BofA Stops Selling Loans to Fannie Mae: Is This The First Step to Life After the GSEs?

By Aaron Task | Daily Ticker

Bank of America this week announced it is severely cutting back sales of loans to Fannie Mae. The move is part of Bank of America's (BAC) ongoing efforts to undo the damage of its ill-fated acquisition of Countrywide Financial in 2008, but could have broader implications if other big banks follow suit.

In Search of...Life Beyond Fannie & Freddie

By ending its activity in the so-called correspondent lending channel, Bank of America is effectively saying it will only underwrite mortgages that are originated in house. By stopping the sale of most loans to Fannie, the bank will either be forced to hold those loans in its portfolio or seek an alternative buyer.

Since 2008, the private secondary market for mortgage loans has effectively dried up. Fannie Mae, Freddie Mac, FHA and other government-sponsored enterprises back more than 90% of all home loans originated since the crisis.

Earlier this month, Treasury Secretary Tim Geithner laid out a plan to significantly reduce the government's role in the mortgage market, based on three options, as The NY Times reports:

• Eliminate any government guarantee for middle-class mortgages.
• The government would only back loans during times of financial distress.
• The government still would only guarantee mortgages if lenders first purchase a guarantee from a private insurer.

Bank of America's decision to stop selling loans to Fannie appears to be the case of one firm being fed up dealing with Uncle Sam's minions and the story may end here. Still, BofA may have unwittingly opened the window to a fourth, private-sector solution.