March 12, 2012

Minimal MBS Impact From BofA Not Selling To Fannie Mae

March 12, 2012

Minimal MBS Impact From BofA Not Selling To Fannie Mae

Remember Bank of America’s decision to not deliver purchase and non-MHA refinance loans into Fannie MBS primarily “because of the expiration and mutual non-renewal of certain contractual delivery commitments and variances that permit efficient delivery of such loans to FNMA”?

Investors are still discussing it, and it seems that although this should directly impact Bank of America’s Fannie issuance volume but the impact on overall monthly Fannie Mae MBS issuance volume is likely to be minimal.

This is mainly because the share of Bank of America loans among monthly issuance has been steadily declining since the start of 2011. Purchase loans account for around 20-30% of Bank of America’s monthly issuance, whereas HARP loans account for around 15-25%. Assuming Bank of America’s share to be around 3% of overall issuance, the net impact is expected to be a decline in volumes of around 1.2%-1.5% in Fannie Mae issuance.

Of course, it is likely that a large portion of these loans will be originated through Freddie Mac going forward.

Other originators noted, however, that the announcement makes it clear that from BofA’s perspective, GSE putback risk continues to be elevated.

Further, the announcement highlights the further deterioration in the relationship between Bank of America and Fannie Mae. And the fact that BofA will only be originating MHA loans suggests that they could have additional capacity to aggressively focus on HARP 2.0.

Even though it will not originate purchase and non-MHA refinance loans through Fannie Mae, BofA can still do so through Freddie Mac.

In fact, for non-MHA Fannie Mae loans originated by Bank of America, it will most likely resort to using Freddie Mac to refinance these borrowers.

Since these loans would have needed full underwriting even in the case of a Fannie to Fannie refinancing (since they are not eligible for HARP), investors do not expect a big impact on prepayments.

Attorney Phil Stein writes,

Now, Fannie Mae is pressuring lender Bank of America to cover losses incurred by insured home loans that have defaulted, but on which the PMI company is refusing to pay. Bank of America, to its credit, is resisting these demands, perhaps weary (and wary) of making such payments after having already entered into a multi-billion dollar settlement with Fannie only a little more than one year ago.

But the kudos to BofA end there. It is notable to those of us who regularly represent correspondents that BofA is not merely refusing to repurchase additional loans from Fannie, but is doing so on the grounds that there was no adequate reason for the PMI companies to fail to pay out mortgage insurance when these loans defaulted. This is consistent with the stance that BofA took as early as its lawsuit against MGIC, but BofA nevertheless routinely makes repurchase demands to correspondents based on the mere fact that PMI has been rescinded (whether it has been rescinded rightly or wrongly is of no particular concern to BofA in such cases). This is yet another important instance of BofA taking public positions that are directly contrary to its assertions when it makes buy-back demands on correspondents. Correspondents can use this inconsistency to their distinct advantage in contesting demands made by BofA. It is also interesting, incidentally, that Fannie has now claimed that it cut off purchases from BofA, rather than BofA deciding to stop selling to Fannie. While they sort out who broke up with whom, let’s hope that the correspondents will be given a well-deserved respite from BofA’s unfounded buy-back demands.

If you’d like to follow this and other mortgage legal issues, Phil’s writings can be found at