Freddie Mac settled with bankrupt mortgage lender Taylor, Bean & Whitaker but will see only a fraction of what it sought, according to a Securities and Exchange Commission filing this week.
TBW, once the 12th largest mortgage lender in the U.S., originated, serviced and sold pools of mortgages to Freddie Mac. It relied on financing vehicles from Colonial Bank and Ocala Funding.
But in 2002, then TBW Chairman Lee Farkas organized a scheme to defraud investors, regulators and Freddie by covering up holes in its financing for the loans.
To do this, Farkas and a group of six other co-conspirators at Colonial and Ocala sold phantom mortgages that were either packed into other securities, already foreclosed on or didn't exist. TBW, Colonial and Ocala all eventually closed in 2009. Farkas faces a possible life sentence after being convicted in April.
According to the SEC filing, the proposed settlement amounts to roughly $1 billion but would only pay out $45 million to Freddie.
"This estimate is based on the plan of liquidation and disclosure statement filed with the court by TBW, which indicates that general unsecured creditors are likely to receive a distribution of 3.3 to 4.4 cents on the dollar," according to the filing.
Freddie did say it would be entitled to roughly $203 million on deposit in certain TBW bank accounts relating to its mortgages. It already received $150 million of it from the Federal Deposit Insurance Corp. as part of the Colonial Bank failure.
As part of the settlement, Freddie will also be able to sell TBW mortgage servicing rights, subject to a $185 million minimum net sales price. Some of the proceeds will go to other parties with interests in the MSRs.
But the settlement also requires Freddie to pay $61 million to TBW creditors to satisfy their "potential claims" against the government-sponsored enterprise.
Freddie estimates its uncompensated loss exposure to TBW to be roughly $690 million, and the ultimate losses could exceed this amount. Most of the exposure stems from outstanding repurchase claims, which Freddie already adjusted for in its financial statements.
"If the settlement is approved by the court, we will recognize the difference between amounts we would pay to TBW and other creditors and the liability recorded on our balance sheet as a gain," Freddie said.
Freddie expects this gain to come in at less than $250 million.
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