I mentioned this past week that I thought that Bank of America got a steal at the expense of the taxpayers. They resolved their Freddie Mac putbacks for a mere one cent on the dollar (1¢ on the  $) versus the total liability.

My back of the envelope calculations is that BofA got away with avoiding payments on somewhere between $5 billion and $15 billion dollars. Note, however, that this was not an arms length transaction. The GSEs are now wards of the state, and both the Bush administration and now the Obama team have been using them as back door bailouts for the banks.

Perhaps my assessment of this as a taxpayer giveaway is all wet, and this was a legitimate, fair value settlement. I highly doubt that is the case, but we will certainly find out soon enough: Various banks are now in discussions with other private entities who bought these securitized mortgages. The Treasury Secretary will not get to approve the giveaway, but in these cases, shareholders and private investors will. And they want every last penny that can be squeezed from their counter-parties.

These private sector, arm’s length buyers have been complaining about both the technical defects of the securitized paperwork (missing mortgage notes, improper filings, failure to properly account for the chain of ownership) as well as the substantive misrepresentations.

As an example, a pool of mortgages that might have been represented as having average borrower FICO score of 710 and LTV of 80% have in fact turned out to be 625 credit scores and 10% down payments (90% LTV). There is a direct correlation between worse scores and weaker LTVs and higher subsequent defaults.

The misrepresentations were substantial, and raise quite a few questions:

• Will the banks settle these cases voluntarily, or will they take a risk in litigation?
• Will the technical errors be perceived as significant?
• Were the substantive misrepresentations material? Did they impact the default rates?
• In dollar terms, what percentage of the putbacks can be attributed to these misrepresentations?
• What will the impact of this week’s GSE settlement be on other cases? Does this set a standard framework for future settlements, or will it be perceived as a giveaway to the banks and thus ignored?

You can think up your own questions, but these are issues that must keep corporate counsel at the banks up at night.

It will be interesting to watch the outcomes of these negotiations/litigations over the next few months . . .

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Bank Loan Putbacks & Repurchases”

  1. rktbrkr says:

    I don’t think these out of court settlements are truly precedents but BAC will certainly argue that they are.

  2. Sechel says:

    Bank America’s sweet heart deal is very consistent with Tim Geithner’s handling of AIG’s counter-parties. He’s shown no hesitation to use tax-payer money to support the financial system, more specifically to support the largest financial institutions.

  3. call me ahab says:

    the 1 cent on the $ appears on the face of it to be a “cave in” by the USG- however as both institutions are ultimately wards of the State- does it matter who is getting the better deal?

  4. Bill in SF says:

    “Were the substantive misrepresentations material?”

    Are criminal activities material? …apparently not.
    So, what’s a little misrepresentation; substantive or otherwise?

  5. b_thunder says:

    Questions for all the lawyers out there:

    If BofA has to pay 10-20 cents on the dollar to private mortgage buyers:
    1. Can The People sue the U.S. Treasury for aiding and abetting fraudsters, for negligence, taxpayer funds abuses, etc etc?
    2. What else can be done by The People to annul the Freddie/BofA deal?

  6. Marcus says:

    @ b_thunder:

    I keep wondering the same things. Is there anything we can do about our Treasury’s mishandling of ALL the bailouts? That includes going back to Buffett’s terms for his investment in Goldman vs the virtually free money the Treasury threw at them. Don’t they have any fiduciary responsibilities? Held to any “prudent man” standards?

  7. Pocket QQ says:

    According to my sources, a meeting with investors on this years “terms for modification” was canceled at the end of last month and is squeduled for this week sometime. It should be a news worthy week.

  8. DeDude says:

    It will be very difficult to compare the GSE’s with private deals because the types of loans were different (a lot more conforming loans for GSE’s). I agree the deals look pretty bad for the GSE’s (particularly the Freddie deal), but it will almost take a loan to loan evaluation to figure out for sure. You have to figure out exactly how much chance of success or failure in court was associated with each of the loans that were disputed. For the wast majority of loans the GSE’s had no chance legally against BoA it was only about 10% that they even considered taking to court. But people love being outraged even if facts can be produced to the contrary – so this 1c on the dollar BS will almost certainly live forever.

  9. DeDude says:

    This is one of those cases where an actual fact-based opinion requires detailed information not available, expertise that few people have, and effort beyond the 30 seconds most are willing to invest. So y’all just go ahead and pull some outrage out of your dumb a$$es – at least that will make you feel good :-)

  10. contrabandista13 says:


    I agree with your view on this matter… So far, it appears that the low hanging fruit is all gone, and just in the nick of time, considering MA and it’s global implications….

    Best regards,


  11. bob motley says:

    All Fannnie Mae and Freddie Mac had to do to get paid 100%
    was to tell BAC they would lose their seller-servicer approval.
    Instead of one cent they could have gotten 100 cents. To lose the
    their right to do business with them would have been worse than
    paying the money. What about the other seller servicers who paid
    100 cents to Fannie and Freddie? Do they get a refund? I assure you
    the little companies would have lost their right to do business
    with the GSE’s. It’s a big bank bailout AGAIN.