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6 Points on Fannie Mae Mortgage Servicing Deal

Tue Sep 27, 2011 on Blog

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Fannie Mae has come under government scrutiny once again regarding its dealings with Bank of America. A Wall Street Journal article details an accusation made by Rep. Darrell Issa (R. California) that Fannie Mae provided a backdoor bailout when it purchased the mortgage servicing rights from the BofA.

But, as the 2008 housing crisis proved, things are not always what they seem. To get a better understanding of the situation regarding Fannie Mae and Bank of America, here are six points to take into consideration when trying to figure out this complex issue.

1. What is mortgage servicing?

* Mortgage servicing is common in the home loan industry. Although the bank brokers the loan for your home, they eventually sell them off to investors as securities. However, they continue to service the loan by collecting and processing payments. Fannie Mae depends on outside companies to service the loans they guarantee of which Bank of America is one.

2. Why does mortgage servicing have value?

* Banks make money in the form of a small fee charged per loan they service.

Since the mortgage bust, some servicers have been overwhelmed by the volume of defaulted loans, which can be harder and more expensive to manage than loans that regularly make payments. If servicers don’t do a good job servicing those loans for Fannie, that’s bad for Fannie because it may lead to bigger losses.

3. Fannie Mae did not purchase any mortgage loans from Bank of America. They paid $500 million to buy the right to service approximately $73 billion in loans.

4. Why would Fannie pay Bank of America for the rights to service mortgages that it already guarantees?

* The reason they purchased the mortgage servicing rights is so they can reassign them to a different company they feel are better able to handle troubled loans. By switching companies, Fannie Mae puts themselves into a better position of making more money from the loans.

5. Rep. Issa is under the impression that Fannie Mae has increased its risk burden by purchasing mortgage servicing rights. However, it is difficult to see where that is the case here. Fannie Mae already guarantees these loans which means they are already on the hook. They will actually lose more money if the loans are not being serviced well.

6. Since Fannie Mae is using taxpayer money for this deal, it is no surprise that it has come under political scrutiny. Additionally, lawmakers have clucked before about what they perceive to be other backdoor bailouts of Bank of America by Fannie Mae.

At the end of the day, the question isn’t whether or not Fannie Mae should have purchased mortgage servicing rights from Bank of America but whether or not the taxpayers are getting a good deal for their money. This is one of those things where we’re going to have to wait and see. 

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