to 10% of its business. And keep in mind that today’s production is considered pristine with little chance of default.
Replacing Bank of America won’t be easy or even possible for the government-sponsored enterprise. And although the bank said it wouldn’t sell any new purchase money loans to Fannie Ñ leaving the door open to refinancing sales – it’s generally believed that in time Bank of America will just cut Fannie off completely.
What does Fannie have to say about all this? Initially it had no comment but then about five hours after the news made national headlines in the business press it issued a statement.
“Fannie Mae has broad dealings with Bank of America,” the statement said. “In this matter, Fannie Mae remains committed to working with Bank of America to resolve their repurchase issues with us and in doing so, to fulfil its contractual obligations.”
An act of contrition? Perhaps.