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Mortgage Loan Deal Reveals Broken System

House on broken ground
In case Americans thought the mortgage industry had cleaned up its act since the disastrous housing bubble burst, some all-too-familiar names might make them think again.

Fannie Mae and Bank of America made a troubling mortgage loan deal last year—the details of which have only recently come to light.

Fannie Mae, a government-controlled agency that helps borrowers get financing for a house, overpaid Bank of America for transferring the servicing of higher-risk mortgage loans to another company. Bank of America was paid $512 million, which is 20 percent more than Fannie Mae was obligated to pay, according to a Reuters report.

A government watchdog—the Federal Housing Finance Agency (FHFA)—discovered what some critics and lawmakers are calling a “back door bail-out.” The discovery was made as part of a Congressional review of the transaction. Naturally, the overpriced deal transaction raised the question of why a government-controlled lending agency was overpaying a massive financial institution for doing a poor job at servicing mortgage loans.

The FHFA advised that Fannie Mae apply stricter scrutiny to the pricing of deals and to evaluate whether to revise existing contracts with mortgage loan servicers. Such policy changes would hopefully save taxpayer money instead of profiting lenders who have already received billions in government aid.

The FHFA’s findings highlight Fannie Mae’s wasteful spending practices, proving the agency is apparently only too happy to shovel money into the maw of Bank of America.

These flawed transactions can only work with government involvement. Fannie Mae guarantees mortgage loans on behalf of the federal government so that private lenders can more readily offer money to borrowers. The actual paperwork of the process is serviced by large financial institutions such as Bank of America, Wells Fargo, and JPMorgan—the very same big banks that were bailed out with billions of taxpayer dollars.

The sour deal for taxpayers aside, the FHFA did say that the practice of transferring mortgage loan servicing from poorly performing mortgage loan servicers to other companies is customary.

However, to add salt to taxpayers’ financial wounds, the FHFA found that the excessive payment of $512 million to Bank of America is but one of many such transactions where mortgage loan servicers were overpaid in a Fannie Mae transfer.

This outrageous practice has clearly cost taxpayers more than $512 million if this recently analyzed deal between Fannie Mae and Bank of America is but one of many such incidences.

Brad Miller, a Democratic Congressman on the House Financial Services Committee, believes that tolerating substandard performance by mortgage loan servicers—especially ones as massive as Bank of America—only increases taxpayer costs while worsening the real estate market.

“By agreeing to pay half a billion dollars and not even apparently raising the issue of whether the performance by Bank of America was sufficient, they have sent a pretty clear signal to everyone involved in servicing that no matter how bad you are the worse that is going to happen is you will get paid to give up servicing rights, and you’ll get paid at a premium,” said Miller in an interview with the Chicago Tribune.

It may be naïve to blame for-profit organizations like Bank of America for all the wrong doing in this affair. A regulator and arm of the government like Fannie Mae should protect taxpayers—not force taxpayers to waste money during a recession and amid growing global problems. Fannie Mae should never have agreed to unfavorable contract terms with Bank of America, nor should it blatantly overcharge taxpayers by giving their money to large corporations in exchange for over-priced services or products. If anything, additional regulation should be implemented that will result in Fannie Mae being legally unable to pay more than the obligatory minimum price for a mortgage loan servicing transfer.

Sadly, as this troubling affair shows, Fannie Mae is prone to mistakes, even years after the subprime mortgage crisis and housing bubble. Big lenders in the mortgage industry—like Bank of America—will only be too happy to keep swallowing taxpayer dollars as the industry fails to correct and improve itself.