CHICAGO – Hardly a day goes by without a settlement between a bank and a US government agency or regulator. The latest one is between Bank of America and the government-backed mortgage underwriter Fannie Mae: $3.55 billion in cash; $6.75 billion in repurchases of bad mortgages that Countrywide, later acquired by BoA, sold to Fannie; and an additional $1.3 billion in cash to resolve Fannie’s servicing issues with BoA.
And yet, as in most settlements, BoA did not admit any fault. Was BoA tripped up by bad luck or sloppiness? Or did it and other financial institutions behave with intent to defraud investors?
As a result of the settlement, we will never learn the truth (at least the version that is established beyond a reasonable doubt in open court). In each settlement, the investigations are stopped, and whatever has been found is sealed.
Fortunately, academic research may be able to shed some light on this important matter. In a recent paper, the economists Tomasz Piskorski, Amit Seru, and James Witkin compare the characteristics of securitized mortgages as they were disclosed to investors at the time of sale with these loans’ characteristics as they were recorded in the banks’ proprietary databases. The data cover non-agency residential mortgages, which are not the same as those targeted by the settlement, and the data come from a pool of banks, so we do not know which banks were present. But their data are similar enough to enable us to learn a lot about what was going on.