* Watchdog urges more scrutiny of Fannie Mae payments
* Members of Congress asked watchdog to review loan deal
* Inspector general has concerns about controls on program
By Rick Rothacker
Sept 18 Fannie Mae agreed to pay Bank
of America Corp about 20 percent more than it was
contractually obligated to last year in order to transfer the
servicing of troubled loans to another firm, a report by a
In a report to be issued on Tuesday, the inspector general
for the Federal Housing Finance Agency urges the regulator to
ensure Fannie Mae applies more scrutiny to the pricing of such
transactions and possibly revise its contracts with mortgage
"FHFA should ensure that Fannie Mae does not have to pay a
premium to transfer inadequately performing portfolios," the
report says, referring to the regulator of Fannie Mae and
sibling Freddie Mac.
The watchdog, however, called the effort to shift troubled
loans to companies more skilled at working with borrowers a
"promising initiative" that could reduce loan losses for
government-controlled Fannie Mae and taxpayers. It could also
The FHFA inspector general scrutinized the $512 million
payment Fannie Mae agreed to make to Bank of America in August
2011 after members of Congress asked for a review. Some critics
viewed the deal as a back-door bailout that allowed the
second-largest U.S. bank to shed poor-performing mortgage loans
- and get paid for it.
At issue is a program in which Fannie Mae sought to reduce
losses on troubled loans by bringing in specialized firms to
handle payment collection and loan modifications.
Banks make mortgages and sell them to Fannie Mae and Freddie
Mac, which package them into securities for investors. Mortgage
servicers such as Bank of America, however, continue to
administer payments sent in by borrowers. Fannie Mae can shift
loans handled by one servicer to another, but has to pay a
termination fee to do so if the move is deemed "without cause."
In January 2011, Fannie Mae started discussions with Bank of
America about buying the mortgage servicing rights to 384,000
loans with an unpaid principal balance of about $74 billion,
according to the report.
Fannie Mae had projected losses of about $11 billion on the
loans, but determined it could get savings of up to $2.7 billion
by transferring them to another servicer. Fannie Mae concluded
that the bank's overall service was below average compared with
its peers, but it had not determined the bank to be in breach of
its contract, according to the report.
Eventually, Fannie Mae agreed to pay a termination fee of
$512 million to Bank of America, about $85 million more than it
had to under its contract, according to the report. The bank had
balked at a lower price and would have been allowed to delay the
sale for up to three months as it sought another buyer.
At the time, the FHFA reviewed the deal and was concerned
about the premium, according to the report. The regulator had
previously raised concerns about similar transactions,
determining Fannie Mae "routinely paid more than the
contractually specified fee for terminations without cause."
In a July 2011 email, one FHFA official wondered whether
Fannie Mae squeezed Bank of America hard enough on price
considering the bank was benefiting by "getting this stuff off
their books." In an email to FHFA, Fannie Mae argued it agreed
to pay the premium for a number of reasons, including avoiding
possible lawsuits with the bank, according to the report.
Ultimately, the regulator did not object to the sale after
Bank of America agreed to refund about $70 million of the
purchase price if Fannie Mae did not realize sufficient savings
from the deal. When all transfers were completed, Fannie Mae
ended up paying a total of $421 million to the bank because of a
reduction of the number of loans in the portfolio.
FHFA WILL REVIEW
In its report, the inspector general found that the concept
behind the program - to reduce credit losses - was "essentially
sound." But it agreed with an internal Fannie Mae audit that
raised questions about controls on the program. For example,
Fannie Mae relied on a single contractor to come up with prices
for most of the transactions.
The amount paid to the bank was similar to earlier deals,
which carried an average premium of about 15 percent, according
to the report. Since the Bank of America transaction, Fannie Mae
has not made any more payments to transfer mortgage servicing
rights, the inspector general found.
In a response included with the report, FHFA agreed that
Fannie Mae should not pay excessive premiums to transfer poorly
performing portfolios. The regulator said its supervision of
Fannie Mae has and will continue to include reviews of the
process for determining the price of "significant portfolio
The FHFA inspector general issued a report last week that
also stemmed from a Bank of America agreement with one of the
U.S. mortgage finance companies.
The watchdog found that Freddie Mac will recover up to $3.4
billion more from banks after it began to better scrutinize
soured loans for defects that could require banks to buy back
the mortgages. The stepped-up loan reviews came after the
inspector general raised questions last year about a settlement
Freddie Mac reached with Bank of America to resolve mortgage
The Charlotte, North Carolina-based bank has struggled with
mortgage losses after buying subprime lender Countrywide
Financial in 2008.