Housing Policy

Bank of America vs. Citizens of America

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Fortune on the this week's quasi-stealth bailout of the Bank of America from America's Toxic Twins, Fannie and Freddie:

critics of the giant banks….charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown.

Monday's arrangement, according to this view, will keep the banks standing—but leave taxpayers on the hook for an even bigger tab should a weak economic recovery falter. Sound familiar?….

And you don't need to be a conspiracy theorist to see that austerity talk in Congress means no more upfront support for financial firms. At a time of double-dipping house prices and nearly 10% unemployment, you can see where some people might find themselves devising new ways to prop up BofA and its housing-exposed rivals JPMorgan Chase (JPM), Wells Fargo (WFC) and Citi (C).

….how sharp is Freddie if all it can do is squeeze a $1.28 billion payment out of a giant customer in exchange for relinquishing fraud claims on $117 billion worth of outstanding loans? The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?

That seems pretty weak even given that this is Congress' favorite subsidy dispenser we're talking about.

"How Freddie can justify this decision to settle 'all outstanding and potential' claims before any of the private-label putback lawsuits have been resolved is beyond comprehension," says Rebel Cole, a real estate and finance professor at DePaul University in Chicago. "This smells to high heaven and they should be called out."

Dan Indiviglio at The Atlantic explains more about why this deal between BofA and Fannie and Freddie is good for Bank of America, and bad for Citizens of America:

Some people who aren't familiar with the mortgage market might have gasped as they read the news that Bank of America would pay $3 billion to government-sponsored mortgage companies Fannie Mae and Freddie Mac. After all, $3 billion sounds like a lot of money. "Maybe BOA is finally getting what it deserves," some naive bank-haters might have exclaimed. In fact, paying this sum is an incredible win for the bank. The penalty is so small that it's effectively insignificant.

For starters, it's important to remember that Bank of America also means Countrywide. After purchasing the ailing mortgage company in 2008, Countrywide's problems became BoA's problems. And according to the press release, this $3 billion loss provision the bank is taking should cover all Countrywide/BoA mortgages sold or guaranteed by Fannie and Freddie during the housing bubble.

How much is that? According to a Washington Post article on the story, it covers a BoA-Countrywide portfolio of about $530 billion held by Fannie and Freddie. That puts the loss rate on these loans that BoA will be responsible for at less than 1%. You don't need to be a mortgage analyst to know that a 1% loss doesn't begin to characterize housing's deterioration….

This settlement has a few implications. The most significant is that Fannie and Freddie are essentially admitting that the vast majority of their losses are their fault. The cost of the bailout alone to taxpayers is expected to easily exceed $150 billion. If it obtains a measly $12 billion or so from banks, that puts its responsibility at roughly 92%….

But the second possibility is that banks were, in fact, shady and Fannie and Freddie could legally push more of its mortgage losses to the banks, but has chosen not to do so. Why take such a strategy? The companies' willingness to let banks off easy could be politically-driven. It could be a sort of backdoor bailout.

This latter possibility demonstrates the unfortunate situation the government has gotten itself into through its decision to stand behind Fannie and Freddie. On one hand, it doesn't want to see financial stability or the housing market thrown back into chaos. So it doesn't want to be too hard on the financial industry. On the other hand, it's duty is to act to minimize the loss to taxpayers from Fannie and Freddie.

If this settlement is a backdoor bailout, then the government has prioritized stability over taxpayers, again.

Reason's own Tim Cavanaugh been beating Fannie and Freddie about the neck and shoulders with his cane with regularity, always to marvelous effect: read up on the continuing scam of the century.

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