Did Fannie Mae Pay Too Much for MSRs in BofA Deal?

As part of its High Touch Servicing Program, ""Fannie Mae"":http://www.fanniemae.com/portal/index.html entered a deal with ""Bank of America"":https://www.bankofamerica.com/ in July 2011 to purchase mortgage servicing rights (MSR) for about 384,000 high-risk loans the GSE guaranteed.

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The Federal Housing Finance Agency Office of Inspector General (FHFA-OIG) recently reviewed the deal and the program in general.

The idea behind Fannie Mae's High Touch Servicing program is to purchase the servicing rights for portfolios of high-risk loans it guarantees and transfer them to specialty servicers to mitigate losses.

At the time of the BofA deal, the portfolio in question had an 11 percent delinquency rate.

Fannie Mae estimated it would reduce losses by between $1.7 billion and $2.7 billion by turning the loans over to a specialty servicer.

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The GSE has the option of transferring servicing rights ""for cause"" without paying any fees to the current servicer, or ""without cause"" at a rate of twice the annualized servicing fee.

However, the ultimate deal negotiated between Fannie Mae and BofA required the GSE to pay 2.4 times the annualized servicing fee -- $512 million instead of $427 million.

While the FHFA held reservations about the price of the deal, it ultimately approved it.

After reviewing the purchase, FHFA-OIG stated in its report, ""Fannie Mae, as guarantor of the mortgages in the BOA portfolio, faced the prospect of significant losses were it not to purchase the MSR; thus, the value of the MSR to Fannie Mae might well have exceeded the value to a purchaser with no such liability.""

The FHFA-OIG did find some fault with Fannie Mae's approach in negotiating the deal. The GSE relied solely on one independent valuator's review of the portfolio and ""did not avail itself of its internal Model Risk Oversight Group to assess the independent valuator's process or conclusions.""

The FHFA-OIG ""ventures no findings as to the validity of the independent valuator's valuation model or the accuracy of its valuation of the BOA portfolio.""

The terms of the BofA deal were not out of line with other similar deals, according to the report. However, the FHFA-OIG suggests, ""The High Touch Servicing Program would benefit from a more rigorous valuation process.""