I’m setting myself up to be able to say I told you so on the Taylor, Bean & Whitaker/Colonial failures. There is just something that stinks to high heaven about the way these two have imploded. They were joined at the hip and there is a smell of fraud that keeps getting more pungent day by day.
The WSJ is reporting that TBW was spotted on the radar as long ago as 2002 when Fannie Mae (NYSE:FNM) basically said take your business elsewhere. So they took it across town to Freddie Mac (NYSE:FRE) who was only too happy to grab the business.
Taylor Bean ran afoul of Freddie’s rival, Fannie Mae, early in 2002. Fannie was long the main buyer of loans produced by Taylor Bean, a fast-growing mortgage lender owned and run by Lee Farkas, an Ocala entrepreneur. In early 2002, though, Fannie officials became concerned about some of Taylor Bean’s practices, according to people involved in the matter. One of the issues involved loans that Taylor Bean had been forced to repurchase from Fannie because the loans didn’t meet Fannie’s quality standards. Taylor Bean later sold back to Fannie new loans backed by the same homes without properly disclosing the nature of those loans, according to these people.
Fannie officials held a meeting with Mr. Farkas in April 2002 but were unsatisfied with his responses. Fannie, which declined to comment, then stopped doing business with Taylor Bean.
Freddie Mac, however, saw an opportunity to pick up market share from Fannie and began buying large volumes of loans from Taylor Bean. An executive who worked at Freddie at that time said the company believed Taylor Bean had been sloppy in its dealings with Fannie but could be trusted to clean up its procedures. Freddie’s decision allowed Taylor Bean to keep growing.
Freddie declined to comment. Mr. Farkas declined to comment on the switch from Fannie to Freddie.
Taylor Bean accounted for 5.2% of Freddie Mac’s single-family mortgage purchases last year. Freddie disclosed earlier this month that it was still assessing its exposure to Taylor Bean and that losses could be “significant.” (emphasis added)
Take a look at the portion I put in bold. TBW got caught trying to sell loans to Fannie that probably had an element of fraud. That could be something to do with borrower documentation or it could have something to do with appraisal or even the structure of the contracts. The salient point is that they turned around and cured the defects and resold loans on the same houses to Fannie. I can flat out guarantee you that all they did was update whatever paper needed to be changed to make it through Fannie’s computer and due diligence screens.
Now, let’s fast forward to the present. As noted above, when Fannie told TBW to take a hike they started selling their loans to Freddie. One of the Freddie officials who let them in the door was a chap by the name of David Stevens who just happens to now be the head honcho at FHA. It seems that FHA, like Freddie, was convinced that TBW had gotten religion. Of course the didn’t and now the paper that TBW stuck them with has a default rate of 9.3% versus their portfolio average of 6.3%.
There are a lot of ugly things starting to crawl out from under the rocks that are getting turned over in this affair. Stay tuned, it is likely to become quite interesting.