BREAKINGVIEWS-Inept Fannie/BofA deal highlights US mortgage mess

Tue Sep 18, 2012 10:41pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, Sept 18 (Reuters Breakingviews) - An inept $512 million mortgage deal between Fannie Mae (FNMA.OB) and Bank of America (BAC.N) casts another revealing spotlight into what ails mortgage finance in America. A new report shows that the government-controlled agency paid too much to pull some loan servicing business from Bank of America for doing a bad job. This double incompetence doesn’t just reflect poorly on the two firms. It’s a reminder that the backbone of the U.S. housing finance is in dire need of repair.

Critics lambasted the deal as a back-door bailout for the struggling mega-bank when it was struck in August last year. But the investigation by the Federal Housing Finance Agency’s inspector general instead reveals it was actually the result of a dysfunctional system.

Fannie may guarantee U.S. home mortgages, but it outsources the collection and paperwork to servicers like BofA, Wells Fargo (WFC.N), JPMorgan (JPM.N) and others. These have done a terrible job handling troubled loans, as the 2010 robo-signing scandal and the ensuing $25 billion settlement with the nation’s five largest servicers proved.

As the inspector general’s report details, one reason why servicers perform so poorly when mortgages sour is that they aren’t paid enough to dedicate the necessary resources. So they let such loans fester, costing Fannie – and by extension the taxpayer – money. Fannie’s solution to transfer the loans to a servicer specializing in work-outs is a good one. Yet, that requires the failed company to be a hard-nosed negotiator. It’s not: it agreed to pay BofA a 20 percent premium, or $85 million, for the bank to stop doing a bad job. Fannie struck similar deals with other servicers, according to the report.

Part of the problem is that Fannie had agreed to unfavorable contract terms. So the FHFA report recommends, among other things, that its ward give servicers less room to negotiate. That could include allowing the agency to buy up servicing rights at a prearranged price if a bank proves unwilling or unable to work with borrowers.

But the broader concern is that many government programs still rely on this problematic business to help borrowers stay in their homes. Fixing the flaws in servicing is essential to ensure a smooth-running mortgage market. Reports like Tuesday's show there’s still plenty of work to be done.

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CONTEXT NEWS

- Fannie Mae agreed to pay Bank of America an $85 million premium as part of an agreement to transfer a portfolio of home loans to another servicer, a report published on Sept. 18 from the inspector general of the Federal Housing Finance Agency found.

- The $512 million deal, struck in Aug. 2011, had been criticized as a back-door bailout of Bank of America.

- FHFA inspector general report: link.reuters.com/geg72t

- Reuters: Fannie Mae paid BofA premium to transfer soured loans-regulator [ ID:nL1E8KHG72]

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- For previous columns by the author, Reuters customers can click on [CRANE/]

(Editing by Antony Currie and Martin Langfield)

((agnes.crane@thomsonreuters.com)) Keywords: BREAKINGVIEWS USA/HOUSING

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