FHFA purposefully vague on Bank of America’s MBS deal?

September 1, 2011

Monitoring the docket Tuesday afternoon, as motions to intervene in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities noteholders piled up, was sort of like watching guests arrive a cocktail party. Oh, here come the hedge funds. Look, there’s a bunch of insurance companies. The public pension funds always head straight for the shrimp. Homeowners? Did anyone invite them? And, of course, Goldman Sachs had to show up fashionably late.

Other party guests may have looked glitzier, but none of Tuesday’s intervention motions is more important to the ultimate determination of the proposed settlement’s fairness than the one filed by the Federal Housing Finance Agency, the government agency that oversees Fannie Mae and Freddie Mac. No one knows the value of mortgage repurchase claims-the claims the proposed BofA deal resolves-better than FHFA.

Here’s why. In the MBS boom years, Fannie Mae and Freddie Mac bought hundreds of billions of dollars of mortgages from Countrywide and many other lenders. The government-sponsored entities packaged the loans into mortgage-backed bonds, just like other MBS issuers. But after the housing bubble burst, and Fannie and Freddie were placed under the federal government’s conservatorship, FHFA had both more of an incentive to get information about those underlying loans than other MBS issuers–and more power to get the information. In July 2010 the agency announced that it had issued 64 subpoenas for mortgage loan documents. Last October it brought in Quinn Emanuel Urquhart & Sullivan to advise on litigation against mortgage lenders that breached representations and warranties about the loans they sold to Fannie and Freddie.

In January the agency’s efforts produced their first fruit: a $3 billion settlement with Bank of America to resolve Fannie and Freddie’s mortgage repurchase claims against Countrywide. BofA announced at the time that the settlement addressed the $130 billion in unpaid principal balance on the loans Countrywide had sold to Fannie and Freddie. But the more significant number was contained in a presentation on the deal that the bank offered analysts. Fannie and Freddie’s total repurchase claims against Countrywide (for mortgages written between 2004 and 2008) were $21.6 billion. The $3 billion settlement, the bank said, substantially resolved those claims.

Those are important benchmarks, and I’m absolutely sure it will turn out that both Bank of America and the 22 Countrywide MBS investors represented by Gibbs & Bruns looked at Fannie and Freddie’s repurchase claims-and how much FHFA got for them-as they negotiated the proposed $8.5 billion settlement.

FHFA took some heat for settling on the cheap with Countrywide and was under political pressure to scrutinize the proposed $8.5 billion deal, in which Fannie and Freddie have a stake as Countrywide MBS investors. (In addition to buying loans directly for their own securitizations, they also purchased mortgage-backed securities from other issuers.) So it’s not at all surprising that the agency filed its 3-page “conditional objection” to the settlement. “FHFA has insufficient information concerning the proposed settlement,” the filing said. “FHFA seeks to be eligible to receive additional relevant information, if any, developed in discoveryto assist FHFA in its ongoing due diligence with respect to the proposed settlement.”

But this was a funny kind of “objection”: FHFA didn’t stop with a request for more information. It went on to note the “positive” aspect of the proposed settlement’s servicing provisions and to say that the agency is “encouraged” that a group of “significant market participants” supports the deal. A press release FHFA put out in conjunction with its filing went even farther: The agency, it said, “is aware of no basis upon which it would raise a substantive objection to the proposed settlement at this time.”

That sure seems to be a provisional endorsement, albeit in the guise of a conditional objection.

I called Marc Kasowitz, who’s representing FHFA in the BofA litigation. He referred me to an agency spokeswoman who said only that the FHFA statement “stands on its own.”

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