BofA May Turn Profit on Mortgage Buybacks, Credit Suisse Says

Photographer: Scott Eells/Bloomberg

The Bank of America Corp. logo is displayed in front of a branch in Galveston, Texas. Close

The Bank of America Corp. logo is displayed in front of a branch in Galveston, Texas.

Close
Open
Photographer: Scott Eells/Bloomberg

The Bank of America Corp. logo is displayed in front of a branch in Galveston, Texas.

Freddie Mac’s decision to force Bank of America Corp. (BAC) to repurchase $330 million of mortgages from its securities may result in a profit for the lender while triggering investor losses, according to Credit Suisse Group AG.

The bank broke Freddie Mac rules by using computer programs instead of appraisers to value certain properties. With the bonds trading at large premiums to face value because of the high interest rates on the underlying loans being purchased by Bank of America at par, investor losses probably exceed $20 million, based on characteristics of about $100 million of debt identified, said Mahesh Swaminathan, a Credit Suisse analyst.

Bank of America may be able to get loans “re-pooled” after manual appraisals into new Freddie Mac bonds that trade at similar values, Swaminathan wrote today in a report. It’s also possible the government-supported firm could accept the debt while charging higher guarantee fees, he said in a telephone interview. The lender also may be able to avoid losses on at least some of the loans through sales to other banks, he said.

“Some investors have questioned whether this would result in a profit for BoA at the expense of the investor,” wrote Swaminathan, head of Credit Suisse’s residential mortgage-bond strategy. “This is a legitimate concern, though” the buyouts may have been unavoidable as Freddie Mac and Fannie Mae face recent restrictions from their regulator on how they deal with faulty loans.

‘Not Eligible’

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on its plans for the mortgages, whose repurchases at par were disclosed May 22.

“These loans are not eligible for resale through Freddie Mac’s flow business and we have no intention of buying them back through any other channel,” Brad German, a spokesman for the McLean, Virginia-based company, said in an e-mailed statement.

The “vast majority” of the debt being repurchased isn’t delinquent, Frahm said. Under Freddie Mac’s rules, mortgage servicers typically must buy loans out of bonds while retaining the firm’s guarantees once borrowers fall more than 120 days behind to rework debt or manage foreclosures.

Homeowner credit scores for the loans that Bank of America is repurchasing are “very good,” though the debt generally includes “high” loan-to-value ratios and a sizable amount of property investors, Morgan Stanley analysts Vipul Jain and Janaki Rao said yesterday in a report, based on the disclosed pools that showed the mortgages made at least as early as July 2009 and through last year.

Defective Loans

Much of the debt may have been originated under Freddie Mac’s version of the federal Home Affordable Refinance Program for current borrowers with less than 20 percent home equity, according to analysts at Credit Suisse, Morgan Stanley and Nomura Securities International. Until a revamp last year, Freddie Mac was more accepting of automated valuation models under HARP than Fannie Mae.

Bank of America has booked more than $42 billion in costs tied to defective home loans and servicing, mainly from forced buybacks of soured debt made by Countrywide Financial Corp. whose underwriting failed to match its promise. The bank bought Countrywide, then the biggest U.S. home lender, in 2008.

In January 2011, Freddie Mac and the bank reached a $1.28 billion settlement over Countrywide loans sold through 2008.

The inspector general for the Federal Housing Finance Agency, the regulator for Freddie Mac and Fannie Mae, criticized that deal in a September report, leading to an expansion of the amount of loan files reviewed. Bank of America’s new repurchases weren’t tied “to any revised loan sampling methodology,” German said yesterday. “We believe the contract violations that triggered it constituted a one-time occurrence.”

‘One-Time Occurrence’

Bank of America’s “error” that allowed the use of computer appraisals on properties such as two-to-four unit and manufactured housing “has been corrected,” with the repurchases a “one-time occurrence,” Frahm said.

A freeze on Freddie Mac and Fannie Mae cash settlements with lenders instituted by the FHFA in the wake of the report may have helped create some of the buyouts, Credit Suisse’s Swaminathan said. Freddie Mac also sometimes has a lender indemnify it for losses without repurchases, securities filings show. German declined to comment on the company’s approach.

Buyouts may have been inevitable if different property valuation techniques would have shown loans to be ineligible for the types of Freddie Mac securities into which they were packaged, Swaminathan said.

The weighted average interest rate on loans in the securities listed in a Freddie Mac statement as most affected by the buybacks is 5.91 percent, compared with typical rates on new loans of less than 4 percent, according to data compiled by Bloomberg.

The loans to be repurchased account for 52 percent of the collateral for those bonds, which traded at almost 110 cents on the dollar, according to Bloomberg Valuation prices. Investors will be paid off at par, or 100 cents, and lose the above-market rates.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.