Representative Darrell Issa (R-CA), has requested information from the Federal Housing Finance Agency on what he said might be a "back-door bailout" of Bank of America (BofA). The request came in a letter dated September 15 questioning Fannie Mae's reported purchase of the servicing rights for a large portfolio of loans from the bank. Issa, Chairman of the Committee of Oversight and Government reform wrote in response to an article in The Wall Street Journal which alleges that the Fannie Mae had bought rights to a pool of 400,000 residential mortgages with an unpaid principal balance of $73 billion. The purchase price was said to be $500,000. According to information from an RSS feed out of Issa's office, the letter signals the opening of an investigation into the purchase.
As quoted by Issa, the August 10 Journal article said that the sale was part of BofA's "strategy to sell noncore holdings, rid itself of mortgage problems, and preserve capital as it repositions its balance sheet to withstand future economic shocks." The paper, quoted an unnamed source familiar with the deal who said the bank sold the portfolio at a loss because its value is expected to deteriorate further. The loans, over half of which are in troubled markets, have a current delinquency rate of 13 percent.
Issa cited past and on-going federal support to Fannie Mae since it was put into federal conservatorship under FHFA in August 2008, including $150 billion from the Treasury and a Federal Reserve Board commitment to purchase $1.25 trillion in mortgage backed securities (MBS) from Fannie Mae and Freddie Mac. Issa said that FHFA was created to guarantee that Fannie Mae operate in a safe and sound manner and have the financial strength and operational capacity to fulfill its role in the nation's housing finance system which requires minimizing credit losses from delinquent mortgages.
The purchase is worrisome, Issa said, both because Fannie Mae does not service mortgages and because the transaction appears to have shifted a significant amount of risk from BofA to Fannie Mae. In addition BofA recently announced it would cut at least 3,500 jobs in the next few months. The purchase, Issa said, gives the bank additional liquidity and allows it to shed severely distressed assets. "Some commentators," Issa stated, "have labeled this transaction as a back-door bailout of BofA by permitting the bank to shift part of its risky portfolio to the American taxpayers."
Issa is requiring FHFA to furnish information on the following lines of inquiry by September 29, 2011.
- A full explanation of FHFA's decision to allow the purchase to take place including all documents and communications between FHFA and Fannie Mae relating to the decision.
- Full details regarding Fannie's evaluation of the portfolio including all documents and communications between Fannie Mae and BofA.
- Whether Fannie Mae took into account the risk of further degradation of the portfolio, and on what basis it determined to expand its portfolio given its conservatorship status and ongoing need for taxpayer funding.
- Whether Fannie Mae or Freddie Mac have considered or are considering the purchase of additional servicing rights from BofA or other financial institutions. Does Fannie plan to sell these servicing rights and if so to whom and when?
- Were there other bidders for the portfolio?
- Were any of the loans in the portfolio among those that Fannie Mae and Freddie Mac transferred to BofA on January 3, 2011
- What communications passed among FHFA and other federal agencies or departments regarding the purchase?
In response to our request for a statement a spokesman for the FHFA said, "We have received the Congressman's letter and will respond soon.
