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Fool Me Twice:
Bank of America Plays Hide And Seek Using Fannie Mae

by Francine Mckenna, 8/11/2011

“Fool me once, shame on you. Fool me twice, shame on me.”

It looks like no one was fooled when the Wall Street Journal’s (WSJ) Dan Fitzpatrick reported that Bank of America (BAC) had sold the servicing rights to 400,000 loans with an unpaid principal balance of $73 billion to Fannie Mae for $500 million. There were numerous reports yesterday calling the deal a “backdoor bailout.”

“The rights being picked up by Fannie Mae were originally worth more than the purchase price, said a person familiar with the deal. The bank decided to sell the portfolio at a loss because its value is expected to deteriorate further, this person added. The loans have a 13% delinquency rate, and more than half of the loans are in troubled U.S. real-estate markets.

Fannie Mae doesn’t service any mortgages but can purchase the servicing rights in order to transfer the day-to-day management of those loans to a different company.

BAC is not selling the assets themselves only the rights to service the mortgages and collect those fees. The WSJ’s Fitzpatrick strongly hints that the portfolio is expected to deteriorate further making collections tough.

That was enough to whiplash the stock on Wednesday. Bank of America was down again almost 11 per cent yesterday after a drop on Monday of more than 20 per cent, mitigated by a temporary rebound of 16 per cent on Tuesday.

“Abigail Field In Fortune: Fannie Mae is purchasing “the servicing rights in order to transfer the day-to-day management of those loans to a different company.” That’s another huge sign that Fannie Mae is overpaying. If the rights were really worth $500 million, wouldn’t a private company pay that for them? Instead, it sounds like Fannie Mae is doing a bailout two-step, one to BofA and one to whomever takes these rights off Fannie Mae’s hands.

Another thing needs to become clear: where did Fannie Mae get the money to do BofA the favor of buying these rights? Fannie Mae just asked for another bailout of its own, seeking a new $5.1 billion infusion last week.

The last time Fannie Mae got involved in shape-shifting servicing rights to hide fraudulent activity was Taylor Bean Whitaker. That‘s the mortgage originator, audited by PricewaterhouseCoopers, that used Fannie Mae’s silence and their influence, according to Bloomberg, to market servicing rights on bad loans to GMAC.

How do we know the most recent $73 billion portfolio might be full of loser loans made via potentially fraudulent means? Fannie Mae told us so when they sued Countrywide, the mortgage originator and source of significant woe Bank of America bought in 2008.

“The New York Times Dealbook, January 3, 2011: Bank of America announced Monday that it had paid more than $2.5 billion to buy back troubled mortgages and resolve related claims from Fannie Mae and Freddie Mac — deals that may prompt a wave of such settlements by big banks.

The agreements center on home loans that Countrywide Financial sold to Fannie and Freddie at the height of the mortgage bubble. The government-controlled housing giants, which have suffered billions of dollars in losses in recent years, have said that the lender misrepresented the quality of the loans.

How much of the portfolio Fannie Mae just agreed to market – the servicing rights, that is, or the right to collect fees for collecting on the loans – consists of the loans Fannie Mae and Freddie Mac put back to BAC earlier this year?

I don’t know for sure but I know two firms who probably do.

KPMG was auditor of Countrywide until it was bought by BAC in 2008. KPMG was the one approving the internal controls over asset valuations when the repurchased loans and the $73 million now that need to be “serviced” were first originated. KPMG was also auditor of Fannie Mae until 2005.

PricewaterhouseCoopers is auditor of Bank of America and also of Freddie Mac. PricewaterhouseCoopers also audits the Federal Home Loan Banks and AIG. These are two more organizations suing Bank of America to repurchase loans first originated by Countrywide because they allegedly have representation and warranty weaknesses.

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