Issa probing Fannie's big mortgage buy - "backdoor bailout"

Issa probing Fannie's big mortgage buy
By Peter Schroeder - 09/15/11 04:41 PM ET

House Oversight Committee Chairman Darrell Issa (R-Calif.) is wondering why Fannie Mae agreed to buy 400,000 mortgages from Bank of America and whether its purchase of the risky assets constitutes a "backdoor bailout" of the bank.

Issa sent a letter Thursday to Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) that regulates Fannie, asking for a justification of the deal, especially in light of the bank's recently announced spate of layoffs.

"The transaction appears to have shifted a significant amount of risk from BofA's portfolio to Fannie. BofA's stock value has fallen over forty percent this year amid concerns that the bank is overexposed to troubled mortgages," he wrote. "Under these circumstances, I am unclear why FHFA allowed Fannie to proceed with the transaction."

The Wall Street Journal reported on the deal in August and noted that the bank sold the $73 billion in loans at a discount, anticipating further losses on it going forward. The loans included in the deal had a 13 percent delinquency rate.


Given that Fannie and fellow mortgage giant Freddie Mac have been under government conservatorship since 2008, Issa worried that such a deal "unwisely spent taxpayer funds."

“Congress and the American people deserve a full explanation for what appears to be yet another bailout paid for by taxpayers benefitting businesses that made bad business decisions,” he said.

DeMarco was given until Sept. 29 to detail the rationale for the deal, as well as any plans Fannie might have for future transactions.

Despite the deal, Bank of America and the FHFA do not have a universally positive relationship. The bank was one of over a dozen the FHFA sued earlier this month as it sought to recoup losses on risky mortgages sold to Fannie and Freddie before the financial crisis.