Fannie Mae still paid a premium to Bank of America (BAC) in order to transfer mortgage servicing from the bank to a smaller firm in 2011, but the Federal Housing Finance Agency forced it to push for a better deal, according to an inspector general report released Tuesday.
When Fannie targeted 384,000 high-risk mortgages serviced by BofA with a combined unpaid principal balance of $73.6 billion, Fannie executives wanted to transfer some of the loans away in order to save money.
According to its servicer guide, if Fannie opted to transfer the loans away “without cause,” it would have to pay BofA double what it got in servicing. Because the banking giant received 29 basis points per loan, Fannie would’ve had to pay 58 bps for a total of $427 million.
The government-sponsored enterprise and the bank reached an agreement however to transfer the loans at 69.5 bps, or more than $511 million.
When Fannie executives went to their regulator, the FHFA balked at the roughly $80 million premium.
“If the threshold question is whether or not to do the transfer, the answer is probably yes,” one FHFA senior manager said in an email obtained by the FHFA IG. “But the analysis probably understates the gain to [BOA] from getting this stuff off their books, so we might question if they have squeezed [BOA] hard enough on the pricing. It looks like doing the deal is better than not doing the deal, but there may be room to push for a better price.”
This wasn’t the first transfer, and when the news came out, Fannie had actually been operating a high-touch servicing program to look at moving more servicing from the larger firms struggling with massive backlogs and investigations into foreclosure practices.
The goal of the program was to save at least 20% on the deals in order to cover the premiums.
On the BofA dilemma, an independent valuator was brought in, and according to the inspector general, found Fannie would save 15.3% on the transfer, making the portfolio worth a market value of $464 million.
BofA publicly stated the value to be between $589 million and $663 million, while Fannie internally valued it closer to $453 million, counting in an 11% default rate at the time of the transaction, not accounting for future problems.
In its report, the inspector general raised the same concerns the FHFA did, that the valuations were questionable, didn’t account for negative equity or regional effects and would not result in the discount estimated.
When the FHFA objected, BofA said they would find a servicer for the loans themselves, and Fannie executives went back to the bank with a compromise.
The ultimate terms of the deal required Fannie to pay the 69.5 bps for the portfolio but would force BofA to refund up to 9.5 bps or roughly $70 million of the $80 million in premiums the bank got for the loans if the GSE did not realize at least 5% of savings in the five years after the transfer.
The deal went through. And BofA ultimately received 2.4 times the annualized service fee it would have gotten had the loans stayed at the bank. The other transactions mentioned as part of the high-touch servicer program resulted in similar results.
To date, Fannie paid roughly $1.5 billion in order to transfer more than 1.1 million mortgages to specialty servicers with an unpaid balance of over $200 billion, according to the report.
It paid an average 2.3 times the annualized service fee for these transfers, and the inspector general said the “breakeven points” on the deals were well under the program’s goal of saving at least 20% on future defaults. Fannie could actually still come out ahead on some transactions if it saved less than 5%, according to the inspector general’s own analysis.
FHFA directors of GSE regulation and conservatorship operations Jon Greenlee and Jeffrey Spohn agreed in a response letter to the report that the GSEs should not pay premiums to transfer “inadequately performing portfolios” but said the agency has cleared deals that benefit homeowners and the enterprises since 2010.
“FHFA asserts these transfers are not unusual, high cost, or new,” Greenlee and Spohn wrote.