Billions in Losses Loom for Freddie Mac and US Taxpayers in Sloppy Mortgage Putback Settlement with Bank of America

Strategic Insights -

The Federal Housing Finance Agency's Office of Inspector General has raised serious concerns about the FHFA's handling of a mortgage putback settlement between Freddie Mac and Bank of America. The Inspector General's report found that the FHFA's senior management failed to address significant concerns about the loan review process used by Freddie Mac, which could lead to major losses for Freddie Mac and US taxpayers in the years ahead. The FHFA's acting director approved the settlement in December 2009, despite additional loan review concerns raised by senior managers in September of the same year.

Key Takeaways:

  • The Inspector General found that the FHFA's senior management did not timely address significant concerns raised about the loan review process used by Freddie Mac.
  • The FHFA's acting director approved the settlement with Bank of America in December 2009, despite additional loan review concerns raised by senior managers in September 2009.
  • The Inspector General recommended that the FHFA promptly initiate management reforms to ensure that senior management is apprised of and timely acts on significant concerns brought to its attention.
  • The Inspector General also recommended that the agency's acting director establish appropriate goals, principles, and procedures at the top of the FHFA organization to guarantee that significant concerns are properly and timely addressed and acted upon.
  • Freddie Mac and US taxpayers could be looking at billions of dollars in losses from a sloppy mortgage putback settlement with Bank of America.
  • The settlement resolved most past, present, and (with limited exceptions) future repurchase issues associated with 787,000 loans sold to the Enterprise by Countrywide Financial.
  • Bank of America acquired Countrywide Financial in July 2008.

Statistics:

  • The US Treasury had invested over $162 billion of public funds in Fannie and Freddie to offset their losses and prevent their insolvency as of June 9.
  • Freddie Mac and Fannie Mae had settled their mortgage putback claims with Bank of America in December, with Fannie settling for $1.52 billion and Freddie for $1.35 billion.
  • The settlements appear to be very small amounts, compared to the billions in subsequent mortgage repurchase losses for which the bank has set aside reserves.

Sources:

  • The Street (http://www.thestreet.com)
  • The Street (http://www.thestreet.com/story/11183756/1/bank-of-americas-multibillion-dollar-blunder.html)
  • Twitter (http://twitter.com/PhilipvanDoorn)
  • Philip van Doorn (http://apps.thestreet.com/cms/email/tscEmailStory.do?storyId=&authorId=1110297&subject=&headline=&storyUrl=/story//1/.html)