Fannie Mae didn’t give Bank of America special consideration in agreeing to pay more than $500 million to transfer servicing of 384,000 mortgages to firms more likely to prevent foreclosures, a U.S. auditor said in a report Tuesday.
Still, the taxpayer-owned company paid more than legally required to Bank of America and 12 other lenders when it spent $1.5 billion for servicing rights on 1.1 million loans from 2008 to 2011, the Federal Housing Finance Agency’s inspector general said in the report.
The transfers were part of a Fannie Mae initiative to cut losses on mortgages at greatest risk of default. The specialty servicers hired to handle the loans, including Ocwen Financial and Nationstar Mortgage, typically do more outreach to distressed borrowers and have a better track record of keeping loans current.
“The amount Fannie Mae paid was consistent with the amounts it had paid to other servicers from which it had purchased mortgage-servicing rights under the program,” the report said.
Bank of America ultimately got $421 million in the 2011 deal because some of the loans were paid off or refinanced by the time it was completed.
The transaction drew attention because it came after Fannie Mae had received $1.3 billion from Bank of America to settle claims over defaulted mortgages. House members, including Reps. Darrell Issa (R-Calif.) and Maxine Waters (D-Calif.), sought the audit to ensure that Fannie Mae wasn’t funneling taxpayer aid to the bank.
Fannie Mae, based in Washington, and smaller rival Freddie Mac of McLean have been operating under U.S. conservatorship since they were seized by regulators amid soaring losses in September 2008.
The audit found that Fannie Mae paid lenders more than required in most transactions because it wanted to negotiate a smooth transfer. Holders of the servicing rights could have tried to sell them elsewhere if Fannie Mae offered the minimum price.
In the Bank of America transaction, Fannie Mae sought to buy servicing rights on a portfolio of loans with a delinquency rate of 11 percent and an unpaid principal balance of $73.6 billion. Fannie Mae estimated that it would lose $10.9 billion on the portfolio if the bank continued to service those loans and would cut that loss by $1.7 billion to $2.7 billion if the portfolio were handled by a specialty servicer.
The inspector general criticized Fannie Mae’s method of computing the value of the loans and suggested that the FHFA should step up its scrutiny of the servicing transfer program.
Jon Greenlee, FHFA’s deputy director of enterprise regulation, said the program was intended to help borrowers stay in their homes, not just to save money.
“The reason servicing transfer transactions such as the one at issue are expected to save money is that the new servicer is better equipped to work with troubled borrowers,” Greenlee wrote in a response included in the audit report.
The FHFA inspector general released a second audit Tuesday concluding that the agency should strengthen efforts to ensure that Fannie Mae and Freddie Mac are better prepared for the failure of the banks that sell and service loans. The enterprises have lost $6.1 billion from failures of four such lenders since 2008.