Recent news announcements have indicated that Bank of America is going to payback $2.8 billion dollars to Fannie Mae and Freddie Mac as a part of a settlement to relieve claims for over $21 billion in loans. Fannie and Freddie demanded that Bank of America buy back bad loans, most from the acquisition of Countrywide.
So, who are Fannie Mae and Freddie Mac?
Fannie Mae is the nickname for the Federal National Mortgage Association. Freddie Mac is the name used for the Federal Home Mortgage Corporation. Both were created as special Government-Sponsored Enterprises (GSE) created by the U.S. Congress as a way to stabilize the home mortgage markets and support homeownership and affordable rental housing. Fannie Mae was created in 1938 as a part of FDR’s New Deal. Freddie Mac was born in 1970 to expand the secondary market for mortgages to allow banks more opportunities to issue additional mortgage notes.
Both entities are tasked with buying mortgages, packaging them, then selling shares of loans to investors. This spreads out the debt among more people and allows the originating banks to have more money available for lending. Often you will hear about Fannie and Freddie when you read stories about such concepts as the “Secondary Mortgage Market” and “Mortgage Backed Securities”. Essentially, these two entities put the responsibility for the payment of the mortgages they purchase into the hands of the U.S. federal government.
Why have Fannie and Freddie Struggled?
Unfortunately, Fannie and Freddie ran into difficulties when large numbers of mortgage holders went into foreclosure as the housing crisis began a few years ago. After much legislation and debate in Washington D.C., the two GSEs were placed under the control of the Federal Housing Finance Agency (FHFA) in 2008 as they floundered and it became apparent that they would not be able to stand alone. Right now, both Fannie and Freddie are publically traded entities, though their stock value has plummeted in recent years.
The Bank of America deal has helped Fannie and Freddie to reclaim some of their losses, but no where near the amount they had originally hoped. The agreements resolved claims from Freddie Mac on roughly 787,000 loans with unpaid principal of $127 billion sold through 2008 by Countrywide Financial Corp. The deal with Washington-based Fannie Mae resolved claims on about $4 billion in loans. The settlement means that the rest of the defaulted loans will be covered by the U.S. Federal Government.
It remains to be seen whether or not the other large U.S. banks will reach similar settlements with Fannie and Freddie, and if so, how much they will re-coup from their losses. The Bank of America settlement seems to indicate that the banks will be allowed to make restitution for much less than the amount they allowed to be sold through Fannie and Freddie to the secondary market.