The Subprime Shakeout-

The Principal – Agent Problem: Part I – RMBS Data Integrity

Back near the dawn of time when I was in business school, and the faculty was hard-pressed to find topics to fill up the curriculum, they introduced the Principal – Agent Problem.  As future corporate managers and agents of the stockholders, I suppose they wanted to explain to us that our economic interests were not identical to those of the owners.  This wasn’t exactly the most shocking news we had ever received, but that was all that was said about the issue, back then.

Of course, there is considerably more to this multi-faceted problem. According to Wikipedia, “The principal–agent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe,” primarily due to asymmetric information, uncertainty and risk.

Let’s look at the relationship between the RMBS bondholder…

[THE SUBPRIME SHAKEOUT]

“Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise?” said Solomon L. Wisenberg, former chief of a Justice Department financial institutions fraud unit.

NYT–

As the financial storm brewed in the summer of 2008 and institutions feared for their survival, a bit of good news bubbled through large banks and the law firms that defend them.

Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.

Continue reading [THE NEW YORK TIMES]

Question:

Did Fannie Mae issue the recent announcement [see below] prohibiting servicers from settling reps and warranties claims with Mortgage insurers specifically because BAC /Countrywide just settled with one of their big insurers AND took back 80% of the loss.

From SeekingAlpha–

The cash settlement of $1.1 billion will be paid in full by March 31, 2012. The initial payment of $850 million was paid on April 14, 2011. In addition, Bank of America and Countrywide have agreed to a reinsurance arrangement that will reimburse Assured Guaranty for 80% of all paid losses on the 21 first lien RMBS transactions until aggregate collateral losses in those transactions exceed $6.6 billion. Cumulative collateral losses on these transactions were approximately $1.3 billion with no paid losses by Assured Guaranty as of December 31, 2010. As of December 31, 2010, Assured Guaranty’s gross economic loss on these RMBS transactions, which assumes cumulative projected collateral losses of $4.6 billion, was $490 million. The total estimated value of the settlement is expected to be accretive to shareholders’ equity and adjusted book value, a non-GAAP financial measure.

Now lets see… Could BAC possibly pass the losses on to the govt. for the Fannie and Freddie guaranteed securities and is this why Fannie is trying to put her foot down with this letter below and say that the servicers do NOT have the authority to make such deals with the insurers, causing the GSE’s to eat the losses that the servicers are blithely bargaining away.

Meanwhile the deal has already been struck and partially paid. Will taxpayers be on the hook for yet another disastrous toxic originating love story?

Did BAC breach any fiduciary responsibilities with Fannie?

[ipaper docId=53095767 access_key=key-1wd6kmoow89ycd06lprq height=600 width=600 /]

Effective immediately, Fannie Mae is prohibiting servicers from entering into any agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to Fannie Mae. Prohibited agreements include, but are not limited to, agreements that directly or indirectly

• modify master policy provisions for settling of claims,
• limit the right of a mortgage insurer to conduct file reviews or investigate claims,
• limit the right of a mortgage insurer to rescind coverage,
• rescind or modify coverage, or
• restrict notice to Fannie Mae of changes in coverage status.

Further, Fannie Mae prohibits loss sharing, indemnification, settlement or similar agreements of any kind between servicers and mortgage insurance companies that affect Fannie Mae’s interest in its mortgage loans.

[ipaper docId=53095767 access_key=key-1wd6kmoow89ycd06lprq height=600 width=600 /]