Bank of America’s decision to stop selling new mortgages to Fannie Mae seemed a surprising move in a government-backed market in which few other options exist. But even before Thursday’s announcement, the bank had been scaling back its share in the mortgage market dramatically in the past year.
While it has abandoned Fannie for new home loans, the bank is now planning to rely on other government-sponsored enterprises, such as Freddie Mac, to support its lending.
Bank of America’s action occurred in part because of its escalating dispute over Fannie’s demand that it repurchase billions of dollars of defective mortgages. But it’s also clear that the Charlotte-based firm believes Fannie in particular is the problem — not the entire realm of government-sponsored enterprises set up to back the mortgage market.
“Our focus is making sure we’re continuing to actively and responsibly extend credit to our customers — the most responsible way to do that is to make sure we’re using various sources of liquidity, including Freddie Mac and Ginnie Mae,” said Dan Frahm, a Bank of America spokesman.
The reality is that there aren’t many other options when it comes to the secondary mortgage market, more than 90 percent of which is controlled by Fannie, Freddie and other government-sponsored enterprises. Bank of America says that it will also keep some of the mortgages on its own books, rather than sell them. But regulations limit the amount of risk that a taxpayer-insured bank can take on its own balance sheet.
“They don’t have [the] capacity to really hold these loans,” said Cristian deRitis, credit analytics director at Moody’s. “I don’t think this changes fundamentally the secondary [mortgage] market at this point.”
Guy D. Cecala, publisher of the trade publication Inside Mortgage Finance, agreed that other mortgage servicers aren’t likely to start rushing for the exits. “Whether you like Fannie or Freddie, they’re two-thirds of the market. There’s no way to really fight that,” Cecala said. “Most lenders need them to exist.”
In recent months, Bank of America has significantly scaled back its own involvement in the mortgage market, making its exit from Fannie even less dramatic. The bank had inherited most of its Fannie-held loans when it took over Countrywide Financial in 2008 — the loans at the heart of the repurchasing dispute — and it decided to abandon operations in big parts of the mortgage market, including its wholesale mortgage business.
As a result, the bank’s market share in Fannie Mae dropped from 11 percent to around 3 percent by the end of 2011. Meanwhile, some relatively smaller banks have ramped up their mortgage operations: Wells Fargo, for instance, has rapidly expanded its mortgage lending operations, both in terms of origination and sales to the secondary market.
And Fannie has been among those to benefit, as well, even as customers such as Bank of America have withdrawn. “Between the third and fourth quarter last year, customers increased their business in mortgages sold to Fannie by 60 percent, while Bank of America reduced their loans by 49 percent,” Cecala said. “Bank of America is an isolated situation.”
Refusing to sell future mortgages to Fannie won’t do anything to change Bank of America’s dispute over buying back faulty mortgages. But it does send a message both to Fannie and the public at large about the issue. Bank of America isn’t cutting all ties with Fannie: It will continue to participate in the housing giant’s loan modification and refinancing program through the Home Affordable Refinance Program, which was part of the 2009 bank bailout.
Fannie, for its part, indicates that the repurchasing dispute is far from over.
“Fannie Mae has broad dealings with Bank of America,” said Kelli Parsons, a Fannie Mae spokesperson. “In this matter, Fannie Mae remains committed to working with Bank of America to resolve their repurchase issues with us and in doing so, to fulfill its contractual obligations.”