The Federal Housing Finance Agency (FHFA) has approved agreements reached by Freddie Mac and Fannie Mae (the Enterprises) with two of the enterprises' counterparties, Bank of America (BofA) and Ally Financial Capital, LLC. The agreement with Ally also resolves a dispute between Fannie Mae and GMAC with respect to GMAC-issued private-label securities purchased by Fannie Mae. GMAC subsequently became a subsidiary of Ally under the name ResCap. The agreements were reached between the Enterprises and their respective counterparties. FHFA, as conservator of the Enterprises, reviewed and approved the agreements late last week.
According to information from Ally Financial, the GMAC agreement resolves potential repurchase exposure for loans serviced by GMAC Mortgage on behalf of Fannie Mae prior to June 30, 2010 and all mortgage-backed securities (MBS) purchased from GMAC by Fannie Mae. The settlement was for approximately $462 million and its terms release ResCap from liability related to MBS with an original balance of $292 billion and an estimated current unpaid balance of $84 billion.
The BofA settlements with the Enterprises resolves repurchase claims involving residential mortgage loans originated by Countrywide Financial Corporation which was purchased by Bank of America in 2008. The agreement with Freddie Mac resolves all outstanding and potential repurchase and make-whole claims related to approximately 787,000 loans sold to Freddie Mac by Countrywide through 2008. The loans have an unpaid principal balance of $127 billion. The agreement provides for a cash payment of $1.28 billion which BofA made on Friday.
The agreement with Fannie Mae involved a cash payment also made on December 31 of $1.34 billion and "substantially" resolves outstanding repurchase and make-whole claims outstanding as of September 20, 2010 arising out of alleged breaches of representations and warranties made to Countrywide. The settlement covers 12,045 loans with an unpaid principal balance of $2.7 billion. Outstanding claims on an additional 5,760 Countrywide loans with an unpaid balance of $1.3 billion are either resolved or the cure period for resolving missing documentation related claims extended by the agreement.
A news release from FHFA said that none of the agreements address representations and warranties with regard to mortgage servicing or foreclosure processing and that, in each case there has been a prior ongoing process of repurchases by these counterparties.
Acting FHFA Director Edward J. DeMarco said, "Combined, the agreements provide $3.3 billion in recovery to the Enterprises and, thereby, to taxpayers. The agreements also reflect FHFA's ongoing efforts to ensure the Enterprises enforce claims for violations of representations and warranties incurred by the Enterprises of breaches of other legal obligations."
Tim Rood, managing director, The Collingwood Group, LLC said that the settlement looks like "a good deal for Bank of America. It got to settle for pennies on the dollar but at the end of the day it might not be in the best interests of the taxpayers." He noted that the Enterprises don't have the available capital to cover losses in excess of the $3 billion they are getting. "I'm concerned," he said, "about the precedent it sets for the market. Will this deal made available to lenders of all sizes?"
The agreements with Fannie Mac and Fannie Mae do not cover loan-servicing obligations or loans contained in private-label securitizations, a fact addressed by Antony Currie, writing for Reuters, who advised stockholders not to get too giddy about the BofA settlement. While, he said it was far less than the worst case scenario of $21 billion that had been rumored last fall and about $500 million less than what the bank itself expected, the government settlement is only part of the story. BofA sold $910 billion in non-agency mortgages between 2004 and 2008 and may have to pay claims to insurers and investors who bought them. While he thinks it is unlikely to be so high, one estimate of its liability is $52 billion.
In addition to the amounts reached under the recent settlements, BofA said that it will take a provision of approximately $3 billion in the fourth quarter of 2010 related to repurchase obligations for mortgages the bank sold directly to the Enterprises. These loans include both Countrywide loans and loans originated on other "legacy" platforms.
Concurrently with the settlement agreement, Ally has increased an existing line of credit with ResCap to $1.6 billion from $1.1 billion. As of Sept. 30, 2010, ResCap has paid debt obligations totaling $2.0 billion, as well as $559 million under Ally's first lien revolving credit facility.
Both Ally and BofA said there were exceptions to the agreements but that they did not expect their further exposure to be material.
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