At first glance, the numbers look impressive. Bank of America Corp. last week agreed to pay $11.6 billion for selling the government toxic mortgages; 10 banks ponied up $8.5 billion to federal regulators for foreclosure abuses. But viewed against the scale of the financial meltdown, the feds most recent deals with financial-industry giants look to some more like a slap on the wrist.
It's all part of the government's push-and-pull with banks, where regulators are both determined to punish wrongdoers, but also tasked with promoting stability in the financial markets. The result is a pair of imperfect settlements that look good mainly when compared with other, even more flawed compromises, such as Freddie Mac's deal with BoA two years ago for far less money.
"To the banks, this was a pittance," said Hugh Totten, a partner in Chicago's Valorem Law Group who was not involved in the settlement but whose practice includes foreclosure litigation. "The problem is so big and the government is so incapable of knowing how to value [the remedy]."
Federal regulators have struggled with how to value the losses stemming from shoddy mortgages that lenders sold to Fannie Mae and Freddie Mac, which have received more than $160 billion in taxpayer funds to remain solvent. Last week's BoA settlement fell far short of the $1.4 trillion Fannie took on in unpaid mortgages from the bank between 2000 and 2008. But it's a huge increase from a settlement struck two years ago by Bank of America with Freddie Mac. Freddie received $1.28 billion."It's looking like Freddie left a lot of money on the table compared to Fannie," said David Min, a professor at the University of California, Irvine School of Law who specializes in financial-markets regulation. While the deals involved different pools of mortgage, Min noted that Fannie and Freddie are "similar entities…but it seems as if Fannie discovered claims worth 10 times what Freddie's claims were worth."
Both Fannie and Freddie require lenders to "represent and warrant" that the loans they buy comply with their underwriting standards that is, the buyers are creditworthy and the property meets eligibility requirements. If it turns out that the loans don't meet the standards, then the enterprises can require the lenders to repurchase them at full face value or indemnify them for any losses incurred.
Under last week's settlement, BoA agreed to repurchase 30,000 defective loans from Fannie for $6.75 billion. The bank, represented by Wachtell, Lipton, Rosen & Katz partner Meyer Koplow, also agreed to make a cash payment of $3.55 billion to Fannie and to pay another $1.3 billion to address loan-servicing issues, for total penalties of $11.6 billion. Koplow declined comment. BoA head Brian Moynihan in a statement called the settlement "a significant step in resolving our remaining legacy mortgage issues."
Fannie was assisted by Dechert partners Barton Winokur and Mauricio España. Winokur referred a request for comment to Fannie. In a statement, Fannie's general counsel, Bradley Lerman, called the deal "in the best interest of taxpayers."
TALE OF TWO SETTLEMENTS
It wasn't the first time Fannie has come after BoA for repurchase claims in late 2010, Fannie reached a $1.52 billion deal with the bank to repurchase about 18,000 loans.
At the same time, Freddie settled claims covering 787,000 loans for $1.28 billion. But there was a key difference. Freddie's deal included a provision "releasing Bank of America and its two affiliates from existing and future repurchase claims," according to Freddie's Form 8-K filed with the U.S. Securities and Exchange Commission. Freddie's then-general counsel, Robert Bostrom, now a partner at Greenberg Traurig, did not respond to a request for comment and a Freddie Mac spokesman declined comment.
Fannie's original deal contained no such concession, leaving the door open to future claims (last week's settlement, however, does ban additional claims down the road). Notably, Timothy Mayopoulos, who is now Fannie's CEO, was general counsel at the time, having joined the enterprise after serving as general counsel of BoA.
In 2011, the inspector general of the Federal Housing Finance Agency, which serves as Fannie and Freddie's conservator, blasted Freddie's settlement, saying the deal could have shortchanged taxpayers billions of dollars a report that now looks prophetic, given Fannie's settlement.