Bank of America and Freddie Mac are currently attempting to resolve a mortgage repurchase dispute in which Freddie Mac claims that Bank of America should have to buy back more than $1.4 billion in mortgage loans it claims were defective. The Wall Street Journal has reported that Bank of America, which is still recovering from its 2008 acquisition of Countrywide Financial, would like to reach an agreement by the end of the year. If that occurs, it will be the second such settlement between Bank of America and Freddie since 2011.

In January of that year, the two giants reached a $1.35 billion settlement in a dispute over loans sold by Countrywide. The initial settlement covered all loans sold to Freddie from 2005 through 2007. As we previously noted, within months of announcing the settlement, its terms were highly criticized by the FHFA Office of Inspector General as being based on a gross understatement of the exposure Freddie Mac faced in respect of those loans.

As of September 30, 2013 federal filings indicate that Freddie Mac has outstanding repurchase demands of $1.4 billion against Bank of America (which amounts to about 42% of all of Freddie’s currently outstanding repurchase demands). While we have not yet seen anything definitive, it has been reported that the $1.4 billion in outstanding demands, and the possible settlement thereof, relate to loans sold by Bank of America/Countrywide to Freddie during the period of 2000-2005.

Despite aggregator claims to the contrary, settlement amount with GSE is relevant when determining proposed settlement with originator

We suspect that after its highly favorable settlement with Freddie Mac in 2011 in respect of claims that even at that time were becoming stale, Bank of America would expect to settle on even more favorable terms in respect of claims that now would date back as long as 14 years ago. However, no matter what resolution Freddie and Bank of America may eventually reach, originators and correspondents should bear in mind that the amount the aggregator pays in that settlement arrangement (or any other settlement between a GSE and an aggregator) is relevant in determining the amount of any proposed settlement between that aggregator and an originator correspondent.

We are aware that certain aggregators nevertheless claim that such settlements are irrelevant to the amounts they are seeking from originators/correspondents for the very same loans. However, if nothing more than as a matter of common sense, it seems absurd that an aggregator would seriously claim that it could pay, for example, $ .10 to a GSE on a repurchase claim and then turn around and expect to be paid $ 1.00 by the originator on the aggregator’s claim in connection with the very same loan. It seems to us that using the aggregator’s logic, in that example it is in effect saying that it is entitled to earn a handsome profit of $.90!